Wolfspeed, Inc. (WOLF) Q4 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen. And welcome to the Cree, Inc. Fiscal Year 2015 Quarter Four Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and then instructions will follow at that time. [Operator instructions] As a reminder this conference call is being recorded. I would now like to turn the conference over to Mr. Raiford Garrabrant, Director of Investor Relations, you may begin.

Thank you, Abigail, and good afternoon everybody. Welcome to Cree’s fourth quarter fiscal 2015 conference call. Today, Chuck Swoboda, our Chairman and CEO, and Mike McDevitt, our CFO, will report on our results for the fourth quarter of fiscal year 2015. 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 posted in the Investor Relations section of our website. Today’s presentations include forward-looking statements about our business outlook, and we may make other forward-looking statements during the call. These 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 fourth quarter of fiscal year 2015 to a discussion of the information included in our press release. We will not be able to answer any questions that would involve providing additional financial information about the quarter beyond the comments made in the prepared remarks. 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’re 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 and one follow up. If you have additional questions, please contact us after the call by email or phone at 919-287-7895. We’re also webcasting our conference call and a replay will be available on our website through August 25. Now, I would like to turn the call over to Chuck.

Thank you, Raiford. Fiscal 2015 was year of good progress and expanding our lighting and Power and RF business mixed with the challenges in the LED industry. Revenue is similar to fiscal 2014 at $1.63 billion as growth in lighting mostly offset the decline in LED. Non-GAAP net income declined to $72 million or $0.64 per diluted share as profit growth in Lightning and Power and RF was not enough to offset the significant decline in LED profits and the related restructuring costs. As we announced previously, we decided to restructure the LED business in fiscal Q4 to adjust capacity, reduce overhead and increase LED reserves. This resulted in $84 million of restructuring charges in our fiscal Q4 and we target $18 million of additional charges in fiscal 2016 as we complete the consolidation of our LED factories. We believe this restructuring once fully completed in our fiscal Q2 will better position the LED business to focus on our new market leading high power products with a reduced cost structure going forward. Fiscal Q4 revenue decreased 7% sequentially to $382 million, as solid growth in commercial lighting was offset by lower LED revenue related primarily to the restructuring and lower consumer bulk sales. This resulted in Q4 non-GAAP net loss of $20.5 million or $0.19 per diluted share, however cash flow improved in Q4 with free cash flow reaching $35 million, the highest quarterly level in a year and a half. Q4 non-GAAP gross margin declined to 21% due primarily to the LED restructuring. Power and RF margins were in line with our targets while lighting was slightly slower than targeted due primarily to year end items related to commercial lighting and lower consumer margins due to lower volumes in the quarter. Commercial lighting margins were in line with fiscal Q3, if you exclude the year end items that Mike will discuss in a few minutes. Company backlog for Q1 is tracking to our targets for the quarter. We made progress on several of our key objectives in fiscal 2015. We continue to drive innovation across our product lines to lower customer cost and further improve payback. We grew commercial lighting 37% for the year which drove overall lighting growth of 28% for the year. Even though consumer lighting revenues increased only 2% for the year, the Cree LED bulbs continues to build the Cree brand and enable awareness across all product lines. We successfully added manufacturing partners for LED chips and LED lighting which should provide long-term cost leverage, enable Cree's factories to focus on new product introduction and technology. The objective that we did not achieve was our goal to grow company revenue and increase operating margin. While we made progress in Lighting and Power and RF, the decline in our LED revenue profits, as a result of LED industry challenges and our restructuring more than offset to gains than the other business. Growing revenue and operating margins will be our primary focus in fiscal 2016, and the actions we undertook at the end of fiscal 2015 underpin this goal. I'll now turn the call over to Mike McDevitt to review our fourth quarter and year-end financial results in more detail as well as our targets for the first quarter of fiscal 2016.

Thank you Charles. I will be providing commentary on our financial statements from both the 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 historical summary of other key metrics. For fiscal 2015, revenue was similar to fiscal 2014 at 1.63 billion. We had a GAAP loss of 64 million or a loss of $0.57 per diluted share and non-GAAP earnings were 72 million or $0.64 per diluted share for fiscal 2015. Non-GAAP earnings excludes a 136 million of expense net of tax or $1.21 per diluted share from restructuring cost, amortization of acquired intangibles, asset retirement charges, net changes associated with our Lextar investment and non-cash stock based compensation. Regarding a restructuring of our LED business we recognized 84 million of cost in the fourth quarter of fiscal 2015 which includes 27 million of LED revenue reserves, 11 million of LED inventory reserves and $46 million of factory capacity and overhead cost reductions. The revenue ad inventory reserves are included in both our GAAP and non-GAAP results, while the capacity and overhead charges are included in our GAAP results only. We now target total restructuring cost to be approximately 102 million which includes 18 million of additional charges in the first and second quarters of our fiscal 2016. Primarily related to additional capacity and overhead cost reduction identified during the factory consolidation process and we're finding the estimated fair values on certain equipments being held for sale. Fiscal 2015 revenue and gross profit for our reportable segments were as follows. Lighting products revenue grew 28% to 907 million and gross profit grew 19% to 236 million or 26% gross margin. Gross margin was lower year-over-year due primarily to lower LED bulb margins due to a more competitive pricing environment. LED products revenue declined 28% to 602 million and gross profit decreased 50% to 191 million for a 31.7% gross margin. The decrease in LED revenue and gross profit was due to a much more competitive market environment during fiscal 2015 and our decision to restructure the business to reduce excess capacity and overhead. Power and RF products revenue grew 15% year-over-year to 124 million and gross profit grew 12% year-over-year to 68 million for a 54.7% gross margin. These increases were driven by growth in our Power products. In determining gross profit for our segments we did not allocate certain employee benefit costs and stock based compensation cost. These non-allocated costs totaled 20 million for fiscal 2015 and are included to reconcile to 475 million GAAP gross profit. For the fourth quarter of fiscal 2015 revenue decreased 7% sequentially to 382 million which was slightly above our revised target of approximately 375 million. We had a GAAP loss of 88 million or $0.83 per diluted share for the fourth quarter of fiscal 2015 and a non-GAAP loss of 21 million or $0.19 per diluted share. The non-GAAP loss excludes 67 million of expense net of tax or $0.64 per diluted share from the amortization of acquired intangibles, non-cash stock based compensation, restructuring cost associated with our capacity and overhead reduction and our net changes associated with the Lextar investment. Fiscal 2015 fourth quarter revenue and gross profit for our reportable segments was solid. Lighting products revenue grew 2% sequentially to 229 million and gross profit declined 2% to 56.9 million or 24.8% gross margin which was 120 basis points decrease quarter-over-quarter. During the quarter we had double digit commercial lighting product revenue growth which was mostly offset by a larger than targeted seasonal decline in consumer lighting products. The gross profit in margin was slightly lower than targets to primarily to commercial lighting product gearing true-ups on inventory and warranty cost, and lower consumer margins due to lower volumes. LED products revenue declined to 122 million and gross profit declined to 8.5 million for 7% gross margins for the quarter which was in line with the updated targets we provided on June 24. Power and RF products revenue was 31 million and gross profit was 16.2 million for a 52.5% gross margin which was similar to last quarter in line with our targets. Non-allocated cost totaled 4.6 million for the fourth quarter of fiscal 2015 and are included to reconcile through a 77 million GAAP gross profit. Q4 GAAP gross margin was 20.1% and non-GAAP gross margin was 21% which excludes 3 million of stock based compensation. Those are GAAP and non-GAAP gross margins were impacted by the revenue and inventory reserves related to our LED restructuring. Operating expenses for Q4 were a $173 million on a GAAP basis and 108 million on a non-GAAP basis both of which were within our revised targeted range after accounting for the restructuring cost. Non-GAAP operating expenses exclude approximately 46 million of capacity and overhead restructuring charges, 12 million of stock based compensation expense and 7 million of charges for amortization of acquired intangibles. Our non-GAAP operating loss is 28 million. We ended the year with 713 million in cash and investments, a 449 million decrease year-over-year. The year-over-year decrease was primarily due to spending 550 million to repurchase 60 million CREE shares and 226 million of capital expenditures which was partially offset by 181 million of cash provided from operations. Free cash flow was a negative 44 million for the year and we ended the year with 200 million outstanding on our line of credit. For the quarter cash from operations was 88 million and capital expenditures were 53 million including 5 million related to patents which resulted in free cash flow of 35 million. For fiscal 2016 we're targeting property, plant and equipment spending to be lower than fiscal 2015 at 150 million plus or minus which will primarily occur in the first half of the fiscal year to complete certain existing infrastructural projects and provide lighting and power and RF incremental capacity. Overall we currently target fiscal 2016 free cash flow of approximately 85 million. Day sales outstanding was 44 days as compared to 48 days at the end of March and lower than our 50 day plus or minus target range. Inventory days on hand decreased to 83 days as compared to 95 days from the end of March, also lower than our 90 day plus or minus target range. Both ratios are in line with our target ranges after excluding the impact of the restructuring charges. At this time we target Q1 revenue to increase to a range of 410 to 430 million which is comprised of solid growth in lighting sales, led by higher commercial sales, LED sales in a similar range to Q4 after excluding the impact of the revenue restructuring reserves and incrementally higher power and RF revenue. We target Q1 non-GAAP gross margins to be 32% plus or minus and GAAP gross margins to be 31.3% plus or minus. We target incremental gross margin improvement in all of our segments along with some benefits from a recent patent license agreement. These Q1 targets are based on a number of factors that could vary including overall demand, product mix, factory execution and a competitive environment. Our GAAP first margin targets include stock based compensation expense of approximately 3 million while our non-GAAP targets do not. We're targeting Q1 non-GAAP operating expenses to be approximately 107 million as core spending reductions are partially offset by higher IP litigation spending. We are targeting Q1 GAAP operating expenses to be approximately 142 million which includes approximately 15 million of restructuring charges, 14 million of non-cash stock based compensation expense and 6 million for the amortization of acquired intangibles. Non-GAAP net interest income and other is target to be approximately 1 million for Q1. Q1 GAAP net interest income and others targeted to be a loss due to the significant decline in Lextar stock price quarter to date. The amenable loss will be primary a function of the Q1 change in Lextar's stock price on our 83 million Lextar shares. We target our Q1 and fiscal 2016 tax rate to be 25%, the Q1 of fiscal 2016 tax rate is higher than Q4 as we target a higher percentage of US earnings for fiscal 2016 due primarily to a higher percentage of lighting sales year-over-year. As a reminder our Q1 in fiscal 2016 tax rates will fluctuate based on our overall earnings, tax jurisdictions in which our income is actually earned, tax credit and other tax benefits that may or may not become available for CREE in future period. We target a GAAP net loss for Q1, to be between 16 million to 22 million due to the additional restructuring cost and the estimated fair value loss based on Lextar's current stock price. Based on an estimated 103 million diluted shares outstanding our GAAP EPS loss targeted is between $0.16 to $0.21 per diluted share. Non-GAAP net income is targeted to be between 19 million to 24 million or $0.18 to $0.23 per diluted share. Our non-GAAP EPS targets exclude restructuring charges, amortization of acquired intangibles, net changes associated with our Lextar investment and non-cash stock based compensation in the amount of $0.39 per share. Thank you, and I'll now turn the discussion back to Chuck.

Thanks Mike. We are focused on several key priorities in fiscal 2016 to take advantage of the growing market opportunities for all of our products, while responding to the competitive environment. Our first priority is to build financial momentum. We target overall company revenue growth of approximately 10% in fiscal 2016 with operating margins increasing for the year. We target our commercial lighting business to drive revenue and profit growth from the combination of new product sales momentum and improved product margins. Consumer lighting is targeted to be lower for the year but at a similar run rate as our fiscal Q4, as we focus on our premium product position and building brand value that translates to our commercial products. We're focused on stabilizing the LED business and executing the previously announced restructuring. We believe the LED market will remain very competitive for at least the next year, but target the combination of design wins for our new SC5 LED products and lower cost structure to help offset the competitive challenges in the market. We target growth in Power and RF to also contribute to our overall growth goals for the year. We believe that we can generate operating leverage as we start to see benefits from our investments across the business over the last several years. We're targeting lower legal expense in the second half of this fiscal year as some of the current patent litigation comes to a conclusion and have adjusted our brands spending lower to better align with the targeted levels of consumer business for the year. We recently announced the worldwide patent cross-license agreement with Epistar for LED chips designed to the further advancing growth of the LED lighting and LED bulb market. This agreement resulted from our strategy to more aggressively enforce our LED intellectual property and our decision to follow several patent losses over the last year. Each party receives a license to the other nitride LED chip patents and has granted certain right to non-nitride LED chip patent. Over the lifetime of the agreement we received license and royalty payments from Epistar. Our second priority is to continue to innovate in each of our business segments. We've established ourselves as the innovation leader in LEDs, LED lighting and [indiscernible] Power and RF. We continue to develop new products that deliver fundamentally more value to our customers and build our brand. We have a tremendous pipeline of new products and technology and target a steady stream of new innovations in 2016. Our third priority is to promote future growth in Power and RF and allow Cree's shareholders to better realize the full value of this business. This is unique business with world class IT and technology in two exciting growth markets, energy efficient high power switching and next generation wireless. Our Silicon Carbide power device technology and Gallium Nitride RF technology are both likely to reshape large markets that today are primarily served with older silicon and Gallium Arsenide technology. We announced our intent to spin off our Power and RF business with an initial public offering in fiscal 2016 to raise capital to invest directly in the business to support targeted future growth. As part of our increased focus on this business we recently acquired APEI to extend our leadership position as advanced power electronics and accelerate the market for high-performance, best-in-class Silicon Carbide power modules. As I mentioned earlier, Q1 total company backlog is tracking with our targets for the quarter as commercial lighting order are ahead of Q4. The LED business remains very competitive and we are taking a cautious approach to this market with our distributors. Our targets for fiscal 2016 include managing LED distributor inventory to increase their returns and further reduce our exposure to changes in pricing going forward. Factory utilization is improving in LED as we execute the restructuring plan and is targeted to reach 85% plus or minus by the end of December when our factory consolidation is completed. Factory execution continues to be critical to achieving our targets, based on our current backlogs, forecasts and trends in the business we're targeting Q1 revenue in a range of $410 million to $413 million which is comprised of solid growth in lighting sales driven by strong growth in commercial lighting and LED bulbs flat to slightly higher, LED sales in a similar range of Q4 if you exclude the effect of restructuring costs in the previous quarter and incremental growth in Power and RF. We target Q1 non-GAAP gross margins at 32% plus or minus. This target includes margin improvement in all three segments. We target non-GAAP operating expenses to be lower than Q4 at $107 million, as a result we target incremental non-GAAP operating leverage in Q1 and higher operating margins. Our tax rate is projected to be 25% and as a result we target non-GAAP earnings in a range of $0.18 to $0.23 per diluted share. The actions we took last year position us for solid revenue growth and margin expansion in fiscal 2016, driven by the strength of our commercial lighting business. We remain focused on leading innovative technology to deliver better products and value to our customers and more profits to the bottom line. We remain on track to raise the focus on our Power and RF business with an IPO later this fiscal year which should provide additional capital or fund growth in that business and enable Cree shareholders to realize more value. We're confident we can deliver revenue and profit growth in fiscal 2016 and we plan to utilize our stock repurchase program this quarter and across the fiscal year. We'll now take analysts' questions.

[Operator Instructions] Our first question comes from the line of Paul Coster with JPMorgan. Your line is open.

So, you're looking for some kind of revenue growth I think it was in next fiscal year, Chuck and is it reasonable to assume that we should see operating leverage given the restructuring actions that you've taken like a 15% EPS growth, is a reasonable expectation or thereabouts?

Paul so, the target we've put out there is 10% revenue growth plus or minus through the year and operating margin increasing and the number we've put out is approximately 8% through the year so that gives you some idea about what the math looks like.

Yes, 8%, sorry I don't understand.

8% operating margin for the year is our target.

And then in the 10% revenue growth forecast that you’ve laid out there, can you just give us some sense of what your assumptions are about high power, low power mix? And whether there is a mix for Ferroics really around the sort of Cree -- the sort of sweet spot whether you can see the market may go against you and yet still post those kinds of numbers?

Yes, the 10% is for the overall company, Paul the real growth driver next year is the commercial lighting business. We are actually targeting consumer lighting to be flat to maybe even down a little bit for the year on a year-over-year basis and then you've got Power and RF growing and then within LEDs we are targeting it to be in a similar range so the idea is that the combination of new products and lower costs from the restructuring are really the way we are modeling in the year is that would be offset by the continuing in competitive LED environment, so that’s kind of the sensitivity to the target.

And your next question comes from the line of Brian Lee with Goldman Sachs. Your line is open.

Hey guys thanks for taking the questions. I had two of them, first and I forgive me, I think you did cover this but I missed it, the capacity utilization that you are running at on the LED front end currently and then how that compares to last quarter and then the follow-up was around your gross margin guidance [indiscernible]. It’s the same as what you had originally targeted for fiscal Q4 before the restructuring was announced and I believe that at that time you sighted lower than expected ASPs accounting for about an 8 million impact to top line, so wondering how are you getting back to the similar margin level, has pricing actually improved or is this all about cost now being down or reduced enough to completely offset the ASP environment which is unchanged? Thanks guys.

Yes, so Brian let me take those in reverse first, so on the gross margin guidance it's really a combination of incremental improvement in each of the segments, so we are targeting some improvement in lighting, LEDs and Power and RF but [LED 1] we take at some benefit from the restructuring but it's also a combination of kind of targeting that that business would stabilized and then some incremental benefits in the quarter from the recent license that we announced. So it's really those things driving the short-term guidance, in terms of the capacity utilization we don’t have a specific number for you for where we're at; it has improved, but the restructuring has actually started it's not finished so the factory consolidation, the one will drive the number the most is our LED fab here in [Duran]. The consolidation of those two fabs into one will take two quarters, and so I would expect that really won't be fully implemented till the end of our December quarter and at that point we currently target for our plans for the year that we are running at that point at about 85%. So right now we are not at that level of efficiency just because we got a lot of moving pieces to get the two fabs consolidated but that’s where we should end up by the end of this December.

Thank you. Our next question comes from the line of Jed Dorsheimer with Canaccord Adams. Your line is open.

Hi, thanks, Chuck I guess just a follow-up to your last answer -- based on the calculations if I assume pricing is relatively static quarter-to-quarter it would look as if, the restructuring resulted in a reduction of about 40% of the available capacity. Is that the right way to look at the bounce back in I guess sort of asking Brian's question a different way; the bounce back in margins quarter-over-quarter?

Yes Jed the challenge is that we will end up somewhere -- there is obviously we are assuming some pricing reduction quarter-to-quarter over the year so when we get to the end, you'll be in the right neighborhood may be not quite as much as you are putting out there, but remember right now we still -- the process of consolidated factories doesn't happen at once, so we're actually taking some equipment offline, we're moving equipment, so we're not actually -- we will end up in a number that gets us back to 85% utilization but it’s a little lumpier than that just given the fact that I've got two fabs that have to be put into one so that’s why some equipments been written off, some actually has to be used in this quarter until we get the rest of it ready to move and reconsolidated. So you are in the right ballpark, I'm not sure the 40% is exactly right but you got the order of magnitude that's probably close enough.

Okay. And then just as my follow-on, as I look at the 10% revenue guidance for the 10% growth in revenue for the year, given that you -- it's out there that you will be spinning out the Power and RF that’s roughly about 150 million of business. Is that included in the 10% or you are netting out that 150 coming out or are you netting out the Power and RF coming out to get to that 10%?

No, we are describing the whole business Jed, so the IPO as we've laid it out at this point, Cree would still remain a majority shareholder and so it will still be consolidated into our numbers so that when you think about 10% of the company, think about all three segments combined.

Thank you. Our next question comes from the line of Mike Ritzenthaler with Piper Jaffray. Your line is open.

Yes, good afternoon. How much does the devaluation overnight of [the one] effect your view on pricing and competitiveness in LED products in 2016?

Yes. I think obviously that’s a very recent move. I think if you look at the likely effect, China is already at tough market that’s been the biggest change in our business over the last couple of quarters that was one on the pricing changes we even saw in the quarter so. I'm not sure that moving by that amount is going to be a dramatic change frankly honest right now. I would assume that the LED business is already very competitive. I think it's something to keep an eye on but as my short term view is it's not a significant effect at least not in the near term.

Okay, all right, fair enough, and then I guess this is my follow up, I was curious about on the call in June you had kind of laid out a bit of a different retail strategy around going after more premium light bulbs. I'm just wondering how that channel has embraced that shift toward more premium light bulbs.

Yes, so I think that you know, effectively there is what happened and what we mentioned in June is that a number of the other companies has basically traded off some of the features and tried to just chase price down and we don't think that obviously works for our customer base and certainly not for our brand. What I would tell you is that our sales although not what we originally targeted actually were pretty solid in the quarter, so if you just factor in normal seasonality they pretty much tracked and as we're six weeks into the new quarter and they're tracking as well, so I think we're doing fine. You know we're not -- it's likely to -- there'll be other people with more volume but I think we're on the right path to getting the ball positioned to where we need it do what it needs to do the premium brand work for us and so I think so far the reaction from our partners has been fine we obviously have to keep innovating and do new products and I think it'll be up for us to show that here over the next couple of quarters and over the next year. But that's what the R&D investments for.

Thank you, our next question comes from the line of Harsh Kumar with Stephens. Your line is open.

Hey Chuck let me ask you an interesting question, when you get to your 85% stated goal by December what can margins be at that point in time for you can answer it either as part of your TIM business margins what they could be or even for the whole company, just any color would be great.

Yes so Harsh, way to think about it is, so we have some benefits that we're going to see in Q1, in terms of cost, we'll see additional cost benefit in Q2 and it's really not till we start Q3 we'll have that full consolidation. I think as we get there, the way we built the model for the year is this, we're going to get some benefit from cost reductions due to the restructuring, we should have some benefit from our new products so the SC5 continues to get traction so we're getting design win momentum on that side. So the combination of focusing on our higher end products, cost reduction, in our models really designed to offset what we think is going to remain a pretty competitive environment. So we're really not targeting you know any big gains one way or another, what we're saying is the progress we make on one side will generally be offset by the market at least in the near time and that's how we're thinking about it.

Okay, so let me ask you another question. For as long as I've covered CREE I've noticed that most of your fluctuations in business and vibrations around your business come from the chip side. Seems like a commercial business is on pretty steady growth pattern, so why be in an outside sales LED business, chip business at all, why not just completely think about making that captive?

Yes, so the external part of that business Harsh, so while we have a very successful commercial lighting business fact is, is that it's primarily focused in North America, so we have a tremendous investment in R&D and capacity for LEDs that, if we just service our internal customer you would end up with something that's very small scale and probably long term not a very practical approach so I think you know if you're going to make the investment in LEDs and capacity I think you want to participate both as a supplier to the internal division as well as to the external market. The other thing that happens is, when you're in the external market competing every day it keeps you a lot sharper and so I think it continues to help us figure out what is our technology at what our cost need to do and then frankly just makes us a better overall LED company.

Thank you, our next question comes from the line of Vishal Shah, with Deutsche Bank, your line is open.

Hi, thanks for taking my question, Chuck you mentioned reduction in spending on consumer segment in order to improve your margins next year, can you provide some color on what your spending run rate has been in that business over the last couple of quarters and where you think it's going to go around to?

Yes, what I'm trying guide to there is, I don't have a specific target but maybe I can get you directionally correct on that. You know we've had a very strong brand investment and with the repositioning of the bulb really to premium we know that the volumes are going to change a little bit and so really what we're going to do when we think about operating leverage for the year, obviously part of that is to try to make improvement at the gross profit level, but the other thing we're looking at is how do we balance our investment on some of the brands and make sure that it tracks a little better with the consumer business and I think by doing that we can still have success with the work we’ve done building the brand for the broader company but at the same time by getting a little better aligned I think gives us some operating leverage for the year, so, it's really just adjusting that spend to be more in line with the actual revenue of the consumer business.

Okay and just somewhat longer term question around the profitability of the lighting business, I know it’s a function of the mix but how do you think the longer term margins, operating margins in the lighting business look like given the new pricing environment?

Yes, so what I would say is, the new pricing environment there is really two pieces to that, right if you're talking lighting there's really a consumer lighting business and a commercial lighting business. Let’s just put consumer to the side, because honestly our strategy is that commercial lighting is the big growth driver here over the next several years and that consumer, while it's important, it's really core of [brand] strategy first so, I think our margins overtime will merge towards our commercial margins and if you look at that market over the past three to five years, the commercial lighting industry generally, once you get to the about a billion dollars, they typically have mid-thirties gross margins and low double-digit operating margins and so, that would be our near to mid-term goal as to get the business at that level in terms of commercial lighting and then in the longer term if we're able to continue to innovate and lead I hope we can at least be on the higher end of that range, but that's kind of how we think about it.

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

First question on the full year target, I know you laid out in terms of LED business being flat and [light] commercial, I was wondering how much of that is vacant if taking to your guidance based on your product that you guys planned to really launch this year or is it based on quality of launch [indiscernible].

Yes Edwin, so one of our first strategy is to continue to lead in all of our segments with innovative products so, inherent in how we build our model is that we'll continue to innovate and as I mentioned in my comments earlier, we feel pretty good about our pipeline in all three businesses, so some of it is assuming we will get some new business momentum from those, the fact though is, is that whether it's LEDs, LEDs we're typically looking at 12 to 18 months design cycle even in new lighting products is typically two to three quarters before we see any momentum, so the majority of next year will be built on the momentum of products that are already in the market, the key though is that we have to keep innovating because that really builds the momentum for the end of fiscal '16 and starts the momentum as we head into the next year. So, I don’t have an exact breakup but the majority of our '16 targets are based on things that are already released and then really well those new products will start to drive the next year.

I have a question about capital restructure I notice your debt has gone up partially because you had to buy back stock at this juncture and you have planned to spend $150 of CapEx this coming year. Any way you can kind of think about capital restructure and what do you think the capital restructure goal or how much debt you guys [can take on your] different balance sheet [indiscernible] some guidance on that?

As Mike mentioned earlier, we've got a free cash flow target for the year of around $85 million and our CapEx while its sitting at target at about $150 million for the year, that's most that's going to happen in our first and second quarter as we finish some infrastructure projects. So, as you think about the second half of the year the free cash flows should increase in the second half versus the first. So, that's kind of the boundary condition of how we're thinking about the operating cash. And then in terms of the buyback, look, given that we have still a very strong balance sheet, we have plenty of capacity available on debt if we want it, and I think we're going to continue to think about the stock buyback and be opportunistic because we have that flexibility from a capital allocation standpoint. If we wanted to we certainly have the ability to execute that full buyback and still be in that cash positive for the year and I think at this point we're going to evaluate that as we go quarter-to-quarter but I think you can see from how much stock we bought back buyback last year and the nature of the buyback we announced this year our current plan is that -- in not only this quarter but over the year we intend to use some of that because we think given where we're at today as we think it's a pretty good use of capital.

Thank you. [Operator Instructions] Our next question comes from the line of Sven Eenmaa with Stifel. Your line is open.

My first question is on the commercial lighting side, could you discuss where do you see the pricing currently, year-over-year change wise and what are your expectations for the year? And the second question is what are your expectations for the [indiscernible] license revenues for the year?

So, in terms of commercial lighting pricing, there hasn't been a big change, I don't have a specific reduction, it's going down a little bit year-over-year but it's nothing like the LED business, so all things considered our commercial lightings are relatively modest decline in terms of pricing specifically and frankly our mix of new products and what that [blend is] has more to do with the what our ASP is year-over-year than the actual price declines. And I would say that hasn't changed a lot in the last year and we don't target it -- there'll be some incremental price declines over the next year but we haven't seen a big swing one way or another there and that's kind of what's built into our model. In terms of licensing, we would target this quarter a little bit of incremental benefit from the Epistar license that we just announced but overall I don't think it will be a significant change from what you've seen in the past -- there's some incremental benefit from it but really at the end of the day, it comes down to the core gross margins we can generate in each of the operating segments.

Thank you. Our next question comes from the line of Stephen Chin with UBS. Your line is open.

Just trying to get an idea on the amount of ASP erosion in LEDs, so if I assume units were flat and add back some of the channel on inventory reserves, I'm calculating ASPs were down about 1%, so is that the right way to think about it?

Yes, Stephen we haven't broken out a number but I think if you're looking at that like a quarterly sequential number, you are in the right order of magnitude on that, it was definitely what we saw middle of the quarter is a fairly -- it was more severe than what we had seen and so, I think you're in directionally correct on that.

And then, just given where prices are have you thought about going out and buying chip, especially mid power chip and high power chips instead of making them and then how do you think that will impact your gross margin going forward?

As we've modeled the next year with the restructuring, we would plan that -- our 85% utilization target for midway through the next fiscal year, that assumes that we are making pretty much our higher power LEDs and frankly the reason we make them is that we can get performance, we still can't buy on the open market. We have been buying mid power chips, part of our goal for last year was to qualify manufacturing partners not only in lighting but also in the LED chip and we are utilizing those partners and I would imagine that we will continue to maintain a pretty good balance between the two. And so our factory utilization is really a function of how does demand fluctuate between the two categories, but I'd say that, right now my expectations will have reasonably good balance between what we buy from a mid-power and what we are making from high power over the next year and that’s kind of what we've built into our utilization targets.

Thank you. Our next question comes from the line of Jeff Osborne with Cowen and Company. Your line is open.

Hey, good afternoon, most of the questions were answered. Chuck I just had a question on the premium bold strategy. Is that going to be using internal chips or would you be buying outside chips? And then I also might have missed this on the call, but did you break out what the consumer was for the quarter? You had indicated that it'd be running at a consistent run rate to the current quarter, but I missed the actual number for the quarter.

Yes, we didn’t give you a specific number for the quarter, so all I can tell you is that it was down from what we had originally targeted, but I don’t have a specific number for you at this point. In terms of chips, our bold strategy is actually not changing, so about more than a year ago we had basically gone dual sourcing, so we initially lost, it was all our chips and we've been basically -- have both Cree chip based LEDs in there, as well as chips we buy on the outside. And we're using that to kind of moderate demand or balance demand in our factory, and so I think we're taking advantage of the external market as it makes sense, but they is still occasionally some situations where our chips just work better or let us do something. So we're trying to use both of those.

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

Good afternoon, this is Andrew Hughes on for Krish. Back to China really quickly, just curious have you seen the macro situation significantly impact demand for LEDs there? And then on the flipside, is the weakening there from a macro perspective is lower, some credit tightening, have you seen that impact your Chinese competitor's ability to scale up or expand at all?

Yes, so I'll just take the back of the second one, I haven't seen it effect the Chinese competitors yet, I think in the LED space there are several large ones, that are pretty well backed and when I say backed, they're both, whether they're access to their equity markets or they have access to what I will call from government sponsored money. I think they're able to access capital from what I can tell right now. In terms of has it changed in terms of demand, I think what we saw, the first change we saw in our business last year and our second quarter was really a change in China. I think that our third quarter, it was relatively similar to what we expected, last quarter we definitely saw a change. And so I think the data you're seeing out of China in my mind, I think we've already seen partially in our business and I think that’s what you've seeing reported by other LED company. So pretty much anyone in LEDs in Q4, had a pretty -- it was a pretty challenging environment and I think that the China market specifically was tough and I think that’s a function of what changed in the backlighting demand. So I think those two pieces worked together and I think China is probably the most obvious place you see it, it's broader than that, but to some extent I feel like we've already seen part of that in what we saw in Q4.

Thank you. Our next question comes from the line of Melissa Fairbanks with Raymond James. Your line is now open. [Operator Instructions]

Hi guys, sorry about that it's Melissa for Hans. I was wondering if you guys could give us a little bit more detail into the dynamics of the LED product segment for fiscal '16. We saw pretty dramatic decrease in fiscal '15 and then to expect kind of flattish trends next year, just kind of wondering what's shaping that expectation? Thanks.

Yes, so it's a combination of the restructuring that we've changed our cost structure, as well as new products, those two working together to help offset what we think will be continuing in a tough LED competitive environment. So, keep in mind that by restructuring our factory we're starting to get a fundamentally different base and so it gives us a better ability to focus really just on the high power LEDs and that's kind of how we built the model for the year. So, the new products, lower cost structure to offset what we think is going to be a tough competitive environment.

Okay. At what point, could we expect to see year-over-year growth in that business? Is the contribution from the newer -- the high and new products when offset, pretty much balanced out competitive issues going forward?

Well, we only have target specifically for Q1 and our targets for the year are more directionally correct, so it's a hard market to predict. But right now the idea is that the combination of the cost and the new products is going to generally offset the competitive environment but with that being said I think trying to predict beyond what happens over the next quarter and over the next year I think given the dynamics within the LED competitive business, we're not trying to put long-term target out in that right now.

I am showing no further questions at this point. I would like to turn the call back to management for closing remarks.

Thank you for your time today. We appreciate your interest and support, and look forward to reporting our first quarter results on October 20. Good night.