Raiford Garrabrant - Director of Investor Relations Charles M. Swoboda - Chairman of the Board, Chief Executive Officer and President John T. Kurtzweil - Chief Financial Officer, Chief Accounting Officer, Executive Vice President of Finance and Treasurer

Brian K. Lee - Goldman Sachs Group Inc., Research Division Christopher Blansett - JP Morgan Chase & Co, Research Division Jesse Pichel - Jefferies & Company, Inc., Research Division Dale Pfau - Cantor Fitzgerald & Co., Research Division Andrew Huang - Sterne Agee & Leach Inc., Research Division Ahmar M. Zaman - Piper Jaffray Companies, Research Division Vishal Shah - Deutsche Bank AG, Research Division Vidya Adala - Morgan Stanley, Research Division Mark Heller - Credit Agricole Securities (USA) Inc., Research Division Daniel L. Amir - Lazard Capital Markets LLC, Research Division Carter B. Shoop - KeyBanc Capital Markets Inc., Research Division Colin W. Rusch - ThinkEquity LLC, Research Division Jonathan Dorsheimer - Canaccord Genuity, Research Division Amir Rozwadowski - Barclays Capital, Research Division Satya Kumar - Crédit Suisse AG, Research Division

Good afternoon. My name is Huey, and I'll be your conference facilitator today. At this time, I'd like to welcome everyone to Cree Inc.'s Fiscal Year 2012 Third Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, April 17, 2012. I would now like to introduce Raiford Garrabrant, Director of Investor Relations for Cree Inc. Mr. Garrabrant, please go ahead.

Thank you, Huey, and good afternoon. Welcome to Cree's Third Quarter Fiscal 2012 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, our CFO, will report on our results for the third quarter of fiscal year 2012. Please note that we will be presenting both GAAP and non-GAAP financial results in our remarks during today's call, which are reconciled in our press release and financial metrics posted in the Investor Relations section of our website at www.cree.com under Quarterly Results in the Financial Information tab. Today's presentations include forward-looking statements about our business outlook, and we may make other forward-looking statements during the call. These may include comments concerning trends 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 will be limiting our comments regarding Cree's third quarter of fiscal year 2012 to a discussion of the information included in our earnings release and the metrics posted on our website. We will not be able to answer any questions that would involve providing additional financial information about the quarter beyond the comments made in the prepared remarks. This call is being recorded on behalf of the company. The presentations and the recording of this call are copyrighted property of the company, and no other recording, reproduction or transcription is permitted unless authorized by the company in writing. Consistent with our previous conference calls, we are requesting that only sell-side analysts ask questions during the Q&A session. Also, since we plan to complete the call in the allotted time of one hour, we ask that analysts limit themselves to one question before re-entering the queue. We recognize that other investors may have additional questions, and we welcome you to contact us after the call by e-mail or phone at (919) 287-7895. We're also webcasting our conference call and a replay will be available on our website through May 1, 2012. Now, I would like to turn the call over to Chuck.

Thank you, Raiford. Q3 revenue was $285 million with non-GAAP net income of $23 million or $0.20 per diluted share. Revenue was slightly below our target range as LEDs and Power and RF were in line with our targets, but the lighting product line was lower than expected as our move to new agents during the integration with Ruud caused more disruption to the project pipeline than we had anticipated. All 3 product lines saw improved order rates in March, and we target solid growth in our fiscal Q4. Non-GAAP earnings per share were in the middle of our target range for the quarter as strong factory execution offset lower revenue. The revenue trends in Q3 were as follows: $9 million decrease in lighting sales as both product lines lost short-term momentum due to the agent transition, but indoor sales were most affected due to shorter project cycles and the availability of traditional alternatives. This transition is targeted to drive revenue synergies in the first half of fiscal 2013. We do not believe that the decrease in lighting sales was an indication of lower end user demand. $13 million decline in LED sales, which was in line with our seasonally lower targets. LED component sales improved post-Chinese New Year and we target improve market demand in Q4. $3 million increase in Power and RF sales as demand in both product lines started to improve. Non-GAAP gross margin was 35.6% in Q3, which was 30 basis points higher than Q2 and within our target range due to solid execution across the company. Factory utilization increased slightly in Q3, which combined with cost reductions, productivity and yield improvement offset the pricing declines in the quarter. The LED market remains very competitive, but we target improved margins as our new products gain traction…

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 a historical summary of other key metrics. For the third quarter of fiscal 2012, revenue decreased 6% sequentially to $285 million compared to our target range of $290 million to $310 million. Our revenue by product group is as follows: LED products revenue was $180.9 million, which includes LED components, LED chips and materials; lighting products revenue was $86.5 million, which consist of revenue from our indoor and outdoor LED lighting product plus traditional lighting systems; and Power and RF products revenue was $17.3 million. GAAP net income was $9.5 million. GAAP diluted earnings per share were $0.08. On a non-GAAP basis, net income was $23.3 million. Non-GAAP diluted earnings per share were $0.20 as compared to our target of $0.18 to $0.25. Non-GAAP net income excludes $13.8 million of expense net of tax or $0.12 per diluted share from the amortization of acquired intangibles, stock-based compensation and certain onetime tax adjustments. Q3 GAAP gross margin was 34.9%, while non-GAAP gross margin was 35.6%, which excludes stock-based compensation of $2.1 million. This was in the middle of our non-GAAP target of between 35% to 36%. Operating expenses for Q3 were $94.4 million on a GAAP basis and $76.9 million on a non-GAAP basis. Non-GAAP operating…

Thanks, John. We remain focused on 3 priorities to drive our business in fiscal 2012. Our first priority is to continue to lead the market and drive adoption of LED lighting. We are focused on developing innovative new LED lighting systems and LED components that enable our customers to deliver a more competitive payback versus traditional lighting. In January, we took the next step in our integration of the Cree lighting and BetaLED product line as we combine the 2 product lines into a single lighting agency for each major market. In most every market, we now have a new agency for either the Cree or BetaLED product line. In some cases, we selected a new agency for both product lines. As a result, we lost some sales momentum in the short term, especially on the Cree indoor product line. A number of projects were delayed and some projects simply moved ahead with traditional technology in the near term. While this was disruptive in the short term, we believe we made the right decision for the mid to longer term as we were able to upgrade our agents by leveraging the strength of the combined product lines. Q4 is an important time for Cree and the lighting industry as there are 3 major trade shows during the quarter: Light+Building in Frankfurt, Germany; Lightfair in Las Vegas and Lightfair in Guangzhou, China. The excitement and momentum for LED lighting continues to build as more companies begin to offer LED-based products. But LED lighting is still generally positioned as a premium product. While the industry is moving, our challenge at Cree is to keep raising the bar with innovative new products that deliver better payback and move LED lighting closer to price parity with conventional technology. Over the last several weeks, we…

[Operator Instructions] Our first questioner in queue is Brian Lee with Goldman Sachs.

How much of the fourth quarter revenue guidance is covered by current backlog? And how does that compare to where you were last quarter? I guess I'm wondering how much you need orders to pick up through the quarter here to feel good about your guidance targets since you say order visibility is limited right now. And then my follow-up question is what assumptions are baked into the fourth quarter guidance on pricing and volume across the segments? And if you can’t quantify, at least directionally, that'd be great.

Brian, let me see if I can get that for you. So I think if you look at where we're at for Q4, the backlog is ahead of where we were at this point last quarter, so that's a positive sign. We're obviously seeing better booking trends. I think the reason I comment -- I make the comment about limited visibility is that it is still a short lead time business, so while we're ahead of the rate last quarter, which is obviously driving our forecast, I think it's also important to understand that both the LED business and the lighting business are relatively short lead times. So we still have some work to do for the quarter, but obviously, we're heading in the right direction. I think the other question was about pricing. And if I look at the assumptions there, Q3 came in pretty much in line with what we were expecting for Q2, and I think Q4 is going to be in a similar range. So I don't have a specific number for you but it's still a very competitive environment. But with that being said, it's definitely not as -- not quite as aggressive of a pricing environment as it was a year ago. So competitive but a little bit more reasonable today.

Our next questioner in queue is Chris Blansett with JPMorgan. Christopher Blansett - JP Morgan Chase & Co, Research Division: So a lot of your competitors seem to be seeing a much bigger inflection off of what looks to be the trough quarter of Q1 here than you are. I mean your midpoint of your guidance is up 7.5%, and so when I look at your lighting business, you're only kind of getting back in the Q4 level to where you were in the Q1 level here of revenue. And I kind of wanted to see on the follow-up, how does this translate to utilization rates from Q1 to fiscal Q3 to Q4. It just seems like you're not quite seeing a snapback that some of your peers are.

Well, I don't -- I think, Chris, you've got to be a little careful with that. I think obviously our LED Lighting business scale is a little bit different than most of the other people out there. And the fact is that when we did the agent transition in the last quarter, we went through a process where I think 80% of the agents are new to either the BetaLED line or the Cree line. So that's a lot of agent retraining and a lot of momentum to build back. Obviously, we're more optimistic now because we've seen the projects pipeline come back, we've seen the backlog come back. But I think what you're seeing is really just a function of that transition. So I'm pretty optimistic going forward about where that's at. From a -- we do have to recover from the lost momentum last quarter. So I think long term, we're on the right track; short term, you've got to just work through the transition. With that being said, as far as utilization, we're looking at similar to slightly better in Q4. Obviously, we're targeting growth in the LED business, which is going to drive utilization more than anything. But I would say given the fact that we're continuing to make yield improvements and some of the other product changes, it's only slight improvement at this point. Most of what we're targeting, the benefit to come from this quarter, is continued strong execution.

Next questioner in queue is Jesse Pichel with Jefferies. Jesse Pichel - Jefferies & Company, Inc., Research Division: Some of the weaker top line appears to be this agency shift. Was that due to the Ruud acquisition or changing demand dynamics? And was that agency dislocation factored into your prior guidance?

So it is basically the difference between our targets and where we came in is almost exclusively related to the agency shift that we saw in the lighting product line. So LED business came in line pretty much with the targets, Power and RF pretty much with the targets, lighting came in below. And what we saw was -- we made the shift to the agencies, and we saw disruption on both sides but affected the indoor more. And that's just a function of the fact that, that's a shorter -- really a shorter cycle business and also more the indoor agents changed. And so when we look at that, to us that's a function of the transition. What we wanted to do from the beginning is we wanted to combine these 2 product lines and actually end up with a stronger channel to drive adoption. At some point, we had to bring the 2 product lines together. Obviously, in our targets, we do not factor in quite as much momentum lost, and it's one of those things that now that we're through it, I'd still glad we made the right -- I still believe we made the right move and we're on the right track, but it clearly came in lower than we had targeted for the quarter. Jesse Pichel - Jefferies & Company, Inc., Research Division: Would that reason also explain potentially, as the prior caller asked, a more modest pickup versus some of your peers because of this agency shift and loss of momentum?

Well I think what you got to realize is that you shift that many agents, we're glad to see backlog coming back. We're glad to see the project pipeline. But we basically stirred up the channel pretty good for a quarter there. So I think that if you look at from where we were mid-quarter last quarter, we're targeting nice growth. I mean we're still looking at double digits from what we did. Obviously, that's -- if you compare that to December, it's only slightly up from there. But I think -- and the important point to us is the momentum's back. And if I look at the project backlog and the combination of new products coming, I feel pretty good. I also think that you've got to be a little careful benchmarking the scale of the 2 businesses at this point. So I think, obviously, we're pretty deep down the road in the LED lighting conversion. And so I think at least the base of business we're working off is a little bit different at this point.

Next questioner in queue is Dale Pfau with Cantor Fitzgerald. Dale Pfau - Cantor Fitzgerald & Co., Research Division: We're going to beat your agents to death here, Chuck. About how many agents did you switch? And about -- over what period of time, did you make that transition? And are these agents now, and I think I missed this, are they regional or are they specific in verticals?

Dale, so it's a regional model of agents. I think we have a little over 50 agents and a little more than 80% of them switched. So in over 80% of the cases, the agent is new to either the indoor line, the outdoor line; or in some cases, they're new to both product lines. And so you basically have less than 20% of the agencies were not disrupted by this. It all happened in early January. We went through a process over the first 6 months, looked to see who we thought would be best to drive the product line going forward, made that call in early January and did it all at once. And so, obviously, I think anyone who's ever had a sales team change 80% of them at one time, you realize that it was disruptive. Frankly, I'm pretty happy to see that overall, the momentum -- the fact that we changed that many and we're seeing the momentum come back as quickly and seeing the backlog rebuild, I feel actually pretty good about it from where we're at going forward at this point. Dale Pfau - Cantor Fitzgerald & Co., Research Division: Was that both international and domestic?

No, this is all North America. If you look at our non-agent business, and this is probably another good indicator, so look at our international business that was unaffected or some of our direct business that we sell through other channels, that business was pretty much on line with our target. So if you want to take out the agent transition and look at the rest of it, that business is roughly in line with what we expected for the quarter, so that's why we're pretty confident in both the fact that the business has come back and the fact that we saw the rest of the business pretty much keep going as planned, that’s why we feel pretty comfortable that with the agent transition-driven, and we looked in there pretty close. And best as we can tell that we have a number of cases of delayed projects, postponed projects and as I said earlier even some projects that ended up going ahead and didn't use LED at all. So, hey, it's part of the process of getting the business ready to hopefully drive adoption a whole lot harder.

Next questioner in queue is Andrew Huang with Sterne Agee. Andrew Huang - Sterne Agee & Leach Inc., Research Division: So you recently announced that your LED troffers and streetlights are priced parity with the incumbent technologies. I think that's basically the end game. It seems to me that all you have to do now is sell the product. So maybe -- could you comment on what you have to do to get products through the channel?

Yes. Andrew, obviously, depending on the product and application, I think what we've said in a lot of cases, we've doubled lumens-per-dollar. We have price parity in some applications. So what does it take to go forward? Look, there's a large market of people that are used to buying the traditional technology, and so one of them is getting the upfront cost down so that we can drive adoption. And you're still selling cost of ownership in a lot of cases, so you still got to convince people to try technology they haven't tried, you've got to get them to understand the cost of ownership and you got them think about it. But the fact is, is that when you're building an LED streetlight then in one case, the XSP is, I think, comes in around USD $200 for certain applications. That's the same cost of sending a bucket truck to change a light bulb. So you got to ask yourself, at what point would a municipality want to ever change another light bulb when they can put a brand new LED streetlight up there? Now, obviously, they're going to want to not mix technologies. But I think we've really kind of changed the conversation. But that being said, it is an industry that has been doing things a certain way a long time and there's a lot of education. There's a lot of work to be done to really get the customer to understand, appreciate that, and I think that's the road ahead of us. But clearly from a product standpoint, at least the new products we've come out with recently, we've really -- I think we've got some people attention. And let's face it, a new product for us in outdoor, you're looking at probably -- we won't really get a good indication for a couple of quarters until that product gets out there. People test it, and we can start putting that into bids for new projects. And then you’ll really know in 3, 4 quarters what the success is. But I think we certainly have changed the game and changed the conversation. Andrew Huang - Sterne Agee & Leach Inc., Research Division: Okay. And then for my follow-up, you mentioned at R&D, you're at 254 lumens per watt for components. And I was also under the impression that the theoretical max was like 200. So I'm just kind of curious if you could give us an idea where your average component efficacy is today.

Andrew, that's going to vary. So we're selling products everywhere from -- I think we have customers down in the 100 lumen per watt range to I know we have products up, well, I don't know what the highest has been out there today, but what I want to say we have products available in the 150, 160, maybe even as high as 170 lumen per watt in certain product categories. It's going to vary with color, temperature and other things. The majority of customers are probably still in the 100 to 120 lumen per watt range. We're seeing customers starting to design at that next level, but there's definitely a lag from when the LED comes out to when you're going to see that in the system. So if you just take the normal design cycle, if you hand someone a new LED today depending on if it's indoor, outdoor, commercial, consumer, you can see a design cycle anywhere from 6 to 18 months. And so I think we're really just starting to see the products come out. We've been at Light+Building the last few days. And I think you're starting to see some of the products come out that use the newer LEDs, but there's still a lag effect.

Next questioner in queue is Ahmar Zaman with Piper Jaffray.

My first question is how many -- can you clarify what percentage of your LED sales -- LED product sales were to the backlighting channel or end market this quarter?

Yes. There's -- essentially, there's -- it's basically a de minimis amount. I think it's essentially less than 1%.

Okay. So you -- I mean we were hearing that there's rush orders in backlighting and then Korea and Taiwan. You did -- you didn't participate in that?

No. As we've kind of said in the past, our focus is really on lighting. We do service the video screens, some other applications, but we have really not focused on the backlighting market. When we do participate, it tends to be more of a chip-oriented business, not a components level business. And although we have seen a little bit of activity there, it's really not our focus. And so I would expect you're going to see more activity on the backlighting front, both the positive and the negative swings, you're more likely to see from some of the suppliers out of Asia.

Next questioner in queue is Vishal Shah with Deutsche Bank.

Chuck, to what extent does some of these new product introductions impacting demand for existing products as some of your customers try to qualify these new products? And can you just update us on the 6-inch transition, timing, any change on that front?

Yes. On the 6-inch, we continue to qualify new products but we're not converting additional capacity. So the way to think about that is, is that there's 2 things you got to do. Each product that you're going to bring over has to get qualified. So we're staying on track with that so we have the flexibility to turn on 6-inch as the volume warrants. But we haven't made a significant increase in 6-inch percentage of starts just because at this point, we want to utilize 100-millimeter capacity in the near term. So I think we're doing all the things to put ourselves in position to take advantage of it. But at this point, we're not going to put a new capital in place to do that, at least not until we see the demand pick up a little bit more there. It just doesn't have any net payback. As far as the demand, old versus new products, I assume you're referring to LEDs. And so what I would tell you is that the XB-D, XT-E and then all the products that use the new SC3 platform, we're seeing lots of design activity. But that's not driving -- I mean that will have some incremental benefit on demand this quarter. And frankly, those products, we have seen lead times move out on those just because of the initial demand. But with that being said, it's still the majority of the business as the products that have been designed in. And so I think going forward, we'll see more people convert to the new products. But in the short term, it's more incremental. Longer term, I would expect most customers to move down there -- down that path just because the lumens-per-dollar is better and frankly that's what we want them to do, right? More lumens-per-dollar means better products on the market, which should drive adoption.

Next questioner in queue is Vidya Adala with Morgan Stanley.

I have 2 questions. One is on the utilization levels, it looks like it's all going to track in that it's trending up. At what level of utilization will you be more comfortable in transitioning to the 6-inch? So I'm using the 60% roughly benchmark you've provided us last quarter. And then my second question is, is there a difference in demand trajectory by geography? Are you seeing a difference in Asia versus Europe versus North America at this point?

So on the utilization question, I think right now 6-inch is going to be -- when is it? I think I said last quarter, it's probably 3 to 6 quarters out when we're going to make a significant move. I think we're going to continue to evaluate that each quarter. The reality is this -- last quarter, utilization was pretty similar, maybe slightly higher than in Q2. So this quarter, we're targeting to be incrementally higher again but we're not having a big shift in utilization in the short term. That's one of the reasons that being able to drive the margins up without the utilization going up significantly is actually -- it's something, we’re real happy with the factory execution that made that possible. And frankly, it shows you what can be done just from an execution and a new product standpoint. So I think that's -- the near term focus is let's take the incremental steps, we'll update more when we go to 6-inch later. But the fact is that really comes down to driving demand, and that gets us back to let's get the new products out there, let's drive the demand. And then which is your second question, which is demand trajectory. We're seeing, if I talk about the LED product line, we're seeing strength in North America, Asia and even some strength in Europe. So I think what you're seeing is a relatively broad-based momentum in LED lighting. To give you an anecdotal thing, we spent the last -- the Light+Building show here in Germany has been going on for 3 days now. And there's essentially no significant lighting company that isn't doing most of their new designs in LED. Now the fact that they're working on new designs does not mean they're selling many of those products yet. But from 2 years ago to where we started to see the shift from the major players, pretty much all the players are now moving. And so what I would expect is that when the designs start to come out, then there's some lag to when you actually get sales momentum and start to drive that. But we're relatively optimistic that the design activity is starting to lead the demand on the LED side from a lighting standpoint. But again, I don't -- I think it comes over time, and we got to keep focused on it and keep working on it quarter-by-quarter and not forget to do the products. I think your other question might be lighting-related, and that's primarily North American business, so we do have some international exposure. But it's really a North American business, and that's really the trends we're seeing there, which are driven by, in primarily, the U.S. and a little bit of Canada.

The next questioner in queue is Mark Heller with CLSA. Mark Heller - Credit Agricole Securities (USA) Inc., Research Division: As you guys move more and more toward a sort of a light fixture model, I'm just wondering how your component customers are reacting to that?

Yes. What I would tell you is that, that question was asked a lot back, when I say asked, not by the analysts but was asked a lot by our customers back in the August-September time frame when we first announced the Ruud acquisition and explained that. I'd say that we're 8 months into it today. I think most of our customers are pretty comfortable with where we're at. I think what we've learned is that -- and what we believed is that if we make products that help our customers' products work better, we're going to be able to sell more of them and it's really about driving that innovation. And what we've seen obviously with the XB-D and the XT-E is you get products out there that help your customers' product work better and you get a lot of momentum on that. So I think it's pretty balanced. I think that the other thing that the industry is coming to grips with is that the reality [ph] is that most companies that make light sources or LEDs also have a systems business in one way or another. And so I think -- and that's not that uncommon in the lighting business. So I think it had a little bit of disruption early on but not significant. And I would say that today, it's a pretty much -- it's not a significant part of any of the discussions, it's about what it -- can our LEDs do to help our customers' products be better. Mark Heller - Credit Agricole Securities (USA) Inc., Research Division: And my follow-up, when do you expect to ramp meaningfully the XT-E, XB-D LEDs? And are there any implications for margins when you ramp that?

So the ramp up of XB-D, XT-E is going on. We started shipping it last quarter. We will continue to ramp up this quarter. I think I commented earlier that the lead times of that have actually moved out already. So my guess is that in the short term, we're going to be ramping that pretty much as fast as we can to meet the near-term demand. As far as what does that mean going forward, I think we'll have to see what percentage of the business it becomes. But in terms of margins, not only did we double the lumens-per-dollar but we made it a lot less expensive. So I would expect that product to be a net positive to margins from where we are today.

Next questioner in queue is Daniel Amir with Lazard.

Yes, a couple of questions. First of all, on the agents, which is something I guess you started in January to shift over, and you probably had some visibility. I'm just a little -- just trying to understand why you actually didn't preannounce the quarter here, considering that you probably knew far in advance that you might not make the revenues for the quarter? And then the second is regarding to the margins here. Can you -- the guidance is flat margins essentially but you're seeing a bit better utilization rates, a little higher revenues. So can you just give us an idea what the moving factors here for the margins here this quarter?

Yes. So I'm not sure where you got the flat margins. We're actually guiding them to go from 35.6% to 36%, plus or minus, so that's actually increased margins and the utilization is relatively flat, slightly up. So we're actually targeting to get some additional execution benefits. So maybe we weren't clear earlier, but I would estimate that margins are actually moving up right now on -- not a significant increase in utilization, so that's a net positive. As far as the agents go, you just have to remember there's a lot of project-based business, so while we did make the change in early January, we were working a number of projects that we thought we could still close between then and the end of the quarter. And that while we had success in some of those, it wasn't until the end that several of the projects that didn't happen or got pushed out into the following quarter, that we realized that we weren't going to quite get there. Hey, it's a significant transition we made. Actually I think we took a pretty aggressive approach to it. In the end, some of the project didn't happen as quick as we wanted to. But in the grand scheme of things, I think if you look at our revenue range, we're within a couple of percent of the bottom of it. So hey, there's a lot of moving parts in LED lighting right now, and we came in a couple -- few million below the low end of the range. But at the end of the day, it's going in the right direction, and frankly that's what we're focused on at this point.

Next questioner in queue is Carter Shoop with KeyBanc.

First question on the agents. It sounds like a couple of your larger lighting competitors' forced agents that carried either Beta or Cree products to drop the fixtures over the past 4 months. And with that said, how many of your current agents still carry products manufactured by the big 4 North American lighting fixtures? I'm trying to get a better sense, if this headwind is completely behind Cree or if we have potential netters the lag [ph] down here?

Carter, I would tell you that while there was definitely pressure put on the market, I'd say in probably 90% of the cases, I think or more than that, I think we end up with the agency that we were targeting going into the change. So I feel pretty good about it. There was definitely a couple of markets where we didn't get -- we didn't end up with one of them. But I'd say all of the -- almost every agent we have works with one of the big 4 today. So in many cases, the agency basically -- we just moved from the one agent to another. And then in a lot of cases, most of them are already a Cree agent or a Beta agent. And so in our case, most of the decision making was, which one did we think would be better at selling a combined product line? Selling outdoor spec business and selling indoor business that is really focused on more of the commercial building side of the marketplace and a different type of customer with a different distribution element. It was really about how do you find someone that can cover that broad range and really wants to push LED lighting. And so as much as anything, a lot of it was us picking who we thought would go out there. I'd say very little of the disruption was people not wanting to stick with us, much more of it was us having to make a choice. And in some cases, between 2 pretty darn good agents, we had to pick one we think would work best. And so in the end, we have one of the large traditional lighting companies is pretty much a part of just about every agency out there today, that's of any significance. And so in many cases, it just changed who that player was.

And then as a follow-up question, today, roughly 30% of your sales are from fixtures. If we fast-forward 2 to 3 years, do you expect that increasing or staying roughly where it is today?

Carter, it's -- obviously, it's going to depend. I think it will go in cycles, so I think what you'll see is when we're able to come out with products that I think can move the market, you can see that percentage increase. So obviously, this quarter, we're targeting double-digit growth in lighting and single-digit growth in LED components, which would mean it's growing a little bit faster. And that's going to be a function of some of the new product momentum. With that being said, I think as the market turns on different segments, because our fixture business is really only focused on North America, there is a significant impact of what happens in Europe or Asia or other markets that's going to drive components. So it's a little hard to tell you today which market is going to gain traction and which time. Obviously, our goal is to grow both of them. If I had to guess, lighting will probably grow net a little faster over that 2- to 3-year period of time, but I don't think it's going to be -- I think it's going to depend on what products, what segments are moving in which geographies each quarter. And I think we're going to see some different factors affecting that as we move along.

Next questioner in queue is Colin Rusch with ThinkEquity.

Can you talk about your investments in control technology and the next generation of integration you're seeing with control technology and some of the utility operating systems?

Yes. So I can tell you today that we have a number of approaches. We're typically, Cree's approach is a little bit different than the rest of the market. So we're typically working with third-party control systems that are out there and working to design our systems to be compatible not only with systems that are already installed but with products that are available from others. We're not -- at this point, we haven't made the bet that a proprietary control system is the right way to drive the market. And I think given how much new technology is coming out, controls related, I think our open approach at least in the near term and trying to stay compatible with several other systems is frankly going to help us move the market a lot quicker. I know there's in different view to that, but I think we're kind of more of the open approach to the market at this point. And a lot of changes coming. I mean I think right now people talk about all the new technology. Frankly, most people are installing relatively old control systems and packaging them together. I think as we go forward, once you have an LED lighting system and you have an electronic platform, there's pretty much -- a pretty incredible amount of things to do. And the product -- the most short-term thing that's got to happen is that a lot of the new installations in certain markets, you're going to have to be able to do daylight harvesting, and you're going to have to be able to do motion sensing just to meet some of the new codes coming especially the ones in California. So I think you'll see that become pretty much a de facto standard and then how far people go, how quickly, I think is going to depend on the customer. There is no one-size-fits-all approach to control, and so I think we're going to take a pretty open approach to that.

Next questioner in queue is Jonathan Dorsheimer with Canaccord.

Chuck, let's hope we don't get any volcanoes this week. In terms of a -- couple of questions for you, or one and a follow-up, I guess. If I normalize for the inventory build, I get a little bit below 35% on the gross margin. It seems as if on -- it's basically a flattish sort of utilization increase as we look to the June quarter. You're getting a nice boost moving to that 36%. Just wondering if you can maybe provide a little bit more granularity in terms of a bridge, if you will, in terms of both in the very near term and then a little bit longer term, how to get the gross margins up? How much do you expect is coming from utilization increase? How much from some of the new products like the XB-D? And then how much from the systems sort of taking costs out? And then I have a follow-up question for you.

All right, Jed. So if you look at gross margin, the way to think about Q3 is this. So if you look at LEDs and Power and RF, which are really the asset-heavy, factory-heavy parts of the business, both of those product lines were inventory neutral to actually inventory down. So there was no gross margin benefit in either one of those from an inventory build. All the inventory build was actually in the lighting product line, and it was pretty much focused on the raw and WIP for areas. So when I look at those numbers, I don't see any significant benefit to gross margin last quarter because it's really raw materials and WIP for a lighting ramp that we're planning for this quarter. So I would say essentially no effect, so I think what we actually saw last quarter was, is that 35.6% non-GAAP number is pretty much all coming from execution. I mean utilization was just slightly higher. So it's really a combination of product mix and some great execution in terms of frankly reducing costs and making more LEDs at the same time. We did a nice job there. As far as the -- and so that -- to me near-term plan is not going to get a big -- we're not going to get a big utilization bump in Q4, so the guidance really comes from, hey, we think we can continue to execute pretty darn well from a cost standpoint. We do have some increasing mix of some of the new products, so that starts to help us, and that gives us some incremental momentum in Q4 because we're targeting, relatively speaking, inventory to be generally a wash, not a significant build or burn. So that brings us back to -- essentially, you're looking…

So, Chuck, good segue into my follow-up. The new products that you introduced, it's sort of half the price point of everybody else's streetlight. Can you provide a little bit more details on how you're getting there and maybe instill a little confidence on the systems side that, that's not going to be dilutive to the overall business?

Well, what I can tell you is that, that product was positioned in a way that we think would take -- would be accretive to our current gross margins for the lighting product line. Now that being said, how do we get there is probably the more interesting question. That is a product -- project that was actually started before we bought the Ruud business, and it was really a design of a system from LED chip all the way through. So we basically sat down and said, "Here's a problem we want to solve. What are all the levers we have?" So that has -- there's pretty much nothing the same in that version of streetlight from the previous one. So we were able to take cost out of the -- some of the cost out of the LEDs but frankly used higher performance LEDs. And that's just a function of the LEDs keep moving, right? So you're taking advantage of the fact that 2 years from when the last one was designed, the higher-performance LED cost you less than the one cost you years ago, and you can do a lot more with it. I think we looked at a different system to put the LEDs in there and some things to extract more light optically, so we've got a benefit out of the optics that -- and gave us more efficiency, which gave us more light at a lower cost. The thermal design, because you got the efficiency, got cheaper, less expensive, and it also helped us on the driver side. It was really a combination of all those pieces coming together. And frankly looking at how do you build the thing to take out inefficiencies there. As you can imagine, if you're trying to cut the cost of your product in half, and LEDs are less than half the cost, you got to work on something other than the LEDs. And I think this is really about taking a look at the whole system. It's not much different than what we did on troffer, just applied to the streetlight.

Next questioner in queue is Amir Rozwadowski with Barclays.

Chuck, perhaps just tailing on that question on the gross margin trajectory, it seems as though you've notably made some improvements on the manufacturing side that's enabling you to drive improved gross margins despite utilization levels. Still, it's only slightly improving at current levels. How should we think about sort of your longer-term gross margin targets? Are the targets are sort of returning to the low 40s, mid-40s level still on the horizon? Or is that something that at least, for the time being, not really where you're gearing the business towards?

Those are always long-term targets. I think the way we think about it is, hey, control what we can control, right? So let's work on the new products and the execution, try to get the innovation and drive the revenue. Those are the 3 biggest levers we have to work on in the near term. And frankly, that's where our focus is. If you ask the question as more philosophical, right, do you still think there's a business model that supports this the low 40-type gross margin. I'd still believe that, that's out there. Now I'm not going to give you a time line, and I don't think it's -- a lot of people like to debate that, but having seen the cycles of this business before, and we've done this quite a few times, you can look at the history of Cree going through these innovation cycles. And that when you come out of an innovation cycle, products that open markets that you didn't have access before, you typically get some scale leverage. And it's really a question of does the innovation you're able to create, can it extract value out of the market? And I can tell you that we're just getting started in LED lighting adoption, and there's incredible value to be extracted when an LED system relative to a conventional one. And it's not one for one. The LED system not only can give you lighting quality as good or better in many case than what's out there today. We can do it with a pay back to where we're generating value not just system for system, but the fact is, is we're saving the customer money whether it be energy, maintenance or other aspects of the design. So I think that if we can continue to innovate, there are definitely opportunities to where that innovation leads to margin leverage going forward. Again, that's longer term. And in the short to midterm, what we can control is, what we can see in front of us, which is get the new products out, drive the execution, drive the revenue, and that should help us start to hopefully continue to build some incremental momentum. But that's where we're at.

So I guess from a strategic standpoint, are you looking to drive down sort of pricing points in order to continue to drive the adoption, particularly in general lighting, and you're willing to sacrifice some margin in order to do that? Or is it not a trade-off like that, I shouldn't be thinking of it as a trade-off?

I think the trade-off you're thinking of comes later when the market's more mature. I think at this point, we're just trying to get the market turned on. I mean for all of the success we've had, and look, we've had a lot of success growing a lighting business from nothing to where it is today in LEDs. And in the components business, the same way. But the fact is, is that LED lighting despite all the people showing new products is still a relatively small percentage of the market. And so we have to turn the market on and get the industry to start thinking of LEDs as the first choice, not as an alternative choice, not as a premium choice, but as the choice. And until we do that, we're all just playing around with small numbers, right? And so from the beginning, we've said our goal is to drive the LED adoption to where this is the primary light source out there. We're looking for large market segments. And so until we do that, everything else is just an incremental conversation. And so I think it's almost premature to worry about it. Your question's valid. I think it's valid though when we're talking about an industry that's at 40% or 50% adoption, not when it's at 5%. And so at this point, let's get the adoption and let's innovate as fast as we can to make that happen. And I think the number starts to take care of themselves when the revenue growth -- when we drive that revenue growth and get some of the new product innovations to where we can drive that value.

We have time for one final questioner. Satya Kumar with Credit Suisse. Satya Kumar - Crédit Suisse AG, Research Division: I was wondering if you could comment on how much capacity you have at the moment to make XB-D, XT-E and how that will ramp over the next few quarters? And given your comments on lead times and customer demand for these products, would you look to prioritize customers where you could perhaps participate more in the value of these products? And I have a very quick follow-up.

Yes. So on the capacity, I think XB-D, XT-E, it is -- generally uses much of our existing capacity. However, there are some unique processes that were developed there. And those are the places, there were essentially bottlenecks that we have to overcome. So I think the vast majority of our capacity can be used for it but it's really a timing issue as we address the bottlenecks and bring on those incremental pieces of CapEx to turn that on. So it's really a timing thing. My guess is we’ll be relatively limited this quarter. But knowing that it's really some key bottlenecks, I think we'll get ahead of the curve here hopefully as we start into the next fiscal quarter. I'm not sure I remember the second part of your follow-up there. Satya Kumar - Crédit Suisse AG, Research Division: Would you look to prioritize customers where you can perhaps participate more in the value of these products in terms of queuing them relative to your customer demand?

Look, obviously, that's a tricky one. I think we want to try to support as many customers as we can because the fact is as we're -- the goal is to get as many people moving with this new platform. I think right now, we're doing a good job. The reason I talked about the lead times and we got a little bit is it's like -- look, it's got -- it's obviously a positive sign. It's got people's attention. It shows us that I think we've hit on something that helps move the market, and we've just got to react. So I think in the short term, we'll find a way to balance the different customer demands to help them keep moving. And hopefully, as I said, by the time we get into next quarter, we can balance it a little bit better. But my guess is this quarter, it will be pretty tight. And in the end, we'll have to make some calls but our goal is going to be to support as many customers as possible, frankly. Satya Kumar - Crédit Suisse AG, Research Division: Chuck, and I know this topic has been beaten to death on the agent transition. But given that your lighting sales are essentially lagging the industry over the last 6 months, and you're going through this retraining process for the last 3 months and the next 3 months. Could you see a breakout quarter perhaps as you look out into the second half where your lighting product sales will actually grow much faster than the industry when you try to catch them? And how should we think about that in the back half of the year?

Yes. Look, I think we've got to be a little bit careful taking industry numbers over a broad industry and applying it to a new technology area. The fact is, is that up through last quarter, we had seen pretty solid growth in the areas we control. Clearly, as we've done an acquisition and so the outdoor lighting product line went through a transition period, and I think we did that pretty well. And frankly, it shows you that, that business actually did pretty well through the lighting agent transition. So I feel pretty good that, that one, we've worked through that piece. And then when we change the agents, and we took the indoor guys through the same thing, there's definitely some disruption. But I think we should be pretty careful talking about 3-month trends on something that's taken us 5 years to get here, and there's a lot way [ph] in front of us. I think it's a fair data point, but I'm not sure we have a trend yet. I think the way we see the projects coming and some of the momentum, I think I feel pretty good that driving growth in the lighting business is something that's just a matter of us continuing to execute. And if we quit switching all the agents, I'm sure it's going to get a whole lot easier to do.

This does conclude our time for questions and answers. I'd like to turn the program back over to management for any additional or closing remarks.

Thank you for your time today. We appreciate your interest, your support and look forward to reporting our fourth quarter and fiscal year 2012 results on August 7. Good night.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and have a wonderful day. Attendees, you may log off at this time.