Raiford Garrabrant - Director, IR Gregg Lowe - CEO Mike McDevitt - CFO.

Joseph Osha - JMP Securities Jon Quealy - Canaccord Craig Irwin - ROTH Capital Partners Brian Lee - Goldman Sachs Paul Coster - JPMorgan Colin Rusch - Oppenheimer Edwin Mok - Needham & Company Tom Sepenzis - Northland Vishal Shah - Deutsche Bank Jeff Osborne - Cowen & Company Cindy Motz - Williams Capital.

Good day, ladies and gentlemen, and welcome to the Cree Fiscal 2018 First Quarter Earnings Conference Call. [Operator Instructions] I would now like to hand the floor over to Raiford Garrabrant, Director of Investor Relations. Please go ahead, sir..

Thank you, Karen, and good afternoon. Welcome to Cree’s first quarter fiscal 2018 conference call. Today, Gregg Lowe, our CEO and Mike McDevitt, our CFO, will report on our results for the first quarter of fiscal year 2018.

Please note that we will be presenting non-GAAP financial results during today’s call and a reconciliation to the corresponding GAAP measures is 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. 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. During the Q&A session, we ask the participants limit themselves to one question and one follow-up so that each analyst has the opportunity to ask a question within our allotted time of one hour.

If you have additional questions, please contact us after the call. Now, I’d like to turn the call over to Gregg..

Thank you, Raiford and good afternoon, everyone. This is my first earnings call here at Cree and I’m excited to be part of this team. And just to give you a sense of the format for today’s call, I will kick it off with a little bit about what drew me here at Cree and then I will turn it over to Mike to cover the Q1 results and the Q2 outlook.

I will then wrap it up with a quick overview of the process we’ll go through to help establish a clear vision for the Company going forward. Cree has a long history of blazing new trails. 5,000 plus patent for a company this size is quite a testament to the innovation engine that exists here.

Combined that with a workforce comprised of bright, talented and passionate people, and I’m confident, we can accomplish amazing things when we’re pulling in the same direction.

This company has a number of opportunities and challenges and I look forward to working with the team to maximize those opportunities while dealing with the challenges head on. My wife and I look forward to becoming part of the local community here, and I’ve already found a home we will be moving into before the end of this year.

Now, I will turn it over to Mike to discuss the results for the quarter and our outlook for Q2.

Mike?.

Approximately $1.5 million fair market value write down on our Vulcan [ph] aircraft, which we have decided to hold for sale. Once we the aircraft is sold, we will realize approximately $1.3 million of annual OpEx savings and approximately 1 million of period cost associated with our Wolfspeed factory expansion for demolition and equipment move cost.

As a result, exiting Q2, our normalized non-GAAP operating expenses are targeted to be $98 million, plus or minus. The joint venture has a nominal impact on our Q2 operating expense targets, but is targeted to have a larger impact beginning in Q3. We target Q2 non-GAAP operating profit to be between $3 million loss to $3 million of income.

We target a 15% of Q2 non-GAAP effective tax rate and we target Q2 non-GAAP net income to be between $1 million loss to $4 million of income or $0.01 loss to $0.04 per diluted share. Our non-GAAP EPS target excludes acquired intangibles amortization, non-cash stock-based compensation and other items.

Our Q2 targets are based on several factors that could vary including overall demand, product mix, factory execution and the competitive environment. I’ll now turn the discussion back to Gregg..

Thanks, Mike. In terms of establishing a clear vision for the Company, naturally, I don’t have all the answers yet. However, we will go through the same process that worked so well during my time at Freescale.

We’re going to work on three things in the near-term, first evaluating and focusing the strategy and the direction of the company; second, improving execution in our existing business; and third, engaging the workforce and getting everyone pulling in the same direction.

And it all starts with spending a significant amount of time with our team, customers and partners to gain an insight and to the opportunities and challenges we have. We will evaluate all the areas where we’re investing resources and ask four key questions.

One, what is our unique differentiation; two, which customers care about this differentiation; three, what are the dynamics of the market for these customers; and four, can we be a top player. After determining which areas have the best opportunity for us to create value, we will focus our efforts and our resources into those areas.

In the meantime, each of our three businesses have opportunities to improve execution, driving improvements in areas like gross margin, new product introduction, quality, customer satisfaction and market share. Now, I’m not talking wild goals, but simply operating each of these businesses at industry norms in terms of those benchmarks.

Progress in these areas will obviously help improve the Company’s results as we create and then launch the focus and vision. I spend a significant amount of time listening to members of our team and believe we have an employee base that is excited about the notion of a clear vision and is equally excited about engaging to make our company a success.

They are giving me there views of the tremendous opportunities we have, as well as the road blocks that are holding them back. And as a leadership team, we’re committed to helping eliminate those road blocks, so our teams have the support and the line of sight to achieve awesome results. So that’s a lot of work in front of us.

We’re not announcing any kind of timeline, but let me give you a sense to how I’m thinking about it. At Freescale, I joined as CEO in early June and went through a similar process, attacking strategies, execution, and employee engagement.

We rolled out a strategic direction in November, so with the process that will be measured in months, not weeks and certainly not years.

After the process completes, we’ll turn our energy and focus to the strategic direction that gives us the best opportunity to significantly increase shareholder value, grow the business and improve profitability, once the plan is solidified, we’ll let everyone know. Thank you. And now, we’ll take any questions you might have..

Thank you. [Operator Instructions] Our first question comes from the line of Joseph Osha with JMP Securities..

Well, I made it right upfront.

Hello, Gregg, how are you?.

I am doing fine, Joe.

How are you doing?.

Very well, thank you. Nice to speak to you again. I’m wondering, as you think about the potential for businesses, then through -- obviously, there are some things you might think about getting rid of.

But, is it possible that you also might add some pieces to this Company going forward?.

Well, Joe, I think the first up is really evaluating where the best opportunities are and we’ll go through that process that I kind of highlighted, which is asking those four questions about our differentiation, the customers that need or have an interest in that differentiation, the dynamics of the market.

And by that I mean the growing markets, are they markets that are fragmented or are they consolidating, what are their competitive dynamics and so forth. So, I think the first order of business is really getting to that point.

And then, once we have that, then we’ll be able to make more sound decisions in terms of any kind of M&A or adding activities that we might have..

Thank you. And our next question comes from the line of Jon Quealy with Canaccord..

First question, I had bigger picture, so you talked about the outline as well as some of the specific questions you’ll be asking, yourself and your team.

Can you talk about customer interaction, have you reached out to customers, are you going to reach out to everyone across the board, Wolfspeed, lighting and LED or what’s the reception been and what’s your plan of attack with those key customers?.

Reception’s been good. Obviously, I think I have been here a grand total of like 12 or 13 days, so we’re early in the process here. We’ve got a rollout of some customer engagements that we’ll be doing here in the coming couple of weeks and so forth, there’s also -- include talking to our partners, our channel partners and so forth.

So, the whole thing is going to be pretty comprehensive. And like I said, I think there’s tremendous opportunity at the Company. I think the key is determining where we spend our resources and where we focus our energies. And as we do that, I think we’ll get better results..

Mike maybe one for you on Wolfspeed on mix. Can you comment a little bit, what were the drivers on the margin, i.e.

was it some solar invertors or electric vehicles, what exactly was shifting in there materials versus some more finished product?.

So, overall, just kind of a general product mix but then across the Wolfspeed factories, we’re kind of running them all full out. So, again, we really get fixed cost absorption and then within -- both at a wafer level and at a device level, we had improved production yields, so we got benefits across the board on that..

Thank you. And our next question comes from the line of Craig Irwin with ROTH Capital Partners..

Good evening and thanks for taking my questions. Mike, just a follow-on on Wolfspeed.

With the shortage of silicon carbide wafers in the market and Cree obviously being the largest supplier into the market, can you comment about whether or not we’re seeing maybe a contribution from price to the margins and the growth that you’re seeing in Wolfspeed?.

Yes. What I would tell you, in the near term, obviously pricing is holding firm and our focus has been about getting the capacity on line. And as I mentioned in my comments, we at the wafer level for third party customers, will have some of that capacity coming on line as we exit out this quarter..

Okay, excellent. I also wanted to ask my second question about Wolfspeed. So, there is quite a lot of chatter among, I should call them, the early stage competitors. Lot of people are excited to be on bids or looking at potential participation on some OEM programs.

I guess, the Tesla Model 3 is the one that caught the most eyeballs recently, but there is apparently number of others.

Can you maybe describe for us level of activity that Wolfspeed is seeing, given your leadership in the space?.

Yes. I think with EV and battery storage, we’re seeing good design activity across the board, and we’re obviously trying to work with all the tier 1, tier 2 to get wins over the long-term..

Thank you. And our next question comes from the line of Brian Lee with Goldman Sachs..

Welcome, Gregg, look forward to working with you. Couple of things from my end, maybe first Mike. I just wanted to clarify something. You mentioned doubling wafer capacity for Wolfspeed for external materials customers.

So, I just wanted to be clear, does that mean you’re going to selling 2X the amount of substrates? And then, what does that imply for your device business, how much capacity are you adding for that segment? And then, if you’re willing to quantify what’s the rough revenue split between the two types of products?.

So, I don’t have a specific revenue breakout between what we’re selling is -- material wafer sales versus what we’re selling at device sales.

But actually what we’re doing is we’re adding, as part of that $220 million of CapEx investment, we’re adding capacity, one that by the end of calendar 2018 we double the wafer capacity for external materials customers but we also double the capacity for power device along that timeframe.

It’s just the third-party material stuff that will start to -- that equipment will start to be called and we will get sales off that exiting Q2 at the device level that will be more coming on line as we exit our June quarter and calendar 2018.

Does it equate to double the revenue? Not necessarily, it will come down to what mix is and product mix but has a potential to possibly double the revenue..

Okay, that’s great. And then, the second question just on lighting.

We would love to your thoughts around how much of the weakness here for Q1 and then for the Q2 guide is company-specific and how much you would attribute to the broader market weakness? Because it does seem like you’re -- for all the markets issue, you’re still tracking to below industry peers, and then on the margins, you’re sort of hitting a new low there, so wondering whether the mid 30% target that you’ve always held in the past, needs to be recalibrated off of these new levels we’re seeing.

Thanks guys..

So from an overall standpoint on the revenue, I would say, it’s a good combination between the North American market weakness and the impacts from the quality holds. I think relative to the quality holds, we’ve identified the root cause, we’ve kind of got fixed this in place, and we’re working with the customer.

So, while that warranty cost we see as a near-term margin headwind, we’ll be able to mitigate that as we go forward. Relative to our longer range target of being able to get up to industry norms in the mid-30s, we still see that.

How we’ll do it is new product introductions which will have higher inherent margins, productivity gains, and sourcing improvements that we’ll have as well as operating leverage. Don’t have a specific timeline on when we’ll get there, but we still see that being doable over the long-term..

Operator:.

Yes, thanks for taking the question. I’m just wondering if you could contextualize the capacity constraint a bit and what your customers are doing in response to it.

Do they have options elsewhere or is it actually leading to just better long-term visibility for you?.

I think for us, it’s certainly leading to better long-term visibility from that. There are some other suppliers out there. But, as we’ve shown and what we’re spending in R&D, we’re moving aggressively to bring that capacity on line as these markets are turning on.

So, we’ve got a pretty good demand picture out over the rest of the year, and we’re just trying to get the capacity on line to meet that..

And then, you’re talking about doubling capacity and mentioned that’s not the end of it.

Have you done any sort of market sizing here that you can share with us for the Wolfspeed business?.

Sure.

So, as we look at the Wolfspeed today on the kind of the power device side of the market or the silicon carbide power market, it’s roughly -- it’s a little bit under $300 million today, but over the next five years see that being north of a $1 billion size opportunity, on again RF side, it’s about a $500 million market size today, and again over that same five-year period, see that market expanding to over a $1 billion.

As we kind of go through past this year, we’re focused on getting the capacity involved this year continuing to evaluate the markets and the kind of growth potentials, so there could be some additional investment as we get past it, but near term is let’s focus what we got, we’re focused on what we need to do to get the capacity on line by the end of calendar 2018..

Thank you. And our next question comes from the line of Colin Rusch with Oppenheimer..

Thanks so much.

Related to the lighting quality holds, can you talk a little bit about any sort of changes in prices that you’ve been rolling out to customers or how should we think about that on a go forward basis, just impact of quality issues?.

Yes. So, I think relative to as -- from a pricing standpoint, it’s not about getting aggressive on pricing cause we still sell an ROI with the lights; it’s more about if there is a warranty issue, it’s taking care of the customer and fixing that problem. So that’s kind of what our focus is in that regard..

And then, just in terms of some of the pacing around EV charging, how much visibility are you guys seeing through the Wolfspeed business into the applications for some of those applications? Are you getting a full read down of that application, are you really just dealing directly with your customers?.

We evaluate the markets in several ways. There’s a lot of dialogue with our customers and even our customers’ customers from that standpoint.

So, we think we’re developing pretty good visibility on how that market shapes up, by continuing to look at different ways to make sure we got a good handle on it and when we should be bringing on and investing in capacity..

Thank you. And our next question comes from the line of Edwin Mok with Needham & Company..

Gregg, I have a question around your comment about industry norm.

So, if I look at some of these RF power, RF companies out there, since they generate substantially higher gross margins and you guys are already running pretty high utilization, is that just the type of product you guys are selling that caused you guys have this level margin, and you do think there’s room for you substantially improve your margin?.

I think there is room in all three of our businesses to improve margin; in some of the, it’s substantial; in some of it, it’s a definitely more incremental. But all three other businesses have opportunities to improve margin, to improve productivity, to improve quality and all of the metrics that I mentioned earlier.

So, I sat down with each of the GMs, they all have plans to do that. And as I said, we’re going to be working on that as we go through this strategy process. So, it isn’t something we’re waiting on, we’re diving into that right away..

And then, Mike may just talk a little about lighting, as you mentioned obviously the market is little bit tough. You guys have announced a number of products this year, like C-Lite lines, few other stuff.

Can you maybe give us just roughly, traction of the new products, where do you guys stand that, do you expect those contributing to revenue as we get into the calendar fourth quarter?.

I don’t have specific breakout on the contribution, but C-Lite see light is kind of new introduction, it’s had a good initial roll out but it’s still in its kind of ramp phase, and we think it will continue to be successful in kind of addressing that contractor part of the market..

Thank you. And our next question comes from the line of Harsh Kumar, a private investor. .

Welcome Gregg. And Chuck, if you’re listening in, we’ll miss talking to you for sure. Gregg, I had a quick question on you. What are some of the biggest challenges that you see in the 14 or so days that you’ve been at Cree? And then, I have a follow-up. .

I would describe it as quite a similar situation that I walked into at Freescale. SO, you got on the plus side, you got an innovation engine, a company that’s got incredible positions in very difficult technologies. There has been a lot of -- it’s actually just a tremendous opportunity. And that’s something that’s really hard to change.

And so, you’re walking in with some great clay, if you will. At the same time, we clearly have an opportunity to focus the company and really point our entire team, kind of all in the same direction. And I kind of outlined the process we will go through.

So, I think I’ve seen this before and I think we’ve got an opportunity to create a lot of value and a lot of excitement inside the company about focus. We will be diligent about this.

This isn’t something we just -- we spend a week on and then announce, we’re going to spend lot of time digging through, asking those four questions and then we will come out guns ablaze and move in a direction that we think has the best opportunity for us to drive shareholder value..

Hey, Gregg, for my follow-up, can I ask you, at Freescale, you were definitely more profitability focused.

But as you roll out your strategy, are you more likely to be growth focused or more likely to be profitability focused, again as you look at the different divisions? And then, also, Cree has had a pretty good -- historically, a pretty good buyback in place, where would that stand at least in terms of your initial thinking?.

First off, again, kind of referring back to Freescale, the company had two company objectives, top line revenue growth and the gross margin expansion. And I don’t believe it’s one or the other. I think if you have awesome products, you’ll get paid a little bit more of it and it’ll be a lot easier for our sales folks to get them designed in.

So, I think those two can and should march in unison and so, it isn’t one or the other.

I think really -- we got to go through the process and determine where we think we have the best opportunity, where we have the most differentiation, where we have the markets that are growing the best, where are those markets, high quality markets where the dynamics are very good. And like I said, we’ll get to that point soon.

In terms of buybacks and all that, I would just say, we’re going to focus on determining where we’re going to drive the company and at that point we’ll start making decisions like that..

Thank you. And our next question comes from the line of Tom Sepenzis with Northland. Please go ahead..

Thank you for taking my questions. First one is just housekeeping, Mike.

I didn’t hear the guidance you gave for the Wolfspeed division, for gross margins, was that up or down in the December quarter?.

For the December quarter guided, that would be slightly lower due to customer and product mix forecast..

And then, just was wondering if you could give us some view and the way you’re seeing in the LED market right now in terms of pricing your competition, if anything’s really changed moving forward or if things are kind of stable -- it looks like they’re stabilizing here from both the top line and margin perspective?.

What I would tell you is right now kind of our current view is that supply-demand trends are kind of moving in the right direction.

But, as I think we both know, there’s planned additional capacity to come on line in Asia, and it really will depend on what’s that capacity going to be focused on and is that capacity basically replacing older obsolete equipment on it. SO, we’re going to continue to monitor it but in the short term it looks like we’ve got some stabilization..

Thank you. And our next question comes from the line of Vishal Shah with Deutsche Bank..

I wanted to ask you on lighting segment.

What’s your sense of what -- with the slowdown that you’ve seen right now, is it cyclical in nature you think or you have got more of a secular problem here given the LED penetration rate? And secondly, as far as the Wolfspeed business is concerned, can we start seeing some of these capacity constraints ease off a little bit in the third quarter and then see growth accelerate there or see some sort of constraints over the near-term?.

Vishal, maybe repeat the Wolfspeed question, I didn’t really hear that one..

The Wolfspeed business, can we see capacity constraints ease a bit in the third quarter, or would the constraints be still there for growth in the third quarter?.

Back on the lighting business, there’s a fair amount of economic report data out there that basically talks about non-residential construction activity being kind of slow down at this point and more recently decline in the recent months.

A variety of reasons that are being positive for that whether it’s tighter lending standards or lower, leaner public sector budgets, wondering -- people wondering on how to spend money in advance of potential tax reform, and then just the variety of projects that are taken longer to get launched from that standpoint.

I think in the near-term, we’re looking at that that leads the softness. I think most of us and some of our competitors, we see that firming up a little bit as we get later in our fiscal 2018. So, we’ll keep our eye on that.

On the Wolfspeed side of it, obviously we mentioned during my comments that we’ll have wafer substrate capacity coming online as we exit this quarter, so that will help out with external customers. On the device side, we’re internally qualifying going the larger wafer size on 150 millimeter and then have to qualify that with customers.

So, we target that coming on line in Q4. But during Q3, we’ll have additional wafer supply and we’ll continue to kind of modulate that. And we think with the investments we’re making, we’ll get more into balance as we go through the year..

Thank you. And our next question comes from the line of Jeff Osborne with Cowen & Company..

Good afternoon. A couple of questions on my end. Mike, I just want to confirm, if you go back a year ago and you had discontinued the operations of Wolfspeed, my understanding was the materials business to outsource customers was a piece that was previously in the LED products but then was reclassified from power and RF to Wolfspeed.

Now, it’s about $8 million to $12 million a quarter depending on a quarter.

Is that a good run-rate for the materials business to third parties and that’s the piece that you are doubling capacity of? I am just trying to put in perspective what moving piece is?.

Yes. So, I don’t have a specific breakout, but you’re right on that. The materials substrate used to be part of the LED. What I would tell you is right now we have good growth in both the materials as well as the device, and the materials is a bigger business than it was back then.

We are doubling two things, the external wafer supply for materials customers but then also the power device side, both by -- both targeted to be double by the end of calendar 2018..

Got it. And then, quickly, can you give us a sense of over the past 9, 12, 15 months, whatever timeframe works for you.

just in broad brushes, what the end-market applications that the device segment is providing in to? You focused on the last call around batteries and EVs, and certainly the stock has reacted favorably to some of the EV kind of buzz in the market.

But, I’m just trying to get a sense of perspective between power and RF and end market applications, whether it’s 4G, 5G, EVs, batteries, solar invertors.

Is there any sense that in broad brushes that quarter of the business went to this, half the business went to that that you can share?.

Not specific by market application breakout but by -- on the power side of it, it’s going into industrial applications like motor control, EV and battery storage or applications that got good growth potential and good traction right now as well as solar and power supplies, which we’ve historically been in.

On the RF side, think of it as telecommunication, so it’s going to tapping the 5G in those markets as well as Mallero [ph] are -- those are the big applications that those products are addressing..

Thank you. [Operator Instructions] Our next question comes from the line of Cindy Motz with Williams Capital..

Hi. Thanks for taking my questions, and welcome, Gregg. I just wanted to follow up just on the lighting in general. I know that you talked about why it’s off. You mentioned some hurricane related issues.

Do you have any sort of breakout of what that would be for this quarter and next? And then, at one point you -- just as a follow-up, you had talked last quarter about the backlog trending a little bit slower. Just curious if there is any update on that, Mike? Thanks..

So, the backlog continues to be the softer for the business just due to the overall market conditions. On the hurricane related stuff, it was more projects that were being worked on that are delayed, obviously as a result of the hurricanes.

That had a little bit of an impact, but more of the impact on the current quarter, the quarter that just ended, September and December is related to just the overall market weakness and then obviously some of the impacts from the quality holds..

Thank you. And that concludes our question-and-answer session for today. I would like to turn the floor back over to Mike McDevitt for any closing comments..

Thank you for your time today. We appreciate your interest and support and look forward to reporting our second quarter results on January 23rd. Good night..

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Everyone, have a great day..