Wolfspeed, Inc. (WOLF) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Cree, Inc. Fiscal Year 2016 Quarter One 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, please go ahead.

Thank you, Abigail, and good afternoon. Welcome to Cree's first quarter fiscal 2016 conference call. Today, Chuck Swoboda, our Chairman and CEO and Mike McDevitt, our CFO, will report on our results for the first quarter of fiscal year 2016. 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 first quarter of fiscal year 2016 to a discussion of the information included in our press release. We will not be able to answer any questions that would involve providing additional financial information about the quarter beyond the comments made in the prepared remarks. 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 November 3rd. Now, I would like to turn the call over to Chuck.

Thank you, Raiford. Fiscal Q1 revenue increased 11% sequentially to $425 million, which was on the higher end of our targets for the quarter led by strong demand for commercial lighting and a solid quarter for our LED business. This resulted in a Q1 non-GAAP net income of $22 million or $0.21 per diluted share which was in the middle of our targeted range for the quarter. Q1 non-GAAP gross margin rebounded to 31.7% due to improved margins in lighting and lower cost in LEDs as we realized some of the initial benefits from the LED restructuring. Lighting margins improved primarily due to improved factory execution. LED margins also improved driven by a combination of patent license income and lower cost in the quarter. Power and RF margins were slightly lower due to mix, but within our targeted range. The LED restructuring and factory consolidation remain on track with our previously announced plans and should be completed by the end of fiscal Q2. Company backlog for Q2 is slightly ahead of this point last quarter and tracking to our targets for the quarter. Our commercial lighting business continued to grow in Q1 and we made good initial progress with our plans to improve margins. The LED business also made solid progress as demand and pricing was in line with our targets for the quarter. Wolfspeed our recently rebranded Power and RF division, is working through some near term softness in the RF side of the business due to macro headwinds. But we continue to build new design win momentum, which should drive good revenue growth in the second half of the year. Overall, we're off to a solid start to achieving our goals in fiscal 2016. I will now turn the call over to Mike McDevitt to review our first quarter financial results in more detail as well as our targets for the second quarter of fiscal 2016.

Thank you, Chuck. I'll be providing commentary and our financial statements on both the GAAP and non-GAAP basis which is consistent with how management measures Cree's results internally. However, non-GAAP results were 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 an historical summary of all other key metrics. For the first quarter of fiscal 2016, revenue increased 11% sequentially to $425 million. Which was at the higher end of our targeted range of $410 million to $430 million. Non-GAAP earnings were $22 million or $0.21 per share and in the middle of our targeted range of $0.18 to $0.23 for the quarter. We had a GAAP loss of $24 million or $0.23 per share which was slightly above our targeted loss range of $0.16 to $0.21 for the quarter. Non-GAAP earnings exclude $46 million of expense net of tax or $0.44 per share from restructuring cost, amortization of acquired intangibles, asset retirement charges, net charges associated with our Lextar investment and non-cash stock based compensation. Our Q1 non-GAAP adjustments were higher than targeted due to a larger decline in Lextar share price for the quarter. Regarding the restructuring of our LED business, we recognized $16 million of cost in the first quarter of fiscal 2016 for targeted factory capacity and overhead cost reductions. These capacity and overhead charges are included in our GAAP results only. We're targeting additional $3 million of restructuring cost in our second quarter as we complete our factory consolidation process. This will bring our total LED restructuring charges to $102 million which is in line with what we announced last quarter. Fiscal 2016 first quarter revenue and gross profit for our reportable segments were as follows. Lighting products revenue grew 8% sequentially to $248 million and gross profit increased 21% sequentially to $69 million for 27.9% gross margin which was a 310 basis point increase quarter-over-quarter. LED products revenue increased 21% sequentially to $148 million and gross profit increased to $53 million for a 35.5% gross margin for the quarter. Wolfspeed Power and RF products revenue declined 5% sequentially to $29 million and gross profit declined 11% sequentially to $14 million for 49% gross margin for the quarter. In determining gross profit for our segments, we do not allocate certain employee benefit cost, stock-based compensation and acquisition related cost. These non-allocated costs totalled $4 million for the first quarter of fiscal 2016 and are included to reconcile to our $132 million GAAP gross profit. Q1 GAAP gross margins were 31% and non-GAAP gross margin was 31.7% which excludes $3 million of stock-based compensation. Both our GAAP and non-GAAP gross margins were in line with our targets for the quarter. Operating expenses for Q1 were $140 million on a GAAP basis and $105 million on a non-GAAP basis. Both of which were below our targeted range for the quarter primarily due to lower than targeted IP litigation spending. Non-GAAP operating expenses exclude approximately $16 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 income was $29 million and above the middle of our targeted range. We made progress towards our goal to deliver operating leverage as operating income increased to 6.9% of revenue for the first quarter of fiscal 2016. Our Q1 GAAP and non-GAAP tax rate was 25% which was in line with our target for the quarter. We ended the quarter with $632 million in cash and investments and $81 million decreased sequentially. The sequential decrease was primarily due to spending [$70] [ph] million to repurchase 2.7 million Cree shares, $54 million of capital expenditures and $13 million net to complete the acquisition of Arkansas Power Electronics International Inc., which was partially offset by $47 million of cash provided from operations. Free cash flow was a negative $7 million and in line with our targets for the quarter. 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 infrastructure projects and provide lighting and Wolfspeed incremental capacity as needed. We continue to target approximately $85 million of free cash flow for fiscal 2016. Additionally, we ended the quarter with $207 million outstanding on our line of credit. Days sales outstanding was 41 days as compared to 44 days at the end of June. Inventory days on hand increased to 89 days as compared to 83 days at the end of June. This increase was primarily commercial lighting related to support targeted growth and is in line with our 90-day plus or minus target range. At this time, we target Q2 revenue in a range of $425 million to $445 million which is driven by growth in commercial lighting. We target Q2 non-GAAP gross margins to be similar to Q1 at 31.7% plus or minus and GAAP gross margins to be 30.9% plus or minus. We target incremental gross margin improvement in each of our product areas, however this will be offset by lower non-recurring LED license revenue. These Q2 targets are based on a number of factors that could vary including overall demand, product mix, factory execution and a competitive environment. Our GAAP gross margin targets include stock-based compensation expense of approximately $3 million where our non-GAAP targets do not. We're targeting Q2 non-GAAP operating expenses to be approximately $106 million. A $1 million sequential increase due primarily to variable sales cost associated with targeted lighting sales growth. We're targeting Q2 GAAP operating expenses to be approximately $129 million which includes approximately $3 million of restructuring charges, $13 million of non-cash stock-based compensation expense and $7 million for amortization of acquired intangibles. Q2 non-GAAP net interest income and other is target to be similar to Q1 as interest income is offset by foreign exchange losses. We target our Q2 and fiscal 2016 tax rate to be 25%, the Q2 and fiscal 2016 tax rate is in line with our previous targets. As a reminder, our Q2 and fiscal 2016 tax rates will fluctuate based on our overall earnings. The tax jurisdiction of which our income is actually earned tax credits and other tax benefits that may or may not become available to Cree in future periods. We target GAAP net income for Q2 to be between $1 million to $7 million. Based on an estimated $103 million diluted shares outstanding our GAAP EPS target is between $0.01 and $0.06 per diluted share. Non-GAAP net income is target to be between $21 million to $27 million or $0.21 to $0.26 per diluted share. Our non-GAAP EPS targets excludes restructuring charges, amortization of acquired intangibles, net changes associated with our Lextar investment and non-cash stock-based compensation amounted to $0.20 per share. Thank you and I'll now turn the discussion back to Chuck.

Thanks, Mike. We're focused on several key priorities in fiscal 2016, to take advantage of the growing market opportunities for all of our products or 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. Lighting revenue grew 8% sequentially in Q1 led by commercial lighting and we forecast growth again in fiscal Q2. Lighting gross margins improved 310 basis points primarily due to better factory execution, which help drive improved company margins. Consumer lighting revenue was similar to fiscal Q4 and in line with our targets. LED revenue improved 21% in Q1 as demand was in line with our targets for the quarter. This allowed us to further reduce channel inventories. Margins also improved as we saw the initial benefits of lower cost, due to the restructuring. The overall LED market remains very competitive and we continue to focus on applications, where our SE5 technology drives system cost advantages. Wolfspeed Power and RF revenue declined about 5% sequentially in Q1. Primarily due to lower RF demand related to delays in the rollout of LTE networks in China. Operating expenses declined 3% in Q1 which was better than our targets for the quarter as legal expenses were lower than forecast. The improvement in OpEx combined with the gains in gross margin led to non-GAAP operating income of $29.4 million or 6.9% of revenue. We target incremental operating leverage gains again in Q2. Our second priority is to continue to innovate in each of our business segments. We recently introduced our new KR8 and LR6 LED downlights. Which further enhance Cree's product leadership and the commercial downlight market? These products are designed to deliver better lighting performance and better value for new and existing commercial spaces. The new KR8 downlight is Cree's first 8-inch downlight and features our market leading WaveMax and TrueWhite technology. The newest generation LR6 downlight provides even better light quality at a lower price. As the number of consumers buying LED bulbs continues to increase. The quality of their experience becomes more important. The key characteristics of LED bulbs are light quality, longevity and of course energy efficiency. Despite this, some manufacturers seeking to cash in on the technology's popularity are driving LED bulbs to CFL-like performance, lifetimes and like quality. In contrast, we recently introduced a better LED bulb unlike compromised bulbs, the new Cree LED bulb delivers better light with better performance, more energy savings and an industry leading 27-year projected lifetime. We released our new XLamp, XQ-E high intensity LEDs. Which are the industry's first family of high power color LEDs optimized for optical performance? The LED's are built on Cree's breakthrough SE5 technology platform and provide a drop in upgrade for proven XQ-E high density design, which enables lighting manufacturers to double the candela performance with minimal redesign. Our third priority is to promote future growth in Power and RF and allow Cree shareholders to better realize the full value of this business. We recently renamed this business unit Wolfspeed which allows the Power and RF division to build brand equity, while operating as a separate business. The name acknowledges Cree's inception at North Carolina State University and highlight speed which is both the differentiating attribute of our technologies and a promise to our customers and partners. As I mentioned earlier, there is some near term revenue softness in RF due to macro headwind. But overall design activity remains very strong for both Power and RF products. And we target good growth in the second half of our fiscal year. We continue to position Wolfspeed for an IPO and we're already seeing the benefits of a Power and RF focused management team. The timing is been driven by market conditions for IPOs and trends within the business. This is likely a calendar 2016 event, as we're going to be patient and get the timing right. As I mentioned earlier, Q2 total company backlog is tracking with our targets for the quarter. As commercial lighting is slightly ahead of Q1. LED's and Wolfspeed orders are in a similar range. The LED business remains very competitive and we continue to work with our LED distributors to increase inventory turns. Factory utilization is improving in LED and we target reaching 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 backlog, forecast and trends in the business. We're targeting Q2 revenue in a range of $425 million to $445 million. Which is comprised of growth in lighting sales driven by growth in commercial lighting and LED bulbs in a similar range? Core LED revenue in a similar range as Q1 but incrementally lower overall due to lower license related revenue and Wolfspeed sales in a similar range as Q1. We target Q2 non-GAAP gross margins in a similar range at 31.7% plus or minus. This target includes incremental margin improvement in lighting, the core LED business and Wolfspeed, which should offset incrementally lower overall margins in LEDs due to non-recurring license revenue from Q1. We target Q2 non-GAAP operating expenses to increase approximately $1 million driven by variable cost associated with higher lighting sales. We target incremental non-GAAP operating leverage in Q2 and incrementally higher operating margins. As a result, we target non-GAAP earnings in a range of $0.21 to $0.26 per diluted share. We're off to a good start in fiscal 2016. Our innovation momentum remains strong across all three business segments. The commercial lighting business is growing and our transition to the new Cree Better Bulb is on plan. The LED restructuring is on track and the business results recovered nicely in fiscal Q1. Wolfspeed design momentum is growing and the targeted IPO provides a great opportunity to create shareholder value over the next several years with a more focused team and dedicated capital to grow the business. We're confident in our business strategy and optimistic about the future. As a result, we continue to buy back stock in Q1 and target additional repurchases across the fiscal year. As a reminder, our annual shareholders meeting is on October 27. We will now take analysts questions.

[Operator Instructions] our first question comes from the line of Brian Lee with Goldman Sachs. Your line is open.

Chuck, just on your commentary around the capacity utilization getting up to 85% by year end. Can you kind of walk us through the puts and takes of what margin trends could look like? I know you're talking about a little bit of the licensing revenue coming off here and that being an offset in the very near term. Does that come back based on higher utilization as you move to the next several quarters of should we actually be thinking, you're going to be exiting the year at a higher level than what you had here this quarter with some of the licensing revenue baked in, and then I had a follow-up, thanks.

Yes, Brian. So I think if you look at capacity utilization, we won't really see the full effect till we get into our Q3. What we target in Q2 is that, even without that, you should see some improvement in the core LED margins. Probably not enough to fully offset the loss of license, but definitely going in the right direction. As far as next year goes, look I think there's things we can do. We should get some cost benefits from the restructuring. I think that the new products also give us some support in the market. With that being said, it's a pretty competitive market environment. So I think it's premature to put out any targets on the margins for LEDs in the second half of the year at this point.

Okay, fair enough. My follow-up was just kind of a bigger picture question of an area where you've seen some margin headwinds. But the consumer bulb, it's been 2.5 years since you've launched that effort. I think we've all been surprised at how quickly pricing comes down in the segment and how competitive it's become and I know you guys had always said about branding and cross selling to the commercial channel as being some of the strategic rationale, for being in that segment, but wondering if that still holds given the changing landscape and if you had any updated thoughts on, potentially restructuring that segment or monetizing it differently and then, the go-to-market strategy you've had to-date. Thank you.

Yes, I think we're still getting branding benefits from that business. But at the same time, we have to do a better job of making some incremental improvements in margins. When you look at our lighting margin, the gains we made in our first quarter, we had improvement both on the commercial side and the consumer side. Now that being said, consumer is still relatively low margin. I think it's a good business for us because with the premium strategy I think we're actually reinforcing what Cree's is all about, which is better light. Right. We want people to buy bulbs that want better light, longer lifetimes, more efficiency that translates directly to the commercial strategy, if anything it translates even better now because as the other competitors try to devalue the LED bulb category I think our product standout more, so. I think it still works that being said. I think there is a balance and so if you think about what we're doing going forward it's a premium category product. I think, it will more than pay for itself. At the same time, the business is really going to be driven by commercial lighting both on the top line and the profit line.

Thank you. Our next question comes from the line of Paul Coster with JPMorgan. Your line is open.

The first question, Michael is can you just give us some sense of magnitude of this licensing revenue put and take and how we should model it moving forward?

Yes, let me take a shot at that Paul and then Mike can clarify, if I get it wrong. But I think what you should assume is that with an incremental benefit to both revenue and margin in our Q1 and then you can see in our targets for Q2, it's not in there. So it's relatively incremental, but with the improvement we're targeting in margins in the three businesses, we'll be able to get back to a similar gross margin in the quarter. So it's - we didn't break out specifically, but it puts the order of magnitude kind of in shape and as far as going forward. Most of the benefit was in the quarter. There are some residual incremental, but most of it was in Q1.

Okay, and then my follow-up is, just following up on Brian's question. Can we at least assume that the, from a mix perspective the consumer bulb now is diminishing as a percentage of overall unit shipments and revenue?

It's definitely diminishing as percentage of the revenue. I think units, it's a much higher volume business, so it's also likely diminishing in units. I don't have actually have that number in front of me, Paul, but yes I mean, think about consumer as a business that operates kind of in this range and then commercial is where the growth is and I think we get that balance right and you we can get both the brand benefit and also get more operating leverage that way.

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

It seems after the 4Q call that the 10% top line growth was mainly in the back of lighting, but now it kind of seems though, as though LED may not quite be as soft as originally projected. I guess my question is, what's the right way to think about the mix of that 10% growth in fiscal 2016? And as an extension of that, I'm curious if the strengthened outdoor or some other commercial projects are being masked by results from retail?

So I think, Mike the way to think about is, when you look at that growth in the quarter keep in mind that almost all that growth was driven by commercial lighting. So consumer is actually down on a year-over-year basis and commercial was up. Commercial business is growing much more in line with the LED lighting industry at a much higher clip. If you were thinking about what drives the growth of the business for the year that is the major driver. Commercial lighting growth and it drives both the revenue line and it drives the profit line. LEDs, I think right now, we came in pretty close to what we thought last quarter. It should be in a similar range this quarter, at least a core revenue level. So I think it's in an okay spot. I think, as we set ourselves up for next year. I think it's really going to be a function on what happens in the market. We like the fact that we have a more cost effective platform to kind of start with and we like the new products at the same time. The industry competitive environment is a bit of a wildcard. So I'm trying not to get ahead ourselves on the second half in LEDs, until we see how that comes in.

Sure, that makes sense and as a follow-up I just wanted to make sure I understood something you said Chuck in your prepared comments. I think previously the operating margin target for the full year was 8% and with 1Q coming in at, a little bit ahead of where we had modelled at 6.9% is that, is 8% still a reasonable target for the full year?

Yes, we've not changed our targets for the year. Obviously, there is going to be some puts and takes. But I think we're directionally heading in the right area and obviously with Wolfspeed being a little lower in the first half we got a little work to do in the second half there, but overall we're heading in the right direction.

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

Hi, Chuck. It's Harsh. Just really quickly, I think you mentioned that you're now targeting 10% growth rate for the next 12 months. I wanted to ask you about your comfort level given all the moving parts and pieces particularly with the LED business and then also, why not a higher growth rate, since you're more and more commercial lightning now, which I believe is growing greater than 20% CAGR, maybe 20% to 30% CAGR, why not target a higher number than that?

Yes, so I think what's our comfort level. I think we're heading the right direction. I think given the uncertainty in the LED market we still have to - we have some work to do in the second half on Power and RF. I think there's a couple of variables there. We don't fully control, I feel very good about commercial lighting. Keep in mind though that it's commercial lighting driving the growth and you have essentially LED's in a similar range plus or minus. You've got consumer lighting in kind of a similar range and relatively year-over-year that's actually will be down likely. So you got to kind of factor those two and I think we're on the right track and I think the math still generally works. Of course there is you know, we are one quarter in, so there is going to be puts and takes across the year.

Got it and as my follow-up, Chuck. Would you be willing to take a shot at what profitability might look like once you attain your December restructuring and let's say you're great then, at 85% utilization or greater than that past December?

Yes, we're not ready to give out targets for the second half of the year, Harsh just because there's a few variables going on. Obviously, you got an idea what we're thinking. We said for the year, we're targeting not only to grow the top line but get the operating margin in the 8% range. So you can kind of back in to what we're thinking we can do for the year, but I don't want to break it down. I mean, more specifically yet just because it's a little premature, we just don't have that good visibility. Again commercial lighting trends, we like but we just to work through some of the variables in the other parts of the business right now.

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

My first question on, just talk about commercial business, lighting business by self. I remember last quarter you guys had some mix issue that have impacted the margins and seems like margins have improved even in commercial itself. So I'm wondering, if there is any mix benefit you get all this quarter and as you look out, are you seeing growth in certain area not as much just kind of getting some color around that.

Yes, what I would say if I look at the margin benefit in the lighting segment. You know the majority that came from commercial, though we did make incremental progress in consumer and then if you break down commercial a little more and what's behind that. I say the biggest driver is factory execution. There was some overall mix benefit, but I would say the single biggest improvement is, we did a great job in terms of factory execution, supply chain management over the quarter. We've been making some investments in that area and while there's still work ahead of us, I think we're starting to see the initial benefits from that activity that we've been focused on over the last six months. So that would be, if look at the biggest impact it's really that execution piece.

I see okay, that's helpful and then on the LED product business you said that, I think in your prepared remarks you said that you expect business to be stable but pricing environment remains pretty challenging here. So I'm trying to understand does that factor in lower pricing in the coming quarters, but you're able to grow because of the new product. Are we - can I get some color around that, how we kind of think about your overall revenue for that business and just kind of throw one piece into that also? And how much of that production are you guys using internally. Do we expect more and more production being used internally and therefore you've actually have less product being sold through market place?

Yes, so let me kind of maybe take the second part first. I would expect our mix of external sales and internal sales to track pretty similarly going forward. So I don't see, our model for the next year does not show a shift more internal or less internal. It's actually, the percentagewise it's pretty similar. My comments about the market remaining competitive. I think if you just read the commentary from anywhere out there. It's a competitive market now. Our LED business does have pretty industry leading gross margins relatively to what else is out there and so when we look at the second half and we really don't have specific targets for it. What we're saying is, there are things we can work on, the factory that's been consolidated that will help our cost to platform. We got the new product, at the same time we would expect pricing to continue to come down on a quarterly basis. I don't think that trend is changing in fact getting worse, it hasn't gotten better. But it still remains, what I would like to call competitive and so, in that dynamic I think that, things in LEDs weren't as expected in Q1, they're on track at Q2 but at this point I think I'm, we're going to continue to maintain on fairly cautious tone, until we get a few more quarters under our belt and see how the market evolves there.

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

Can you talk a little bit about potential for expanding the commercial lighting portfolio particularly into the controls area and a little bit in more robust way?

Yes, so commercial lighting. So I think we have a couple things. One, we have our R&D is always looking at expanding the product line and so there's, it's within category. So you know, whether it be [indiscernible] or downlights or new street lights, will continue and expand products within certain categories. At the same time, we do look parts of the market that are under serve, that we enter. So last year, we got into the high day business for the first time and again that's mostly being driven by our internal R&D effort. The controls piece, we've taken a different approach. So we have several partners that make controls and we make lights that work with them and so we try to support existing controls investments that are out there and we have number of partners in that area and at the same time, about a year ago we came out with something called SmartCast. And what SmartCast is, is it controls without controls. So in other words, we think it is easiest to install smart lighting system. It doesn't require, it's easier to install, cheaper to install and you get the maximum benefit with the least user input. And so we think there's a different way to think about smart lighting controls. It doesn't mean that people won't go down the other path. We actually think there is a lot of way to solve this problem. But where our partners aren't focused. We're trying to do some pretty innovative R&D and solve this problem, a different way and I think we're early but the initial returns on the additional reviews on that have been quite positive for our approach. Especially, and what I call commercial building market.

Great and then just you deemphasized some of the consumer products. You looked at how much you might end up saving in terms of marketing dollars. Certainly that was a focus for a little while curious how you think about that over the next 12 to 18 months?

Yes, I think of it is as, when I say deemphasize consumer. Think of it more that we're overemphasizing commercial. I would expect the consumer business to continue to be an, piece of the strategy it's just on a relative basis. Commercial is going to grow a lot faster. I think that if you look at the advertising that will still be part of our plan, but it's really going to be balanced with that, within the consumer business and what we can afford and what makes sense return on our investment. So usually expect to see us continue to advertise, you're probably going to see some of that this quarter but I just think it's a more balance approach given the new premium strategy and the fact is that the brand has a lot of momentum. So it's going to be focused more now and really consumer specific than just overall brand building. Although, we are happy to have that benefit as well.

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

I guess first question Chuck just one I just want to make sure, I'm looking at this correctly on the LED business and the restructuring. Prior to the restructuring I think, it was somewhere around less than 50% but around that 40% to 50% mark was consumed internally. And then you wrote down the business basically by half. So in terms of what can be, sold externally to the market versus what's consumed by your lighting business. There have been a major change or should we look at that as somewhere still around that 70% to 80% being consumed internally or transferred internally, I guess.

Jed, I don't know that we've ever broken out the specific internal consumption. What I will tell you is your estimate, that it was 50% would be more than, that is an overestimation of how much is consumed internally. It is definitely an important, it's our biggest customer but if you look at the mix overall that even before the restructuring that percentage I don't think was that high and I don't think with the restructuring that we've changed that balance at all. So I would say that, maybe slightly more internal now, but honestly overall I would say it's a pretty similar mix and before in fact if anything, with our focus on high power. We're really driving where customers value high power LEDs and if one that's internal great and they obviously have a lot of design to use that, but at the same time, if an internal customer needs to use a different LED for different application, we've been doing that for a while as well. I would say there is no real change in the mix of LEDs post restructuring.

Okay, good. It seems like there is some margin headwind there. I guess on the lighting side, maybe more of higher level question strategically, if we look out at the competitive landscape what we've seen from some of your lighting peers not necessarily just LED peers, but more lighting fixture and mainly fixture. We've seen some consolidation in the market. Additional acquisitions and you know I you were busy integrating Ruud as well as LLF and [indiscernible] in the past. But more recently we've seen a shift, in the use of capital used to be more aggressive in buying back shares. I'm just wondering the message that I read into that, is that you're not seeing things that necessarily fit, with the strategy to grow. I'm curious as to whether to not that the message that we should be interpreting or basically whether or not you still see holes to the business that strategically could be filled out i.e. on the controls or more of a systems approach I guess.

Yes, so look I think that, over the last year you did see us focus on really improving our execution in the lighting business. Frankly, Jed that business has grown at a tremendous rate. Scaling up the business and people and all the systems and processes that's what we needed to focus on. I think as that business matures here and when I say matures, as this processes matures, we get better at running a larger lighting business roughly a $1 billion business at this point. I think we'll have the opportunity to look more at strategic opportunities out there. Now what those pieces are and how they fit, I think I don't want to divulge where we're looking or where we might go, but I think it's reasonable to think that over the next year or two, we may add some pieces to puzzle, if they make sense. I think we're going to continue to be pretty picky. We want things that fit with the product strategy as well as with the culture. But I think there are things we can do over the next year or two. Especially now that we've made some progress really getting the lighting business scaled up. And by the way, I still think there is good organic growth opportunities. I just think organizationally we'll be in a position to take that on more now than we were over the last year.

Thank you. Our next question comes from the line of Mark Heller with CLSA. Your line is open.

Chuck, you maintained the guidance for fiscal 2016 about $1.8 billion and you gave the guidance for December. For March, typically you see some seasonality there. So should we assume a very strong June quarter to meet that full $1.8 billion for the year?

Yes, I think what I reiterate with the 10%, but it is in the right. You're close to the right number. I think you come out right in that range and then 8% operating margin. Mark, I think we're going to directionally correct. Plus or minus, we usually get close to that but yes, the math says that we're going to have to have a pretty good second half the year. I think there are some variables in that. I think that, we're starting out a little slower for the year just because there are some things in the Power and RF side of the business. But I think, if we don't hit that target I think we're going to come pretty darn close. So that's why I feel like, we can keep putting it out there because the business is heading in that direction. So I think it's our best estimate at this time.

Okay and can you provide any color on the China market particular to LED, I know that's been weak over the past few quarters, but have you seen any pick up lately for street lighting projects?

Mark, we haven't seen any significant change in China. There is definitely more, talk about projects that I would say China continues to be a pretty tough part of the market, not any worse than it was a couple of quarters ago but actually I haven't seen any significant improvement. It remains a very competitive piece of the market and just with so much activity and speculation about infrastructure spending or non-infrastructure spending. Our business is doing okay there, but I don't see a big change one direction or another, right now.

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

I just had two lines of questioning, Chuck. I was wondering, if you could touch on the SE5 product portfolio and what the design win activity is been and then if you have any sense of outside of your own captive consumption of that product line, what the addressable market of that is trending, is it getting bigger or smaller just with the competitive dynamics and then I had a follow-up?

Yes, so I don't have specific design wins to really offer you, but I can tell you that this is something we track each month and each quarter and we continue to have success. Really the places you're going to see SE5 winning today are typically outdoor or directional indoor application. So places where you have a high density of light that you need to put in a lot and at certain applications and places that have thermal limitation. So I would say the market is about what we thought so far, it hasn't gotten. I don't know that we've, we're pretty optimistic about it. But I think we're also realistic about the application where there is really value. Now I think the one subtlety to that is, there is the SE5 products and then there is the technology that was invented as part of it. We are starting to put that technology into other areas. So you know one of the products I mentioned in my prepared remarks was a new XQ-E product and that's really, that product existed before, but we're able to use some of the component of SE5 essentially upgrade the performance. And so I think, with SE5 it's more than just a set of products. It's really a technology platform that we can use pieces of it, in other products that kind of keep really refreshing the whole product line. I feel good about, where we're at, it's not magic bullet, but it's definitely trending in the right direction.

Great, thanks for the detail there and then the second question I had, was just on the bulb itself in a bigger picture. But with your discussions with Home Depot and other partners. I guess, A, what are have you been able to verify that there actually is a premium shelf positioning in this space given that GE and Phillips are obviously brand names that people are familiar with, so I'm just being curious, what's your sense on verification of your hypothesis that there is a premium segment to this market? And B is that, what are the kind of cost reduction plans? I think you're in your fourth generation bulb at this point and maybe it's the third. Actually that's a year ago, but some of your competitors use contract manufacturing for the bulb as oppose to making [indiscernible] just where do you stand, given the gross margin performance over the last year, with the bulb potentially looking to either restructure that. I think as Brian alluded to earlier in the call or using contract manufacturing?

Yes, so can we verify there's a premium market. Yes. So the product as we've been launching it here over the last few months. The sales data says, that there is a significant not the majority but a significant subset of consumers that want bulb, that have better light quality, that have longer lifetimes and are more energy efficient and we see in the sales data. So we know that, in the same store against those cheaper bulbs, our bulb still does well and I think it's a combination. There's a subset of customers that want the best product because they want it to last really long time. And to some extent, it seems kind of crazy to me that you would build an LED strategy around bulbs that don't last a long time, but maybe I'm just old fashion when it comes to inventing technology that actually works. So I think we're on the right track there. I think it's a subset of the market and more importantly, it applies to the same value that we think, translate to the commercial lighting market. What I wouldn't want to have, is a branded bulb it says hey, buy this cheap bulb that kind of works and then convince someone to buy my commercial lighting product. I think we're staying true to the brand and what we stand for there. As far as the next generation, so the new bulb that's out there is actually, we internally call it Gen 3.5. so it's an improvement on the previous generation. I think that, we have more work to do though, to not only create value, real value that drives a premium positioning, but we also have to keep working on the cost. And what I would tell you is, that manufacturing strategy has evolved from where we started three years ago, it continues to evolve. But I think we're being pretty open minded about what parts we should make, where we can use partners and I think, we're going to get that balance is constantly changing, but I think we're in a pretty good spot to continue to move down that and have a reasonably good business there although it's a consumer margin style business, but a better business there over the next year and I think we can continue to innovate as well.

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

So first I wanted to clarify your commentary on the 8% operating margin target for the year and then improvements we expect from the first half of the year to the second half of the year. Is the improvement you need to have 8% target just driven by RF business or do you require for the cost reductions improved pricing or is there something else?

To hit our operating margin targets, we have to have improvement in gross margin in the product line. So we're targeting gross margin improvement in Power and RF. We're targeting in lighting and we need LEDs to at least stay in a similar range that is today and then we're looking at getting operating leverage. So you know it's both the gross margin side and also the fact, you know we made big investments over the last few years and the idea is, as we drive revenue growth that we can scale revenue faster than the OpEx line and get some leverage there as well.

Got it, second question I had is, in terms of 10% growth target, what are the, how do you see the pricing on your commercial lighting market for this year end on your consumer side, what are down the line market assumptions?

Yes, so what I would tell you is that, the consumer strategy is a premium ones. I think while our pricing will probably be adjusted overtime and likely to be positioned higher than the rest of the market there and also plan to deliver more value. On the commercial side I think, there will be some price erosion but I think the market is shifting now. It's less about cost, just the price of the products then it's going to be much more about what value can we deliver. So can you save the customer more energy, can you deliver products that work better in their application, what is the total value delivered? We spent four, five years chasing how do we get LEDs close enough and price [indiscernible] considered, they're being considered. Now it's about how do we create the most value with our products versus the alternatives they're in the market.

Thank you. Our next question comes from the line of Tom Sepenzis with Northland Securities. Your line is open.

I was just wondering if we could talk a little bit about Wolfspeed and when you think you're going to see a little bounce there in the infrastructure market in particular, what if you could provide us with any color on what you're seeing in China right now and India as well, which is starting to rollout, it's LTE network?

Yes, I'm a little. I try not to forecast what those rollouts will be because I tend to be know for sure, whatever I throw out that will probably not be accurate. I think our design activity puts in a good position, than when the infrastructure rolls out, we'll be able to participate. But Wolfspeed's growth strategy in the second half, goes far beyond RF. RF is really the reason that the revenue is little lower than we thought this quarter and next. If I look at the whole portfolio and the design activity is not just RF, but really on the Power, side. We're getting good momentum. We've always had a good shocky business, but the silicon carbide MOSFET is probably the fastest growing product line we have in that business and that's not a single customer, that's a broad range of application. So our target for growth in the second half is really a combination of improved RF, but also continued growth on the Power side.

And would you expect that to potentially grow, March's seasonally weak so it that something that could actually see a return of growth in the March quarter or is that all back end loaded in June?

No, so I think for Wolfspeed specifically said, it's really design win driven and project driven. I think there is an opportunity to see some growth in our fiscal Q3. Obviously, that typically a slightly lower quarter for the semi business, but we're really going to be, we're probably going to trend more on design wins than the market at this point because we're still relatively low percentage share of the overall market.

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

Curious, how do you characterize the level of channel inventory with distributors for LED?

Lower in Q1 than it was in Q4 and it was lower in Q4 than it was in Q3 and we're targeting that. We'll probably be lower again even in this quarter. So we're actually actively working with our distributors to take a pretty conservative view and increase their term. So I guess the way I'd characterize it is, it's probably lean as it's been in several years and I think that's really healthy position for us to be in an especially with the new products and really gets us focused on driving those new design wins.

Got it, all right and then just on the overall supply demand balance. I know you've said that, ISPs are continuing to decline. So curious, if you're seeing the rate of decline either increased or decreased or stay the same? Are there any indications we could see some stabilization?

Yes, so look the LED business over the last 10 or 15 years, there is always decline I don't remember, a year there wasn't some decline, right it's the nature of that business. I would say right now in the segments we're focused on. So Cree's perspective is probably more focused on the high power markets. It's - the rate of decline is similar to what we saw, you know in the previous quarter. So I would say, we had, in our Q4 there was a more significant decline. I think that kind of resolved itself and I think we're seeing a more a more normal competitive environment. So it's not getting, I wouldn't' say pricing declines have slowed significantly. I also wouldn't say they're accelerated. They're more than normal rate from what we project for the business at this point.

Thank you. [Operator Instructions] our next question comes from the line of Krish Sankar with Bank of America. Your line is open.

First one, maybe on the Wolfspeed. Chuck, at the time when semi companies are consolidating due to need for scale. I'm kind of curios, does Wolfspeed have enough scale to remain robust as a standalone entity?

It's interesting, obviously we follow what's going on the semi business. What makes Wolfspeed unique is the reason I think the industry is consolidating is the rate of innovation has slowed and I think Wolfspeed is the exact opposite of that. I think if you're in the RF business or the Power business, we have two pieces of technology that let you do pretty dramatic things whether it be RF infrastructure or [indiscernible] there and on the Power side, if you're in the silicon IGBT business our silicon carbide MOSFET is going to quite disruptive. So I think it's unique in that. Yes, it's obviously smaller scale but it's incredibly disruptive technology and so I think that's why, it can standalone at this time. I think it's a pretty unique business and I think being focused on disrupting those markets, is what's going to make it successful.

Got it and got it and then just as a follow-up. Clearly, your restructuring is progressing well. I mean, is there a way to hypothetically explain the impact. For example, if you take your September revenues and your gross margin, what will the gross margin look like when the restructuring is completed at the same revenue run rate for the LED and the lighting division?

We're not - I can't give you any guidance beyond Q3 other than the color. What I can think about, maybe this is will help you to think about. So in Q2, we're targeting incremental improvement and it's enough improvement to get us to a similar range 31.7 plus or minus and we're going to do that without the benefit of the license income, that we had in Q1. So to give you some idea, we're continuing to get incremental benefit in each of the business now. I know you asked specifically about LEDs. I would expect the core business to improve incrementally probably not enough to offset, all the benefit of the license revenue but at least to partially offset that in Q2, so I think we're on the right track and that, we really won't see the full benefit till we get through Q3 because we're really still consolidating that, LED factory. So while the packaging factories are consolidated, we still have work to do this quarter to get our chip factory and so till that done and we can run it for a quarter. I don't know that we have, we fully can project the impact of that. Other than, it should get better.

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

Thank you for your time today. We appreciate your interest and support and look forward to reporting our second quarter results on January 19. Good night.