Edited Transcript of CREE earnings conference call or presentation 1-May-19 9:00pm GMT

In Q3, we took an significant step at the transformation of the company with the pending sale of Cree Lighting to perfect Industries. This transaction will allow us to sharpen our concentrate to accelerate Wolfspeed's growth still providing a awful venture because the Lighting affair and its employees to an expanded channel that strengthens its impartial position. We trust this transaction benefits complete stakeholders because it unlocks value, increases management concentrate above the heart affair and supports our mission to accelerate Silicon carbide and GaN adoption.

I'll now grow it above to Neill to provide more details above the quarterly results and expectation because next quarter.

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Neill P. Reynolds, Cree, Inc. - CFO [4]

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Thank you, Gregg. because the third belt of fiscal 2019, revenue from continuing operations increased 22% year-over-year to $274 million, with non-GAAP net earnings from continuing operations of $20 million or $0.20 per diluted share. The non-GAAP allowance per section from continuing operations exceeded the midpoint of our targeted range, owing to record revenue combined with edge improvement because Wolfspeed. Our non-GAAP allowance from continuing operations exclude $43 million of expense, net of tax, or $0.42 per diluted section from non-GAAP stock-based compensation, acquired intangible amortization, advantage accretion above the convertible notes, transaction-related costs and other items.

2019 third belt revenue and non-GAAP entire amuse because our reportable segments were because follows: Wolfspeed revenue grew 72% year-over-year and 4% sequentially to $141 million, at the high target of our targets. Wolfspeed entire edge was better than our targets at 48.7%, an increase of 90 base points sequentially. LED Products revenue was at cord with our targets at $133 million. LED entire edge was 80 base points above our targets at 27.8%. Non-allocated costs totaled $2 million because the third belt of fiscal 2019 and are included to reconcile to our $104 million non-GAAP entire edge amuse from continuing operations because a 37.9% entire margin.

Non-GAAP operating expenses from continuing operations because Q3 were $80 million, slightly better than our target. Our non-GAAP operating earnings from continuing operations exceeded the midpoint of our targets at $24 million. Our non-GAAP tax appraise was at cord with our targets at 18%.

During the third quarter, money from operations was $61 million and headmaster expenditures were $37 million, resulting at free money run of $24 million. This free money run deed was driven by healthy working headmaster management too because an upfront payment related to our wafer provide agreements. We ended the belt with $789 million at money and short-term investments, 0 borrowed above our cord of belief and convertible debt with a appearance appraise of $575 million.

Our headmaster allocation priorities remain focused above expanding talent at our Wolfspeed business.

For fiscal 2019, we purpose headmaster investment of about $175 million, mainly driven by expanding Wolfspeed's manufacture talent to uphold forecasted long-term guest demand. The underlying investment project because fiscal 2019 surplus unchanged, still the investment below -- the investment is below our preceding target, mainly owing to the timing of receipts and payments because machinery orders. because we persist to ramp this new capacity, we desire some variability at our initial manufacture yields and factory utilization that can diminish our near-term Wolfspeed entire margins.

For the quarter, engagement sales outstanding from continuing operations came at can 34 days, and inventory days above hand from continuing operations was 90 days.

Turning to the expectation because Q4. We are targeting revenue from continuing operations at a hill of $263 million to $271 million based above the following part trends: Wolfspeed revenue is expected to increase about 1% owing to healthy materials and RF demand. Our energy instrument business, we are seeing some near-term softness owing to the suspect almost the reduction at EV incentives at China. still we remain confident at the EV impartial and will persist to become above the desire term. LED revenue is expected to exist down about 5% sequentially owing to impartial softness, mainly at Asia.

We purpose Cree's Q4 non-GAAP entire margins from continuing operations at about 37% based above the following part trends: Wolfspeed edge is targeted at about 49%, an incremental increase year-over-year and sequentially; and LED edge is targeted at about 25%, down from Q3, mainly driven by lower factory utilization and lower sales volume.

We are targeting Q4 non-GAAP operating expenses from continuing operations to exist slightly up sequentially at about $81 million to uphold continued growth at our Wolfspeed business. because we dine discussed previously, changes at OpEx can vary from quarter-to-quarter because a class of reasons including the timing of R&D projects, marketing cost almost commerce shows and while IP cases influence at to trial. We purpose Q4 non-GAAP operating earnings from continuing operations to exist among $14 million to $19 million, and we purpose non-GAAP nonoperating earnings to exist about $2 million.

We are targeting a non-GAAP effective tax appraise of 18% because Q4 and fiscal 2019 and Q4 non-GAAP net earnings from continuing operations to exist among $12 million to $17 million or $0.12 to $0.16 per diluted share. Our non-GAAP EPS from continuing operations purpose already includes a diminish of about $0.02 from the ongoing shock of the tariffs.

Our non-GAAP EPS from continuing operations purpose excludes acquired intangible amortization, noncash stock-based compensation, advantage accretion above our convertible notes, transaction-related costs and other items. Our GAAP and non-GAAP targets conduct no involve the shock of any changes to the beautiful appraise of our Lextar investment. Our Q4 targets are based above few factors that could vary including overall demand, produce mix, factory execution and the competitive environment.

I'll now grow the discussion uphold to Gregg.

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Gregg A. Lowe, Cree, Inc. - President, CEO & Director [5]

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Thanks, Neill. above the final 18 months or so, we've made great influence at towards our target of creating a semiconductor powerhouse at Silicon carbide and GaN technologies. We've grown Wolfspeed by more than 100%; acquired the Infineon RF energy business; more than doubled our manufacturing talent of Silicon carbide materials; jointly announced with Valeo an innovative deliver lighting solution because the automotive industry; and signed multiple long-term Silicon carbide materials agreements, which at aggregate to generate revenues at excess of $500 million.

With the anticipated completion of the Lighting divestiture during this quarter, Cree will exist healthy positioned because faster growth and higher margins with a money remains approaching $1 billion upon closing. I'd clothing to thank the Cree Lighting employees because their difficult vocation and dedication towards fixing the business, which translated into an venture because them to grow a big and significant isolate of perfect Industries.

For LED Products, another belt of hard execution helped the affair compose influence at above its purpose of driving appraise over greater focus. entire margins were at cord with our targets because a arise of healthy execution and our tactic to concentrate above the affair where our products are differentiated and valued. That being said, the LED impartial is experiencing softness at demand because global commerce uncertainties persist. We remain focused above our purpose markets where we trust our customers appraise technology. We vocation with these customers to persist bringing innovations to the impartial and if needed, inspire manufacturing capacities to Wolfspeed to the LED impartial persist to soften.

Wolfspeed achieved record results again at Q3 because revenue increased 72% year-over-year. Wolfspeed entire edge surpassed our targets and showed improvement year-on-year and quarter-on-quarter because the team continues to conduct an select profession of balancing the challenges of rapidly increasing talent still maintaining yield. Wolfspeed is now our largest affair and represents 2/3 of our entire amuse from continuing operations.

Cree's technologies are helping to energy some headmaster transitions at our economy. if it's the automotive industry's transition to electric vehicle or the telecommunications sector's moved to faster 5G networks, we are at the forefront of change. Our leadership at Silicon carbide and GaN setting us healthy at the marketplace to help customers better deed and effect greater efficiency.

Our materials affair continues to become because the inspire from silicon-based energy and RF energy products most of Silicon carbide and GaN technologies at an accelerating pace. because you can recall, we dine already signed few long-term deals with headmaster customers including STMicro, Infineon and others, which describe above $500 million at revenue. at appendix to this success, we're currently discussing long-term provide agreements with additional partners and desire to finalize a few above the coming few quarters.

In RF, the wireless telecommunications impartial is rapidly moving towards GaN, which enables faster 4G and the transition to 5G. This is driven by GaN's inherent ability to provide wider bandwidth, higher frequency and higher efficiency and the expectation is same promising. modern reports meaning momentum is house because 5G rollout at North America, China, Latin America and South Korea. because such, we're at the process of adding GaN manufacture talent to encounter the increasing demand we are seeing. We will vocation same difficult to expedite this talent addition, still we hope demand exceeding provide because the next few quarters.

Car manufacturers persist to declare new investments at electric vehicle platforms and are increasingly interested at our Silicon carbide technology. Our sales funnel is house nicely, and we now dine an venture pipeline which is greater than $5 billion. guest advantage spans the clay because we're engaged at Europe, Asia and North America with many OEM and Tier 1 customers who dine a healthy advantage at our Silicon carbide technology. Now because I've mentioned at many of our preceding calls, our street towards our long-term goals will no exist a straight line. We dine a fate of moving parts and we appearance a fate of challenges with the significant ramps ahead of us. Our manufacture and our guest ramps will exist lumpy. That said, our belief almost the transition from silicon to Silicon carbide, coupled with the adoption of GaN technologies, is stronger than ever.

And to encounter the growing demand because Silicon carbide and GaN solutions, next week at the PCM -- PCIM appear at Germany, we will draft our plans to farther exaggerate capacity. PCIM is the premier parliament because energy semiconductors, and I trust our customers will exist excited to listen almost our continued investment. while completed, this expansion will uphold our efforts to help customers compose the transition from silicon to Silicon carbide and GaN using Wolfspeed technology.

Our venture pipeline is larger than it's ever been, and the guest engagements with us persist to expand. We dine a vast venture ahead of us and trust we are healthy positioned to capitalize above the excitement we exclaim on because our technologies.

And with that, I'd clothing to grow it uphold above to the operator consequently we can receive any questions you can have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the cord of Brian Lee from Goldman Sachs.

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Brian K. Lee, Goldman Sachs orchestra Inc., investigation piece - VP & Senior sweep might Analyst [2]

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Maybe impartial above Wolfspeed to depart with. You said final quarter, Gregg, that Wolfspeed grew above 40% -- sorry, 50% organic year-on-year. can you agreement us some feeling because what that same metric was this belt and then too what you're embedding into the conduct here?

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Neill P. Reynolds, Cree, Inc. - CFO [3]

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Yes, Brian, this is Neill. allow me receive a shot above that one. consequently because the contemporary belt impartial reported, that organic amount is 40%, a moment north of 40%. because you influence at into Q4, we don't dine the cite from final year above Infineon, consequently that's above a pure organic basis.

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Brian K. Lee, Goldman Sachs orchestra Inc., investigation piece - VP & Senior sweep might Analyst [4]

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Okay. beautiful enough. And then impartial I presume staying above the Wolfspeed prone because a second, the entire margins, it's encouraging to exclaim on edge expansion, ongoing edge expansion here. I learn you guys dine said time and time again that it won't exist linear; you've got a handsome good profession there. still impartial wondering, can you agreement us some of classification of puts and takes almost how much of the edge expansion you're seeing recently into the fourth belt is mix versus impartial improvements at the factory surroundings and volumes? And I'll desert it there.

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Gregg A. Lowe, Cree, Inc. - President, CEO & Director [5]

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Well, I presume what -- I'll receive a explode at that first and maybe Neill can provide some color to it. Our manufacturing team has impartial knocked it out of the park at condition of expanding the talent and doing it at no only an incredible pace, still with super high quality. at fact, yields that we're getting out of our factories exact now at Silicon carbide manufacture and the wafer fabs and consequently forwards are at record highs. And what I used to talk you is we still dine some handsome merry room ahead of us to persist driving some of that.

So I don't learn what the tear is, still I used to say a significant amount of the resiliency, if you will, above the entire edge is indeed coming from an execution perspective.

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Neill P. Reynolds, Cree, Inc. - CFO [6]

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Yes. Brian, this is Neill. consequently yes, I agree. We're certainly seeing benefits from the operations execution and that's class of underpinning the entire edge deed at Wolfspeed exact now. I will say although because we count almost talent expansions and because we vocation over these things, because we begin bringing up various levels of volume and utilization of the factories because we influence over these things, we can exclaim on some fluctuations at that because we influence forward. still we're handsome favourable with the deed hence far, and we clothing the path rgeister that we got above the charge side.

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Operator [7]

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Our next question comes from the cord of Jed Dorsheimer from Canaccord Genuity.

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Jonathan Edward Dorsheimer, Canaccord Genuity Limited, investigation piece - MD & Analyst [8]

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Two. consequently I presume the first one, because we receive a appear at -- Gregg, because we receive a appear at the silicon -- the Wolfspeed business, I'm impartial wondering if you could provide any additional color above maybe platform wins or fabricate wins. because it used to appear that with most of the affair being successfully sold out above the base materials that the appraise proposition going from an IGBT silicon transistor to a MOSFET SiC is going to exist indeed at the electric vehicle. And given the limited amount that are out there, it seems clothing that's more of a 2020, 2021 class of ramp. consequently your climax line's going to exist fairly limited because we metric you above revenue. consequently maybe some color above platforms or fabricate wins force exist a useful metric consequently we can better understand what the future force appear clothing there. And then I dine a follow-up.

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Gregg A. Lowe, Cree, Inc. - President, CEO & Director [9]

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Yes. Okay, Jed. What I used to -- we mentioned at the prepared comments that our venture pipeline is now above $5 billion. Obviously, that's substantially higher than -- well, it's the highest it's ever been, and that was substantially increased above this past quarter. We're no announcing concrete fabricate wins and consequently forth. I count your commonplace thinking of the ramps event at the 22x time mature is above I think. if you appear at the adoption rates because electric cars and the foretell that nation are talking about, you're seeing noticeable increases at electric vehicle penetration event at that 2021, 2, 3, 4, classification time frame. What excites because almost this complete worry is that we meaning it -- 2 things. One is the customers are indeed paying attention to the appraise of Silicon carbide. What it brings basically is a lower systems charge and an ability because customers to extend the mileage that they acquire out of a scold and that's obviously a big business because customers of electric vehicles.

The additional worry that excites us is that even with a relatively low penetration of electric vehicles, the TAM is absolutely huge because Silicon carbide. consequently we're possibly looking at, and I've said this a mix of times, at least a decade and possibly a multi-decade secular trend because us, consequently it's a indeed great long-term venture because us.

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Jonathan Edward Dorsheimer, Canaccord Genuity Limited, investigation piece - MD & Analyst [10]

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Great. That's useful and helpful. impartial shifting above to the gallium nitride above the Wolfspeed, I'm crazy how we to count almost the difference among manufacturing above the LED and the powered GaN from a, maybe GaN thickness perspective or chip size, or how to count almost the difference among the LED affair and energy because base stations?

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Gregg A. Lowe, Cree, Inc. - President, CEO & Director [11]

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Well, the GaN itself, what I used to say is from a manufacturing perspective, the base substance is Silicon carbide, relatively clothing and certainly the manufacturing asset associated with house a Silicon carbide LED wafer and a Silicon carbide wafer that ends up with GaN above climax of it, that base manufacturing is relatively -- basically same similar. And consequently we've got a high degree of fungibility above that.