Wolfspeed, Inc. (WOLF) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Cree, Inc. Fourth Quarter Fiscal Year 2016 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and 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 Raiford Garrabrant, Director of Investor Relations. Please go ahead, sir.

Thank you, Abigail, good afternoon. Welcome to Cree's fourth quarter fiscal 2016 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 2016. Please note that we'll be presenting non-GAAP financial results during today's call, and reconciliation to the corresponding GAAP measures is in our press release and posted in the Investor Relations section of our website. Today's presentations include forward-looking statements about our business outlook, and we may make other forward-looking statements during the call. Such forward-looking statements are subject to numerous risks and uncertainties. Our press release today and the SEC filings noted in the release mention important factors that could cause actual results to differ materially. Also, I'd like to note that we'll be limiting our comments regarding Cree's fourth 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. Consistent with our previous conference calls, we're requesting that only sell-side analysts to 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. Now, I'd like to turn the call over to Chuck.

Thank you, Raiford. Fiscal 2016 was a year of progress towards our goal to build a more focused and valuable LED lighting technology company. We successfully restructured the LED business, improved commercial lighting fundamental, refocused our consumer business on premium LED bulbs and unlocked significant value with the agreement to sell Wolfspeed. Fiscal 2016 revenue was similar to fiscal 2015 at $1.6 billion. As the combination of growth and commercial lighting and stable LED revenue was offset by lower consumer lighting sales and the slowdown in our Power and RF business. Despite some challenges in the year, we made good progress growing company profits as the non-GAAP operating income increased 55% to $102 million or 6.3% of revenue. This is a 230 basis point increase driven by improved margin in lighting and LEDs combined with lower OpEx spending which more than offset lower Power and RF margin. Non-GAAP net income increased 23% to $88 million while earnings per share increased 37%. These results demonstrate that our strategy to focus more on lightings to drive operating profit is working. Fiscal Q4 results were in the middle of our target range. Revenue increased to $388 million as commercial lighting regained momentum in the quarter as orders increased, customer service improved and we released nine new products or significant upgrades in the quarter. The growth in commercial lighting more than offset the slowdown in consumer lighting as we reduced retail inventory in preparation for our next generation bulb launch in late Q1. LED products continue to execute well despite the challenging competitive environment and we also benefited from LED related IP license revenue in the quarter. Power and RF revenue was in line with targets. The decision to sell Wolfspeed to Infineon instead of continuing down the IPO path speeds our transition to an LED lighting technology company while providing significant resources to accelerate our growth. Divesting Wolfspeed which includes our Power and RF product segment and non-LED materials business is expected to reduce short term profits but at the same time increase free cash flow. We believe this will also increase management focus on the core lighting business and provide capital to support our mission to build a larger and more valuable company. I will now turn the call over to Mike McDevitt to review our fourth quarter and fiscal 2016 financial results in more detail as well as our targets for the first quarter of fiscal 2017.

Thank you, Chuck. I will be providing commentary on our financial statements on the 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 periods mentioned on this call is posted on our website or provided in our press release along with historical summary of other key metrics. For fiscal 2016, revenue was similar to fiscal 2015 at $1.62 billion. Non-GAAP earnings were $88 million or $0.86 per share for fiscal 2016, an increase of 23% and 37% respectively from fiscal 2015. Non-GAAP earnings exclude $109 million of expense, net of tax, or $1.07 per share from non-cash stock-based compensation, acquired intangibles amortization and other items. Fiscal 2016 revenue and non-GAAP gross profit for our reportable segments were as follows. Lighting Products revenue was down 2% to $889 million, but gross profit grew 3% to $242 million for 27.2% gross margin, which is 120 basis point increase year-over-year. Commercial lighting revenue grew year-over-year but was more than offset by our forecasted decrease in consumer lighting as we shifted our product focus to premium bulbs. Gross margin improved year-over-year due primarily to factory cost reductions. LED products revenue increased 1% to $611 million and gross profit grew 11% to $212 million for a 34.8% gross margin which is a 310 basis point increase from fiscal 2015. Excluding upfront license fees of $8 million in the year, LED revenue was flat year-over-year while gross margin improved as we successfully restructured the business while navigating a challenging competitive environment. Power and RF Products revenue was down 6% year-over-year to $117 million and gross profit declined 17% to $56 million for 48.1% gross margin. Revenue declined due primarily to customer delays for RF Products with demand improving in the second half of the fiscal year. Gross profit and margins were down due primarily to cost associated with new product ramp ups and changes in product mix. Non-allocated cost totaled $7 million for fiscal 2016 and are included to reconcile to a $503 million non-GAAP gross profit for 31.1% gross margin. For the fourth quarter of fiscal 2016 revenue increased 6% sequentially to $388 million, which was at the upper end of our targeted range. Non-GAAP earnings were $90 million or $0.19 per share which was in the middle of our targeted range for the fourth quarter. Non-GAAP earnings exclude $30 million of expense net of tax or $0.30 per diluted share from non-cash stock based compensation, acquired intangibles amortization and other items. Fiscal 2016 fourth quarter revenue and non-GAAP gross profit for our reportable segments were as follows. Lighting Products revenue grew 6% sequentially to $198 million, which was in line with our targets. Commercial lighting revenue improved from Q3 with double digit growth as customer service improved significantly. This was partially offset by lower consumer lighting sales as we are in a process of transitioning to our next generation LED bulbs which launch in the fall. Gross profit was similar to Q3 at $51 million or 25.8% gross margin due to lower consumer margins related to product transition costs. LED Products revenue grew 6% sequentially to $159 million, and was at the upper end of our targeted range. Gross profit increased 7% sequentially to $56 million or 35.1% for the quarter. Revenue was at the upper end of our targeted range due partially to upfront license fees recognized in the quarter. Power and RF revenue grew 7% sequentially to $31 million and was in line with our targets. Gross profit was up 3% sequentially at $14 million for 45% gross margin. Non-allocated cost totaled $1 million for the fourth quarter of fiscal 2016 and are included to reconcile to $120 million non-GAAP gross profit for a 30.8% gross margin. Non-GAAP operating expenses for Q4 were $98 million and in line with our targets for the quarter. Our non-GAAP operating income was $21.5 million which was in the middle of our targeted range. We ended the year with $445 million in cash and investments, net of line and credit borrowings, a $50 million increase from Q3. At year end, we had $160 million outstanding on our line of credit. For the year we generated $203 million of cash from operations and spent $134 million of capital expenditures which yielded free cash flow of $69 million. During fiscal 2016, we spent $150 million to purchase 5.8 million Cree shares. We did not repurchase any shares in Q4 due to the Wolfspeed sale negotiations which closed our window. During the fourth quarter, cash from operations was $65 million and capital expenditures were $24 million including patents which resulted in free cash flow of $41 million. For fiscal 2017, we are targeting Lighting and LED Capital spending of $55 million plus or minus to support our continued operations. Until the sale of Wolfspeed is completed, we will continue to invest in capital to support the Wolfspeed business. We target Wolfspeed capital spending to be $20 million plus or minus through the end of calendar 2016. Overall, we target fiscal 2017 free cash flow of $100 million plus or minus which may change depending on the timing of the Wolfspeed sale. Days sales outstanding declined six days from March to 38 days at the end of June. Inventory days on hand declined six days from March to 98 days at the end of June. We recently announced an agreement with Infineon to purchase our Wolfspeed business. The Wolfspeed business includes the Power and RF Product lines that have historically been reported as a separate operating segment plus the non-LED materials product line previously reported within our LED segment. Beginning with the first quarter of fiscal 2017 we will report Wolfspeed at discontinued operations in our financial statements. We anticipate the Wolfspeed sale to Infineon will be completed by the end of calendar 2016. For a comparison to Q4, we targeted our consolidated Q1 company revenue which includes both continued and discontinued operations in a range of $356 million to $378 million. We target consolidated non-GAAP net income for Q1 in a range of $10 million to $16 million or $0.10 to $0.16 per diluted share. For continued operations we target Q1 revenue in a range of $310 million to $330 million as Q1 Lighting backlog is tracking behind this point last quarter. While the business fundamentals are improving, Q1 Lighting revenue was target to be approximately 5% to 10% lower sequentially as we continue to rebuild the commercial project pipeline that was disrupted in Q3. LED revenue was targeted to be in a similar range if you exclude the upfront license fees we recognized in Q4. We target Q1 gross margins from continued operations to be incrementally higher sequentially if you exclude the upfront license fees. We are targeting Q1 operating expenses from continued operations to be similar to Q4. We target Q1 non-GAAP net income from continued operations to be between $6 million to $11 million or $0.06 to $0.11 per diluted share. Our non-GAAP EPS target excludes acquired intangibles amortization, non-cash stock based compensation and other items. For discontinued operations we target Q1 revenue from Wolfspeed in a range of $46 million or $48 million which is similar to Q4. We target Wolfspeed Q1 non-GAAP net income in a range of $4 million to $5 million. Our Wolfspeed non-GAAP net income target excludes acquired intangibles amortization, non-cash stock based compensation and transaction cost related to the pending sale to Infineon. Our Q1 targets are based on a number of factors that could vary including overall demand, product mix, factory execution and competitive environment. I’ll now turn the discussion back to Chuck.

Thanks Mike. As we start fiscal 2017, we are focused on the company transition to Cree 3.0 and building the more valuable LED lighting Technology Company. We project the markets for commercial LED lighting products will expand in fiscal 2017 and provide a good environment to grow our lighting business. We target that our consumer LED bulbs and LED components businesses will be in a similar revenue range over the next year as these markets are expected to remain highly competitive. We are focussed on the following goals for fiscal 2017. First, we are working to complete the sale of Wolfspeed to Infineon. We are going through the process to get the necessary government approvals or our team is engaged in various transition planning matters. We currently target closing the transaction by the end of calendar 2016, but recognize that the approval process can by unpredictable. In the interim, our Wolfspeed team remains focused on running the business to drive new design wins in both Power and RF applications while we continue to develop the technology and ramp up new production processes. Second, we are focused on driving top line growth for the new Cree with our Wolfspeed. Over the next year we target growing core commercial lighting revenue from current levels in line with the market and potentially adding to that growth to product line expansion and some incremental lighting M&A in calendar 2017. The fundamentals in commercial lighting have clearly improved over the last several months and we saw a nice sales rebound last quarter. The base distribution business improved in Q4 and continues to look solid in Q1, but we are still working to rebuild the agent-driven U.S. project pipeline which is running behind Q4 level. The sales cycle for our lighting project is two to three quarters which means that we are likely going to continue to face some near terms variability and project demand as we continue to recover from the project gap created by the Q3 ERP conversion and related customer service disruption. For fiscal 2017, we are targeting consumer lighting revenue in a similar range as fiscal 2016 as we transition to our next generation premium LED bulb. LED revenues also targeted in a similar range for the year excluding the benefits from non-recurring license revenue as new product design wins are targeted to offset what we believe will continue to be a challenging competitive environment. Third, we are working to improve operating margins. We target increased lighting margins in fiscal 2017 through a combination of lower cost and higher value of new products. We target LED margin in a similar range to slightly lower as we work to continue reduce product costs and increased performance levels to offset lower ASPs due to the competitive environment. We target company operating expenses to grow slower than revenue which should drive increased operating margin for the year. To enable our revenue and profit goals, we must continue to innovate in all business segments to differentiate our products in the market and improve the customer experience and service levels across the company. Innovation is what makes Cree a leader in LEDs and lighting, and the customer experience is what enables us to build larger and more valuable company overtime. We make good progress over the last several months getting new products released which have started to drive new projects over the next several quarters. We are off to a good start in fiscal Q1 with the release of our market leading HXB LED fixture which opens applications in commercial and industrial high-bay. We also released a new 130 lumen per watt ZR troffer products for high efficiency commercial indoor applications, a higher performance version of our CPY fixture for canopy application and our next generation MHB LEDs for commercial outdoor lighting application. Even with the tremendous number of new products, we must continue to fill product gaps and develop new capabilities As an example, we are we are working to finish the large format RSW products, which are important to strengthening our roadway product offering. We are also focussed on using our SmartCast technology in more existing products to increase our IoT product offering we are also expanding the capabilities of SmartCast with an open API and BACnet building system compatibility to further improve the value proposition to drive adoption in this area. While the primary driver of lighting growth in the near to mid-term is selling LED based fixtures, we believe Smart Lighting and the related value added sensing and analytic capabilities is key to longer term growth. Our SmartCast technology enables IoT capability and we are winning business today, but were early in the adoption cycle. And as an industry we are not yet providing the user experience and value added capabilities that will drive this in a mainstream applications longer term. As we stated in April, it will take several quarters to fully recover from the customer service disruptions we had in Q3. Despite some Q1 softness in commercial lighting orders, our lighting business fundamentals continue to improve. Customer service levels are significantly better than before the ERP conversion and at industry competitive levels. We made good progress getting the backlog of new products released over the last several months and are now opening new applications with products like the HXB high-bay. Lighting factory costs were down, and productivity should improve as we grow the business. We are confident these fundamentals will drive improved lighting sales over the next several quarters, as we work with our channel partners to rebuild our core Cree project pipeline and get our new products designed in the projects. The LED business has delivered solid results over the last several quarters in a tough competitive environment and continues to deliver innovative, new LED technology that enables our existing customers, and position the business to expand into new high power applications in the future. Our consumer lighting business is well positioned for renewed sales momentum with the launch of our next generation premium LED bulb family in late September. We remain focussed on building a larger and more valuable company by bringing better light to our customers, light that makes your environment better and is intelligent by design. Light that enables you to see better, feel better and do more. The sale of Wolfspeed will enable us to increase our focus on improving the fundamentals in our Lighting business. Expanding our LED fixture product offering, launching a new LED bulb, and enabling our channel partners to win more business. Looking ahead we are working to combine these fundamentals with new capabilities that become possible as we combine our Smart Lighting technology with the larger IoT ecosystem. We are having good initial success with SmartCast and SmartCast PoE, but we are really just scratching the surface as to what LED lighting systems can do and what they will be able to do in the future. Enabling this capability is important to delivering on our promise of better light and the longer term growth of our company. We will now take analyst questions.

Thank you. [Operator Instructions] Our first question comes from Hank Elder with Goldman Sachs. Your line is open.

Hey guys thanks for taking the questions. I’m on for Brian Lee. Can you guys elaborate on what the inline with the market in terms of commercial lighting growth means; I mean what are your expectations?

Hank we don’t have a specific number I think, what we are basically trying to break out for you is how to think about how we plan to grow the lighting business. So if you think about our kind of base lighting business we would expect it to grow with the market. The reality is that Cree plus all the other major suppliers are now mostly LED. So that would grow with the market. Then in addition to that, as we open new applications, so if we can expand into market segments we don’t serve today, we think there is an incremental growth opportunity on top of that and then obviously M&A would give us some upside beyond that. So that’s kind of how we think about the pieces but no specific target for you.

Okay. And I think with Wolfspeed and that transaction you had mentioned the CapEx and the investment that you have made or were making, can you just give us a sense of what that was over the last 12 months so we can maybe get a sense for what the go-forward CapEx needs in the business are?

Well, I think Mike broke out what the CapEx needs are going forward. Mike, can you repeat that again.

Yes, for the LED and lighting business targeting about $55 million in FY 2017 and then with the piece that Wolfspeed will be on board thinking that that will close by the end of Calendar 2016 roughly $20 million plus or minus for them.

Thank you. Our next question comes from Vishal Shah with Deutsche Bank. Your line is open.

Hi. Thanks for taking my question. I just wanted to better understand the M&A option you mentioned. You said $100 million of free cash flow. How much do you think you will be realize looking to spend on M&A and versus how much would be towards buyback and other activities?

Vishal, I think the way to think about it is our primary focus is to grow the business, so I think we will be looking at really M&A as the first option, but we'll continue to evaluate buyback and where that makes sense we'll do that. Obviously, in the near term Wolfspeed closes, I think we'll take one approach and then assuming Wolfspeed closes on as expected by the end of the year, that will obviously give us quite a bit flexibility in our balance sheet to really be able to pursue both of those in parallel.

That's helpful. And then can you talk about the linearity of the revenue, some of the seasonality assumptions that you should be making versus some of the impact you had from the slowdown in the commercial lighting business. Should we assume normal seasonality in the business in the calendar Q1 and maybe a much more backend loaded year as sort of think about the next couple of year or quarters? Thank you.

Yes. What I would say it’s a little tough to put seasonality on the business, because really the major factor that's affecting commercial lighting is just working to rebuild the project pipeline from the disruptions we caused in our fiscal Q3. And so, knowing that that's about a two to three quarter phenomenon, we're kind of in the middle of that. So a nice rebound in Q4, little softer in Q1. But I think over those two to three quarters we should start to get this back to a normalized rate and that combined with the new products will then kind of set the bar going forward as far as what that means in terms of seasonality. It's going to be a little hard to give you that because I think getting the new project pipeline as that comes back that's going to have a bigger effect on the business over the next few quarters than any seasonality. There obviously will be some, but I think the bigger factor is project pipeline and that's we're focused on, because that's what we can control.

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

Hi. Thank you for taking my questions. I'm sorry if I miss the upfront licensing revenue during the June quarter. Did you quantify that?

Yes. Tom, we don't break it out specifically, but if you think about from Q3 to Q4 the LED revenue went up about 6%, so roughly about half of that was license related and half of that was the business itself growing. So that gives you kind of a rough number about how much it was.

Thank you. And then, just on the last comment you made, so with the commercial business you expect that over the next two or three quarters that could get back to a run rate similar to what we were seeing in early 2015? Did I hear that right?

I think what you should expect is, we'll rebuild the project pipeline. I'm not sure I'm trying to put any specific target out there. I think I'm trying to layout the pieces of how we'll rebuild that momentum and I think it's going to be a function of getting the core business growing, but also what is the rate of success on the new products. So obviously we've released a lot of new products and so how fast those get designed in and what their success in the market is going to affect that number both directions. And so, I think we're cautiously optimistic that if we get that customer service fundamentals right and keep the new products coming, we can continue to have some success but also recognize that we got to work through this two to three quarter period where we got to rebuild that pipeline.

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

Great. Thanks for taking my question. So, Chuck, I guess, the follow-up question to your last comment there. In terms of all the new products you guys made announcement, any thoughts around where you [indiscernible] adoption there, are you guys taking any additional steps to drive adoption or drive revenue uptick, and if you can remind us, I think as both of you guys talk about two to three quarters before new products start to really contribute meaningful revenue. Is that still kind of time frame we should expect those to be more material for you guys?

Yes. Edvin, think about it. That two to three quarter phenomenon is about how long it takes from when you get the channel to start working on a project to when you can convert it into revenue whether that's the base business or that's a new product. So it’s kind of the same phenomenon in terms of timeline, obviously there are some variability. So with the nine new products, if there's a split between platforms and major upgrades they're all going to be kind of in a similar time frame, I'm sure we'll have some short term success, but it will take two, three quarters to be really kind of see what that is. And remember some of those are really significant upgrades to our business we're already in. so they're going to have people focused on those applications. And in some cases with like an HXB high bay or the LN4 linear, those are really putting us in new markets that we haven't been in before. So, I think the timeline is about right, it’s probably little shorter for things in market we're already in, a little longer for new market, but that's the right sensitivity.

Great. Thanks for clarifying that. And then, I guess a question on cash, you guys talk about potential acquisition as a way to drive growth in your business. Anyway you can give us somewhat your thinking about it. Are you looking at a certain hurdle rate or specific technology I think you talk about controls or integration or IoT as one direction you're looking at? Any color you can kind of give us to let us think about the M&A opportunity there? And in terms of also the pipeline, are you guys looking to a pipeline or funnel of M&A opportunities?

Yes. I'll pick those kind of in reverse. So we have a small team that is working to build the pipeline to look at projects, but we're early. Really our focus right now over the next four, five months is to really need to get Wolfspeed closed. That's the short term priority. But there is a team working to kind of build the portfolio of options and ideas that might make sense for us, but early stage is there. What kinds of things are we interested in? Think about it as really wanting to access more customers more customers and more applications. And so I think today we're pretty successful in certain market segments, but I think there is other segments that for example, we just introduced the product for an industrial high bay. We weren't in that market before. So, are there products that really let us access complementary markets that are good for our overall portfolio and really help us strengthen the channels ability to win in business in the marketplace, but again, any more specific than that would be premature.

[Operator Instructions] Our next question comes from Krish Sankar with Bank of America. Your line is open.

Hi. Thanks for taking my question. I had couple of them. One, I just want to clarify. Did you guys say sequentially for September quarter the lighting products revenue would be down 5% to 10% and LED would be down more than 10%. And if that is the case, looks like Wolfspeed is up almost close to 50% sequentially. What's driving that? And the second one is, thanks for the breakdown on the CapEx between Wolfspeed and the continuing operations, wondering if you have a breakdown on the OpEx side and what – how to model taxes without Wolfspeed? Thank you.

Yes. So let me get to the first one. So, our guidance was as follows. We would target that the commercial lighting business would be down 5% to 10% sequentially. What we also said is that LED would be in a similar range if you exclude the benefit of the license revenue. So if you take that, I think you'll get to a different number than what we were just saying. But I think to clarify those comments its really – commercial lighting is down, LED a similar range, we take out licensing. As far as a breakdown of OpEx between continued and discontinued operations, I don't believe we've broken that out any further, but I'll Mike if you want to add any color to that or not.

Yes. You'll get a picture of that if you look at our press release we put pro forma information at the back of the press release. And you'll see OpEx for continuing operations will be similar to what it was in Q4.

Thank you.

Sure.

Thank you. I'm showing no further questions at this time, I'd like to – I'm sorry, we do have a question from line of Colin Rusch with Oppenheimer. Your line is open.

Thanks so much. Can you guys talk a little bit about the cycle time and the commercial lighting business? Where you're seeing in terms sell-through? Is that picking up or slowing down or how can we think about that?

Colin, I don't know, that it’s really – this sell-through rate in commercial lighting is really function of win a project. You bid a project, you win a project, you ship a project. And that's that two to three quarter phenomenon. I haven't really seen that change significantly over the last couple of years. So I'd say that's relatively similar to what it's been.

Okay. And then, just in terms of financing options for some of those bigger products, are you seeing lower cost of capital or kind of persistently low debt rates starting to impact pricing at all in the market?

It's interesting. An LED project is relatively compared to small capital it happens relatively fast payback, I think if most people do the math, you're looking at on in consideration of what other projects are, its relatively small capital with payback two to three years. What we found in some of the applications that especially in a lot of them are commercial application, when someone realizes how quick the payback is financing's rarely a path they need to make the project. Now that being said, there is some financing that's used on the bigger, municipal [ph] type projects, but that would be a more limited part of the business and I haven't seen a significant change in that side of the market one way or another.

Okay. Thanks so much, guys.

Sure.

Thank you. Our next question comes from Vishal Shah with Deutsche Bank. Your line is open.

Yes. Hi, Chuck. I know you mentioned the lighting was an expansion in fiscal 2017, can you just maybe provide some more color on how we should think about that. Can we assume some of the sort of growth – our improvement in margins as you saw in 2016 or what are some of the drivers there? Thank you.

Yes, Vishal, no specific target, but the way to think about it is, so we've already has seen some of the benefits. We know that for example, we've made some significant gains in our factory cost levels that as we're able to grow the revenue we should get some incremental margin from using a low cost factory and loading it. So that would be one example. I think there's also a number of activities around getting lower cot of production, so some cases that supply chain relative, some cases that's designing cost reductions into the product. And then third is on some of the newer products, we're actually starting to access some applications that should give us some incremental leverage, because we're frankly able to speak more the value for ourselves, because these products address a higher value application. It's really a combination of those three pieces. I don't want to give a specific target, but that's why we believe we can make incremental projects from here also next years.

Okay. Thank you.

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

Thanks for squeezing me in. Just had a couple of questions. One is on the SmartCast opportunity, Chuck, I was wondering if you feel you have the breadth of products to really push now or do you need to expand the M&A and then kind of follow that up with broader reach of SmartCast. I guess what's the feedback you're getting from your agents and channel in terms of the ability to sell the IoT Solution with the new products that you've introduced as well as some of the legacy ones?

Yes. So, I think in breadth of product we definitely want to expand the breadth of product. But I'd say, Jeff, its less about having to acquire technology and more about making SmartCast available on a much wider range of the Cree platform. So, SmartCast is really as a technology, today it’s in a limited number of our down light and our troffers, but over the next year you'll see that expanding to a wider range of those product. So it’s really about taking that core technology, making it available across the product line, while there is always a potential that we were looking for and look at M&A as a way to access additional smart technology. I think we're pretty comfortable about what we're doing internally and rolling that out across the business. Of course that will take time and it really gets into your second question, which is what about the ability to sell it? And what I would say is, there are some sophisticated customers that are able to move very quickly, we launched SmartCast PoE and had a number of projects right away. That's because these customers are already looking for IoT based solution. I would say the generic lighting customer is going to be a little slower. They would normally differ to control plus lighting, not some integrated solution. And I think it will take time to develop that, and so I think as our product line rolls out, you'll see us do some things to maybe add some more controls like feature to make it more applicable to conventional channels while at the same time continuing to do innovative things like SmartCast PoE that access really a very sophisticated customer that such a trying to get the IoT today.

That makes sense. If I could follow-up with one more if you don't mind. Just on the consumer bulb, obviously look forward to the introduction, sounds like in September. One, just kind of a two part question on it, one or maybe actually three part one, if you could talk about what is different with bulb, hopefully it’s a better margin profile than what you had in the past? Question two is I think in the past the hypothesis of the bulb in general was to reinvest the gross profit dollars that you're receiving with the bulb into branding the C&I opportunity. I don't know if that's still relevant just given that kind of focus that you have on the high end of the market and reduced shelf space that you have in the retail channel. But then also the third-part is there any significant OpEx increase that you would have in conjunction with this bulb launch. Again more in the December quarter, I know...

Jeff you get cut off, but I think I can still answer your question. So, the basic idea of the next gen bulb is better light at a better value. And so, what does that mean? We think we can come with a bulb that even has better features than our customers had in the past and frankly lower the price point also being a premium bulb in the market. So, that's the idea. You'll see some additional promotional activity around that when we launch it. What's the strategy? It still is a brand building strategy that's absolutely one of the thinks. But I think what you'll see as we go forward to next year while there will be some incremental promotion. We believe that with this new bulb that even where we are today that what has been a bit of a headwind as we work through really the product transition, we'll get some small incremental tailwind. But there is – I generally speaking it is mostly about investing those profits to build the brands. I think what you'll see with the new bulb is we'll be able to do more of that we'll have frankly the new product will enable that. Next question.

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

Hi. Thanks for the follow-up. I had two. One was Chuck or Mike. Can you just give us how to look at tax rate with and without Wolfspeed and can you give any color on how much of your sales was to China in June quarter?

Yes. So, let me give a shot. We don't breakout the sales to China. If you look at the company overall because if you think about the product mix, it hasn't changed very much between the three pieces, so I'd say it's relatively similar to the previous quarter, if you just look at relative revenue. That being said, since lighting grew the most shrank with small percentage, right. But it’s not changing dramatically within each of the businesses. As far as any commentary on tax rate, I'll let Mike to comment on that.

Yes. For FY 2017 kind of think about total company's non-GAAP tax rate been in the 28% plus or minus range with the continuing ops, meaning the LED and the lighting piece of it be in less than half of that and then Wolfspeed on the discount side being roughly 34% plus or minus.

Got it. Thank you, guys. Very, very helpful. Thank you.

Sure.

Thank you. Our next question comes from Steven Chin with UBS. Your line is open.

Hey, guys. Thank you for taking my question. We're starting to hear about larger MLP [ph] sales to LED chip companies. Does your FY 2017 outlook for LED sales incorporate some risk of oversupply or pricing pressure?

Steven, what I would tell you is we assume that the LED market has been in oversupply and will continue to be there. And so the words I'd like to use is we'll remain highly competitive. I think that I saw some similar reports that you're seeing, But you have to remember, there's people retiring a lot of old capacity at the same time or at least that's been the discussion. So I think what you're getting is that for those that are going to stay in the game, there will have to be some reinvestment even to stay in the game at lower capacity levels.

All right. Thank you. And if I could get a follow-up on the Wolfspeed, trying to look at EPS going forward. Can you give us an idea of how much stock-based compensation is going to be removed with Wolfspeed?

There'll some, but I don't have a specific breakout for you at this time.

Thank you. Our next question comes from Daniel Baksht with Pacific Crest Securities. Your line is open.

Yes, hi. Thank you very much. Just a couple of questions. First, you mentioned smart lighting is a key to longer term growth. Just curious if smart lighting is a meaningful contributor to revenue right now?

Obviously it’s a small percentage of the total, so I'd say, its relatively modest and the reason I talk about it as more important in the mid to longer term. Today what we're really talking about a smart lighting that allows you to optimize the lighting environment. When you start to think about smart lighting which are really platforms for not only lights, but sensing and then some building analytic for environment analytic. We're really talking about the system that start to add value of the fundamentally different level than just the lights. And so, that's not going to happen overnight, but I think it’s really creates an interesting opportunity for all the lightening companies that we can participate – we can add value by more than just delivering great lights.

Great. Just a follow-up. In terms of the decline of 5% to 10% in commercial lighting sequentially, could you provide a little bit of color in terms of ASP and units that you're looking at?

Yes. I don't know that there's any significant ASP or unit trend. It’s really a quantity of project trend. So I would think of that as some dynamic as far as big shift one way or another. It just – when we have the disruption back in our fiscal Q3 we really created a project pipeline gap and it will take us two three quarters to rebuild that.

Thank you. I'm showing no further questions. So 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 first quarter results on October 18. Goodnight.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone have a great day.