cree, inc. - shareholder/analyst call

by:ILED     2019-12-20
Cree, Inc. (NASDAQ:CREE)
October 25, 2011 morning 10:00 etexecutivesunknown speakerCharles M. Swoboda -
Charles M. , chairman, chief executive and president of the board
Good morning.
For all the people sitting in the back, I would really encourage you if I could, to find your seat in the next minute or two, we are about to start.
Okay, we started.
First of all, I wish you all a good morning. welcome to Corey. I am Chuck Swoboda, Chairman and CEO of Corey.
Thank you for your attendance today. We welcome you to the 2011 annual meeting.
Before we start, I would like to take a few minutes to introduce our board members and ask each of them to stand up when I call the roll.
First of all, the plantation owner lifeguard, the retired chairman and CEO Dolph von ALKS;
Clyde Hussein, chief financial officer of Marvell Technology Group;
Bob Ingram, managing partner of hatras venture capital and former vice chairman of Glaxo Pharma; Frank Plastina;
Former President and CEO of Tekelec;
Bob Tillman, retired chairman and CEO of Rovey;
Harvey Wagner, H. A. Wagner Group;
Tom Warner, CEO of SunPower Corporation;
Our newest board member, Alan Ruud, vice president and founder of Alan lighting, former chairman and CEO of Ruud lighting.
Alana\'s role is Ruud Lighting and his national founder, executive officer and director
As we continue to work hard to lead the market and drive the adoption of LED lighting, the recognized expertise in the lighting industry will be very helpful.
Finally, I would like to introduce John Kutzwell, our chief financial officer;
Our latest executive vice president of led, Norbert Shearer, and our latest executive vice president of lighting, Ty Mitchell.
Please applaud our board members and officials.
Before I talk about the meeting, I would like to take this opportunity to give special recognition to Dolph von ALKS who decided not to take part in this year\'s re-election.
Dolph, please stand up again.
Dolph has been on the board for 20 years since Cree was a private company.
Since the establishment of these positions, he has been our chief independent director and chairman of the governance denomination committee.
He has served on several occasions as chairman of the Executive Committee, chairman of the Audit Committee and chairman of the compensation committee.
Dolph has brought a lot of leadership experience to the board, and he himself served as chairman and chief executive of two listed companies.
We are very grateful to Dolph for his contributions over the years and for his valuable services to Cree and our shareholders.
I would like to say in person that as a new CEO, I am very grateful for his guidance over the past 10 years.
While I got good advice from all of my board members, Dolph not only directed myself, but also all of Kerry\'s CEOs in history.
So Dolph, thanks to myself and all of us, and so again, applaud Dolph.
As a reminder, Dolph has been a very large shareholder for that time, so it is clear that his interests as a shareholder are in line with the rest of you.
So, now, please order.
The chairman\'s note of the company secretary was handed over to me, the notice of the meeting, the notes given to shareholders, an affidavit sufficient to prove that the meeting had been officially held and in accordance with the articles of association of the company.
In the election inspector table on my right, there is a list of shareholders of the minutes recorded on the date of August 29, 2011.
The list will remain open for inspection by any registered shareholder or shareholder representative during the meeting.
Mike McDevitt, director of the company\'s sales operations, was appointed election inspector for this meeting.
If someone holds an agent who has not yet submitted or intends to vote in person, please report to the election inspector at this time.
In order to determine that we have a quorum to conduct business, the holder of the majority of the shares issued on the record day must be present today in person or through an agent.
The inspector has [indiscernible]
The report, which he determined based on the account of the previously submitted agent, represented the holder of the majority of the outstanding shares on the record day in person or through the agent today.
According to the inspector\'s report, I find a quorum for all purposes.
Meetings have been convened to consider the following operational matters.
First, 8 elected directors;
Second, the approval of an amendment of 2004
Regular incentive compensation plan;
3. approve the amendments to the 2005 employee stock purchase plan;
Fourth, approve the appointment of the independent auditor of Ernst & Young accounting firm for the current fiscal year;
Consultation vote on executive compensation;
And the frequency of future executive compensation consultation voting.
All of this is described in the previous annual meeting notice and proxy statement provided to shareholders.
I note that Kim Verode of Ernst & Young, the independent auditor of the company, attended the meeting today to answer the appropriate questions and, if she wishes, welcomed her to make a statement.
Kim, are you there?
Do you want to make a statement, Kim?
It\'s not great. it\'s not great.
The articles of association require shareholders to notify shareholders in advance of any nominations or suggestions that may wish to be made.
The company has not received a shareholder nomination or proposal, so it is only possible today to consider the items described in the annual meeting notice.
Do any shareholders want to discuss the matters to be voted on? [Voting]All right.
If you intend to vote by vote and have not yet given your vote to the election inspector, please do so at this time.
If you have previously used the proxy card or the instructions attached to the proxy statement to vote, you do not need to vote.
While collecting and summarizing votes, I would like to take this opportunity to update you on the status of our business.
So it\'s interesting for me now.
This is actually the 11 opportunities I have shown you as CEO of Cree, even though it has been over 10 years and I have been doing it for many years and I have had the opportunity to go back and see some of the things we talked about, hopefully today, I can give you a perspective on how far we have come, but what is still in front of us is an incredible opportunity.
I want to start with exactly the same place you see in this year\'s annual report.
That\'s what we did in leading the LED lighting revolution, and just a few years ago, no one even thought it was possible.
So we showed you this very interesting light and what I want today is to show you how it looks in person.
Thus, this is a prototype lamp designed to meet the requirements of the 21st century lamp specification, and surprisingly, it provides more than 1,300 lumens of light, more than 75 lumens
Light bulbs with less than 9 watts of electricity.
While this is an amazing technological achievement, especially since we have shown these results before the DOE has even finished defining what they should be, but what is more important than technology is its significance to energy efficiency.
So some of you have heard me in the past that the cleanest, cheapest and richest energy source is the one we \'ve never used before.
The point is, while there is a lot of discussion around alternative energy in the world today, the opportunity before us is that there is less energy than we are using now, the significance of this product is not only from a technical point of view, but also in terms of energy efficiency, what it may mean.
If we adopt this technology and are able to deploy it extensively, then we have shown it here today, and we have transformed the lighting technology that exists in the United States into this technology, we can save 15% of our electricity bill.
Now, I want you to understand that this is not 15% of the lighting power.
This is 15% of the electricity we use in this country today.
This is the impact that we can give you a perspective that will take us back to the amount of electricity we used in 1987, which, by the way, happened to be the year Cree was founded.
I\'m going to turn it off, not because I can\'t leave it on, but because I notice that some people will be a little blind by it after a while.
No, it\'s not hot.
Let\'s start the discussion.
First of all, I will move forward before I proceed --
Look at the report. if I don\'t, some reports will appear.
But more importantly, we have done a lot to file with the SEC to discuss all the risks and uncertainties of our business and investors, and I encourage you to become familiar with these.
Let\'s start with our mission.
Despite the amazing changes that have taken place in Cree, our mission remains the same.
About 5 years ago, we decided to let the company focus on leading the LED lighting revolution to replace energy waste or inefficient lighting, and what is important to us is not just to make better bulbs, not just making alternative lighting products, but, we are committed to eliminating all the lighting that is wasted energy today.
So we would like to talk about market opportunities when you buy new lighting, but we are interested in finding ways to get your current lighting out and upgrade to LEDs, and get the benefits of energy saving.
Before I get into the future, let\'s talk a little bit about the past.
So, maybe, ten years later, I have some memories.
But if you go back to 2001 and we make about $0. 178 billion in revenue, which is interesting, we will enter an era of uncertainty in the market.
For those of you who remember, before Neil gave me the opportunity to be CEO, the tech bubble was slightly cracked, thanks Neil.
We face challenges.
Our main product is a new LED chip called MegaBright chip, and we are very excited that it will help us further penetrate the backlight of the car dashboard.
What this chart really shows us is that not only are Corey good at inventing technology, but we have always been good at innovating our business and taking advantage of new opportunities to deal with new threats, continue to find ways to solve new problems and continue to develop the company.
Even though we have managed to build a company that earns more than $1 billion, I think we are actually just touching the surface of possibilities.
So let\'s talk about some of the highlights.
So I know that last year\'s results were mixed and people expect us to grow at a very high rate.
We personally have the same expectations.
However, despite the difficult market environment, we have actually done a good job in many goals.
So our first goal is to take the lead in lightning.
Our lighting systems business grew 92% year on year. over-year.
We have proven that great products drive adoption and we have done it with some very innovative new ideas.
So if you look at the first product, our CR6, this is the downlight we designed because people say it is impossible to build the downlight for $50 and sell it through retail.
This is a product that is sold today at Home Depot at a level you never thought about, and we do this by solving problems and doing things, not only unexpected, but the real reward for customers.
What you see next is that we continue to innovate PAR lights for different applications, which is not only our first success at Walmart.
We showed 60.
Watt Energy Star light bulb.
Everyone asked, do Corey want to do this bulb?
But we didn\'t do that because the leading point in lighting is sometimes to build systems and sell them, but sometimes just to drive the market. So did it work?
When we came out with this bulb, there was no other 60-
Watt Energy Star bulbs on the market.
Philips is selling one today, and both General Electric and Osram have announced plans.
Therefore, the opportunity to change this market is growing, whether we are selling systems or selling components to system companies, the market is expanding.
Our CR troffer, this is the product you see there today, and I encourage you to take a look if you don\'t have a chance to see it.
So, when Cree first made the LED product to compete with the fluorescent product, it was a $400 product, and while there were several customers, it was really too expensive.
So we launched a new LED troffer that costs half of the old and has higher performance.
We do not accept fluorescence directly.
In many applications, when one considers the fluorescent troffer of the building grade, we can provide the LED troffer at almost the same initial cost.
But more importantly, we are creating returns that allow people to start to afford old lights and convert them to LED-based lighting.
Last but not least, the 152 lumens/watt light, in many cases today, we don\'t show it well, I don\'t think most people know how this is possible in many cases in the industry.
Not only is this possible, we have not finished it yet.
There is more to do and you will hear more.
The second thing we have been focusing on is to make our customers.
So LED component business-
A very important part of our company.
So our idea is that we lead the market with systems and then we can come back with components that we can sell through all the other companies in the market, we did something very different a year ago.
We changed our strategy so everyone else focused on the same LED and made it brighter and they would buy more.
Although we are still focused on making brighter LEDs and more efficient LEDs, we believe that in order to make the market truly successful and to really make these customers win in the market, we must deliver products optimized for specific applications.
So if you look at the past year, we \'ve launched a range of new products that address different applications, whether it\'s MR16 or the spotlight, or all the different things that we do with these products are valid, so although the market environment for LED components is very difficult, our business is still growing at 25%. over-year.
Now, for those who don\'t have a chance, if you stop today on your way back to see the first demo, you\'ll notice our latest product launch in the LED component space, which is a high
Same idea, voltage LED.
Therefore, we use chip technology to make very bright LEDs, but we combine them to enable customers to solve lighting problems that they cannot solve with existing component technology.
We have done this by making an LED with a voltage high enough that it makes the rest of the circuit simple enough to fit into the standard Candra Barra bulb.
This is the focus of our continued attention in the coming year.
What is strategy?
It has not changed.
We start with the system.
The system provides us with the opportunity to lead the market.
Someone has to show people what is possible.
When we lead the market, we can\'t just set standards, we can drive the development of LED lighting.
Then, we have an LED component business, and our idea is that if we continue to develop leading LED component products, as the market expands, we can sell them more products by making all the companies in the lighting field more successful.
This is a key point.
We can\'t just sell components.
We have to make their products better than today\'s.
That\'s why their products are adopted.
Last but not least, our LED chip products.
At the end of the day, our LED chip technology is our fundamental advantage, whether it\'s the efficiency of our system, the performance of our components, or the ability to design new components, design the ability to solve problems that have never been solved before.
The biggest question I \'ve been asked over the last 3 months may be, is strategy effective?
I was always surprised when I was asked this question, because I guess that means we didn\'t explain very well what exactly we did in the last 3 years.
So when we acquired LLF in 2007, we decided to launch a system business that led the market, and our belief is that with system technology, we can develop this business, but more importantly, the market for LED lighting is bigger and there are more components.
The result is this.
So if you look at the slides in the upper left corner, you can see that since we entered the system business, we have developed the product line at a rate of more than 100% per year.
At the same time, our LED component business is growing by more than 30% annually.
So when I was asked, \"Do you think it\'s possible ? \"
\"The answer is absolute.
We \'ve been doing it and we\'re going to do more because that\'s what we think is driving the market.
Because this is the combination of the two most important factors driving adoption.
This is the return.
How quickly people who buy LED lighting recover money from maintenance savings or energy savings.
The slides on the right show these are external market survey data.
2008, the first generation of LED-
Whether it is the first generation of outdoor products or the first generation of indoor products, lighting products are the main products.
You can see that the return is quite long, so not many people buy it, we have some early adopters.
When we get the second generation, the cost is down, the return is reduced by more than half, and we see the market starting to grow.
With the third generation of products we are working on, we now have the leverage to drive the next phase.
So when we reduce returns, adoption rates rise, and that\'s the market opportunity we\'re trying to create.
Not only for Cree, but also for all of our component customers.
Over the past few years, I have talked a lot about what this market opportunity is?
So I want to show you the same picture that I showed you in the last few years.
Here are the three pie charts on the left.
What do they say?
Every year, there is a market opportunity of $100 billion to sell new fixtures and new fixtures.
As you can see, the market for lamps and lanterns is around 75% and the market for lamps and lanterns is around 25%.
One thing we have been talking about is that while we are interested in many of these parts, our focus is on business, industrial applications, because they believe these customers will understand the idea of return.
So if we try to convince you to buy a more expensive LED bulb, you will not consider the return, you will consider the first cost.
But fundamentally, businesses are used to thinking about the cost of ownership and how to make capital investments and get their money back.
That\'s where we started.
Although we have achieved great success, the first thing I want to tell you is that it is too early.
So while our own system business has grown and our component business has grown, we are indeed in the early stages of adoption and we have learned two very important things.
The first problem is that the market will never move if you have no one to go out and develop the system and get the first install.
The market itself will not change.
Someone goes to get them to change, whether it\'s something we do with downlights at fast food restaurants, or something we do with PAR lights when designing at Walmart, or by getting street lights, what did the BetaLED product line do.
When you actually install these devices for the first time and show people what it looks like, what has been adopted and how math works?
That\'s why we started building momentum, which is critical to driving the market, and we have to figure out how we can continue to do so.
However, along the way, we learned something very interesting.
We \'ve been focusing on this $108 billion market, and we \'ve actually missed a bigger opportunity.
Most of the places where we sell LED systems today are not actually new buildings.
They\'re not architects.
Drive the decoration property.
In fact, they chose to take out the very good lights and upgrade to the LED lighting because it was worth it in itself.
The upgrade opportunity to install the base is at least 10 times higher than our estimated average market.
What we focus on driving our business is the combination of these two markets.
The point is that these markets will not happen on their own, there must be someone to let them happen, our strategy continues, and how Cree does it.
So let\'s talk about where the lighting application is.
The second most common question, where are we?
We are definitely still very early, and what I am showing you is a big curve, and there is no real action to show, what is the timely adoption rate?
I\'m describing the classic S-
Technical curve.
It\'s no different than a digital camera, or when you buy a cd instead of a record, or any other technology.
At the beginning, new technology came up and some people tried it.
It is usually more expensive and few people want to be early adopters.
But they like it when they try.
More and more people hear it, and as more people buy it, the cost starts to drop and it will boil on its own.
You will reach critical mass over time and the whole market will begin to convert.
Obviously, how do we aim to achieve this market?
Then we ask ourselves, why not happen today?
Because we are still in the early stages, we focus only on four major areas, and we think that if we can overcome these, we can push adoption faster.
The first one is, today, if you go and buy the lighting, ask for the LED-
You will find that this is a very fragmented market.
In other words, each company has several LED-
But no one really has the product to solve the whole building problem.
So you have something but no one really offers the complete product line and the complete solution.
Second, the innovation speed of components is far ahead of the system.
So at Cree, we produce more than 150 lumens per watt of LEDs today.
Starting with our invention of a new LED, it usually takes 18 to 24 months, starting with the LED eventually appearing in our customers\' system products.
If we can shorten this time, we can get the benefits from LED access to the market, thus speeding up adoption.
The third thing is that the return of the LED is too long.
So where we see people buying it today is that the return is 2 years, 3 years, which is a small number.
But too many cases, the return of the LED is 6 or 7 years.
So while you might be able to get someone with very high energy costs or very high maintenance to switch, we don\'t have a wide range of market changes and we have to reduce the return, which is to reduce the initial cost.
Finally, the lighting market is not very good at selling LED technology.
Think about what we want you to do.
Since Thomas Edison invented the light bulb, the lighting industry has been in the form of two dollars since 130.
There are lamp or light bulb companies, as well as lamp companies.
The lamp company wants you to buy a lot of lights.
In fact, what they have convinced you is that you can buy a completely defective product that usually gets damaged, which is fine and you should buy more.
On the other hand, you have a fixed company saying that I don\'t know anything about that lamp, which is not my problem.
I will sell you a fixed thing that will last for 20 years.
What we are asking the industry to do is to combine the two.
So what we have to do is to help an industry that is considered to be these two separate parts, to gather them where the LED is the light source, where the fixture is one, and to combine, they offer a value proposition about cost of ownership.
Now we have made progress in the field of indoor products, and there are other companies that have made progress, but today, we are still lagging behind because there are too many lighting companies or lighting agents because it is easier, so they want to simply sell at the first cost and we have to keep building momentum to make the channel more successful.
So for the past year, we have been asking ourselves, if these are barriers to adoption, we are leaders, what can we do?
So what you saw a few months ago was our solution.
Our idea is that we can choose Cree, the best indoor LED product line, we can choose Ruud lighting company, the best outdoor LED lighting company, and we will bring them together.
Together, we will have a range of product lines for application services.
We will be able to bring the time for the development of new component technologies to a system where we can reduce the time by integrating.
We can focus on how to improve the return of all products in the indoor and outdoor markets, and we are solving the same channel problem.
But instead of working with a group of agents, Cree\'s interior products are trying to solve the same problem.
Overall, we are now able to drive the market better than we used.
We believe that this combination will enable us to accelerate the adoption of LED lighting, which is indeed the key to our business strategy.
So let\'s talk about Ruud.
I know a lot of you have heard of it, but this is a company that has earned about $0. 2 billion in the past 12 months ended June.
Everyone is talking about them as a lighting company, they are in the lighting business, but what I want to point out is that they are actually very unique.
Ruud Lighting is the first Lighting company we see in the world, and it has actually transformed from a traditional Lighting company to an LED company.
In 2007, 100% of the company\'s sales came from traditional lighting technology.
By deciding that led is the future, and focusing the technical resources of sales resources and marketing resources on how to drive these outdoor applications with led, they became the leader in outdoor LED lighting, more than 60% of their income last year came from LED-based products.
They have transformed from traditional companies to LED companies, along the way, they have developed unique technologies in optics and thermoelectric, and really understand how to sell these products in the market.
So today, we have the best brands in outdoor LED lighting and the best brands in indoor lighting, Cree, we are able to combine these brands together, we have the ability to drive the market at a level we can\'t do before.
The best example Ruud brings us is probably the Los Angeles City project.
Now, I said a few minutes ago that you have to install some devices to show people what is possible.
Los Angeles, the best example in the world when they decide to switch to LED lighting, outdoor LED lighting is ready for prime time because it\'s not just a demo project.
They decided to turn 140,000 street lights into LED
Based on street lights, they do this for a very simple reason, they have a return, which means we will pay for these lights for ourselves.
So they spend $57 million, but they make $10 million a year.
So the project was driven by the technology invented by Ruud lighting.
Today, we have become part of achieving this, but what is even more impressive is that in two years they have found that the return is better than they thought.
So 7-
Due to better technology and lower cost, the annual return is now less than £ 6.
The 40% energy saving is now over 55%, so we show the world through such an application that LED lighting is ready, not only in our system business, but also around the world, it all really created momentum and began to seriously study the turn to LED-
Basic lighting of street lamps.
So we have Cree now, we have Ruud, we have scale.
Another thing for us is that we have this comprehensive approach, and when I was asked a lot of questions, I really think that\'s why we succeeded.
So it\'s not a challenge for us, it\'s an opportunity.
Because we focus on the system, we can drive returns.
If we reduce the return, it will drive adoption, and if you drive adoption, it will create a bigger market for Corey\'s system business and our customers.
In doing so, because we are not only component suppliers, but also system suppliers, we have developed component technology to fundamentally solve lighting problems that have not been solved before.
So we have the knowledge and understanding of how to make our customers successful in a way that we can\'t do before.
I really think that as we move forward, this integration is essential to continue to drive the market.
So this is the big picture.
So what are we going to do next year, because everyone wants to know, great, so what is the key in the short term?
The first problem is that we must continue to lead the market.
Where are we leading the market and driving adoption?
So what does this mean in the system?
We have to roll out new levels of performance to open up new apps, but we also have to roll out products that have basically lower returns.
We must continue from the first
Generation products to the second, to the third, reduce the initial cost, improve performance, and get these returns in 5 or 6 years, but in 2 or less
This is what we see really starting to drive the market.
The second thing is that we must continue to develop components that meet the needs of our customers.
Not just technology.
One thing we \'ve learned over the past year is that you can develop all the great components, but we\'re dealing with lighting companies in many cases, as I said before, never deal with the light source, they don\'t know anything about the light, that\'s someone else\'s problem.
We now ask them to develop systems that integrate light sources and fixtures.
This requires them to do tests that they have never done before.
This requires them to understand the norms that do not belong to their business at all.
So what we have announced in the last month or two is something called TEMPO design services.
This is the first opportunity for Cree to go beyond the product and try to leverage our expertise at the system level and component level to integrate it together to help our customers achieve greater success.
Do our biggest customers need it?
No, but there are a lot of small ones. to medium-
All the effective and ineffective things we know, we can help them by showing them how to test their designs, by showing them some tips that they may not have considered, so that we can get their products to where they get their first return through the innovation curve.
It also helps us drive adoption and really helps us create a more successful component business in the long runterm.
I know everyone is thinking that we need to increase our profitability.
So there are things that we control, things that we don\'t control, and we focus on what we control.
What can we do?
We can promote the popularity of LED lighting.
This will create a bigger market.
This will increase production, and this number will benefit us from simply running a plant with a high utilization rate and a larger scale.
But other than that, we do things every day.
The reason why we are successful in a very difficult environment today is that we have been reducing costs for the past year.
We have made great progress in production and productivity.
We have new product designs that cost less than what we did a year ago.
These will be lower.
Whether we improve the utilization or not, this is the focus of our attention, it\'s not just on the chip level, these are chips, these are LED components, we can expand the market when we reduce the cost, this will help the adoption of LED lighting.
The last thing is that we didn\'t talk much about it because we were always focused on lighting, but we didn\'t forget the power supply and RF.
It was a very exciting business for us a year ago.
We saw a huge growth in the solar market, we saw a huge increase in the power supply of diodes and servers, and we saw all these opportunities.
Since then, we have seen that the solar market has basically gone through a period of time ---
There are more capacity and inverters than their needs.
So, with the exception of some new applications, we have little demand for the solar business.
With the server, this is a market affected by the overall economic slowdown.
But we don\'t focus on things that we can\'t control.
We focus on what we can do.
What are we doing?
We invented a MOSFET that should give us the opportunity to go to our existing customers to buy diodes and help them save more energy by designing our MOSFET in their application.
But in addition to that, we have to go to the next app.
We know how to reduce the cost of this technology. we must start to surpass these good niche applications that we have today. we must enter the mainstream areas where our technology can be adopted more widely.
So, some problems have to be solved in the short term, will this be a business?
Sure, but aren\'t we discouraged?
Not at least.
This technology fundamentally saves energy than other technologies today.
We are confident that if we continue to innovate, we can apply it to more mainstream applications.
So in my summary, I would like to remind you of the last annual report for two reasons.
We showed you this picture a year ago, this is Santa Barbara, California, and this is a demo installation of 23 street lamps and we are very proud that it used our led.
I am more proud to tell you that these are the street lights we have now.
But what\'s more important than 23 street lamps is that it gives you an example of how many opportunities we have in front of us.
Therefore, in this city alone, there are 3,000 street lamps that do not have LED-based.
There are 37 million in North America, there are more than 0. 2 billion in the world, we are just talking about street lights.
So, if you want to know where LED lighting is adopted, what is the opportunity?
Think about this application, it\'s a small part of the lighting industry, we have the technology to transform it, but the opportunity is in front of us.
That\'s why I say I\'m more excited today about the opportunity to change this market than ever before.
Despite some challenges, we are indeed more capable than ever of achieving this goal.
With this, what do I want you to remember?
First of all, this is a huge market opportunity.
It is very large and the adoption rate is very low, which is a good thing.
That means the opportunity is right in front of us.
Our strategy is working.
We have proven that system-driven adoption helps drive our component business.
Cree and Ruud have given us the ability to drive the market and accelerate adoption in ways that we could not have done before.
When we put all this together, we can better set the standards, and in order to influence how the market will change, we will put Cree in a better position as an LED lighting brand, I think we will be more successful in the coming year.
At the end of the day, are we facing challenges? Absolutely.
But think about the record.
We have experienced many cycles before, and what we have shown is that innovation at the product and business levels is the key to continued success.
We believe we will look forward to the future in the next few years and you will be surprised when you don\'t see the LEDbased lighting.
The challenge we face is how we make sure it\'s ours.
So I will stop here and answer a few questions. Question-and-
Answer Charles M.
SwobodaSo we have a couple of people with microphones and I will try to bring them to you so I can repeat them.
It\'s live webcast, so if I repeat your question, it\'s not because I didn\'t hear it.
This is because I want to make sure the webcast hears it.
What happened in China?
You don\'t talk much about China today.
So what does Cree do in China? Charles M.
What does Sw do in China?
So China is still a very important market for us.
Selling LED components is our biggest market.
What we see in China is that in many different ways people still really focus on energy efficiency, which means LED lighting for us, for new and more efficient infrastructure, there is still a lot of support.
So we successfully sold the LED for the street light, but it\'s not just the street light.
We are seeing apps in China start to show up.
But as important as the app there is, there are a lot of designs that are going on and are now entering other markets.
Therefore, as a market, it is important for us to sell products that consume LED lighting, and an important part of the supply chain that can provide products elsewhere, and we continue to achieve great success.
One thing we \'ve seen is that over the past year, as China is aware of the importance of performance and standards that have really driven efficiency improvements, high quality led, this is very helpful for our business and other high-end led
Quality suppliers on the market.
So I would like to say that it is positive in general.
On the other hand, there is a lot of talk about China as a potential competitor, so invest in LED capacity.
What we have actually seen in the past few months is that there has been a real shift and some investment reduction.
As a result, we have seen a decrease in some capital plans.
In fact, we have seen some companies announce that they will enter the LED business.
But depending on what they saw, they decided to cancel the plans.
So I also think that from a supply point of view, we will see the justification of this segment of the market.
The reality today is that although there is a lot of investment, the technology there is really lagging behind, not only the technology we have, but even the technology in the rest of the world now.
So there is a learning curve.
I think it\'s a key thing to keep in mind, and it\'s not a technology that can do business with just buying equipment.
We have proven it for almost 20 years because this is not the first time this has happened.
Taiwan, 10 years ago, bought a reactor and you have a device, but in fact, the human capital and knowledge needed to make this technology work, and what we \'ve shown for a long time is that while you can draw the learning curve, we continue to raise the standard.
Therefore, I think there is still a considerable gap between our innovations and differences in the market. Yes?
Unknown Speaker chuck, what I often hear in investment advisors, especially the one who deals with my personal investment, who has been looking at Cree for over two years, the analogy he uses, it convinced him to invest in solar panels, and we are entering an environment that will be heavily commercialized, with lower margins and lower multiples of stocks than we see today.
So can you talk about solid state lighting and solar, maybe I can educate him and he can buy some of the shares in Cree. Charles M.
The SwobodaSo question is, how does LED lighting not look like solar energy for those on the Webcast?
What can we do to continue to deliver profits and growth rather than commercialize technology?
Is it close enough?
So I think LED lighting is similar in one way, which is part of the alternative energy efficiency equation.
What we need is the technology of globalization.
But, I think, when you look at what really drives our business, and the dynamics of the industry, I think they are completely different.
So, first of all, I think what we\'re talking about in terms of LED lighting is a complete disruption of a very old and existing technology.
Well, that\'s right, what we\'re talking about is taking on all the lighting and essentially providing what we think is better across the board.
So I think it\'s more disruptive in this regard.
But in the solar industry, not just disruptive, one of the challenges is that as companies invest and buy these devices, they are able to draw the technology curve and close the gap relatively quickly.
Although there is still a difference, I don\'t want to say that there is no Tom, but there is a Solar CEO in our audience.
But what I think you see is that they have been able to close the gap and really create supply --
Really created the demand for goods --like market.
Led, there have been some companies going out for nearly 20 years, investing a lot of money, buying equipment to enter the industry, but this still hasn\'t caught our attention.
There are two reasons why they didn\'t catch us.
It\'s a lot harder to walk this curve because it\'s not just the equipment, but the knowledge of how to make it work.
Process knowledge is still one of the most important differences in the industry, as it was 10 years ago, and it is still like this today.
But not just process knowledge, the bar is moving.
So the other thing you have to keep in mind is that we\'re not done with innovation.
We have not finished making brighter LEDs.
If you turn 10 years ago, I will tell you that we will be happy.
We may stop R & D at a rate of 150 lumens per watt.
I think we may know something about the impact.
Now I have this slide because some of Cree\'s R & D guys have told me that this is the best thing we can do.
What we have found is that we have now surpassed 200 lumens per watt in R & D, which I think is the ability to continue to improve performance and translate it into benefits for our customers.
So, this is not technology for the sake of technology.
More efficient led means we reduce the cost.
We can pay off, and as long as there\'s a gap in where innovation drives economic debate, we can keep that gap with other companies, and I think it\'s a huge opportunity to be different.
This is LED level.
And the second one.
As a lighting system company, we are not solving a simple problem.
What we put in by entering the business is not as simple as taking LEDs and stuffing them into metal boxes.
Manufacturing good LED lighting is a complicated problem, one thing we get paid for is to solve this complexity, because it requires not only good LED, but also optical knowledge, which requires thermal knowledge, the ability to build an efficient drive circuit is needed to make this all work together.
So not only do we innovate from a leading point of view and stay ahead of the competition, but as a systems company we are paid for innovation because we are creating--
Translate complex problems into customer value.
I don\'t think we even touch the possible surface limits.
So today, the best system we offer is 115 lumens per watt.
So there is a lot of innovation in the system as well, and I think as long as those two things still exist, we are leaders, and I think we have the opportunity not only to increase our revenues, but also to increase our profits, increase profit margins.
Now, nevertheless, we are a semiconductor company with a cycle of business and what I encourage your investors to do, don\'t look at Cree for the past 12 months.
Look at the past 10 years, because there are a lot of investors in this part of the past, and ask me a year later, why don\'t you tell me?
We can\'t guarantee what will happen in the future, but I want to tell you that we are passionate about innovation and I believe we will become one of the leaders.
I believe that if we are leaders and continue to innovate and solve these problems, we can bring better financial results in the future.
They have been using fluorescence in Europe-
Typing lighting longer than our country.
People are very worried about eye damage and people have read these and I have not seen any research.
Sorry to say if you are here.
First of all, have you seen any research?
Secondly, have there been studies on Cree lighting and the effects on reading light and people\'s reading eyes? Charles M. SwobodaYes.
So I think the question is, is there any research into the harm of fluorescent or LED to people\'s eyes?
Is this a good example of the problem?
What I want to tell you is that I have seen all kinds of research, but nothing is behind either.
What I would like to tell you is that in general, fluorescent lighting is good enough in this industry to read below, I believe this is--
We also show how good or bad LED lighting is.
The reason I say this is better is that a challenge for fluorescent lighting is that it is a very high frequency light source, and some people can actually see the frequency there and it affects them, but more importantly than that, the light quality is actually relatively low.
If you change from an incandescent lamp to a fluorescent bulb, you will make a good compromise, not only because it may not be dimmable, but not just because it contains mercury.
But because in general they give you lower light quality.
One of the things we do with LED lighting, especially one of our successes with Cree white Technology, is that the light we provide is as good or better than the incandescent lamp it replaces.
So what we do for our products in many cases is that we are actually going out and providing LED troffer for fluorescent tubes as an upgrade, not just energy saving, not just maintenance, because this is a business case.
But in many cases, we will provide-
Improve the quality of light.
But it\'s harmful in terms of people\'s attention, and what I usually see is most of the time research, which is not all the case, but in many cases, when I saw behind this research, there was someone trying to protect an old technology.
As a general rule, you should be aware that we should make sure there is nothing there, but I am not too worried. Who else?
We\'re going here. we\'ll be back.
Unknown speakers who change the learning curve often involve a large number of intellectual property rights.
What problems do you see in protecting your intellectual property? Charles M. SwobodaYes.
So the problem is that when you\'re on the learning curve, it\'s usually a problem to have intellectual property and protect it from other companies.
What I want to say is that Corey is in a very good situation today.
Obviously, since its inception, we have focused on patents to build portfolios.
Initially at the material level, then at the chip, component, and system level, we have added more System IP to the outdoor lighting market with Ruud\'s acquisition.
I think we are in a good position.
I think there are other companies that are in a good position.
But I guess if you look at what\'s going on in the market, my guess is, will you see some IP issues coming up? Whether it\'s a company like Kerry, Philips or Osram, companies with strong portfolios must take a stand.
You will see that in the market today, Osram actually has a lawsuit against two Korean companies for some lighting IP.
So I feel like we are in a good position, but my guess is that we will take some action in the future to defend this, but we will see the result, but there will be more
But I think we have a good start. Yes?
Unknown Speaker chuck, perhaps a way to send messages to all non-believers who call you afterwards, is to buy some stock at a time when the stock falls to a very low level.
This is a good vote of confidence and your cash flow is good. Comments? Charles M.
SwobodaYes, so the question is, I want to explain, why don\'t we buy back the stock?
The problem is--
My answer is in the short term.
We haven\'t done anything recently because we \'ve just finished a pretty big deal.
So when buying Ruud, we want to complete the deal before we start using cash for other purposes, because I do think that while buying back the stock, there may be some psychological benefits at the end of the day I really believe we should invest the money and give you a bigger return than the return I bought back.
That being said, we do have a repo, and what I\'m going to tell you is, please keep an eye on it.
I think we \'ve shown in the past that at some levels we\'re going to buy back the stock, and we just have to look at what\'s going to happen in the next month and several quarters. Unknown speaker [:indiscernible]. Charles M.
SwobodaNext problem. Over here?
Where is your brain? Charles M.
Where do I get mine. . .
I don\'t know. it\'s yours. . . Charles M.
The brain of our company?
So, where are the people who make Cree successful?
Intellectual capital.
You\'re doing brain business.
Where did they come from? Charles M.
When you see the way we hire people in the US today, SwobodaSoS.
Obviously, we have a good university system in North Carolina, but we actually have it all around the United States. S.
If you look at the nature of the Kerry scientists, they are actually not just from North America, they are actually Global.
So we have scientists from Turkey and Russia, almost every major country with developed science projects around the world, and we continue to be very successful in recruiting these people to Cree, whether or not they work in North Carolina, whether or not they work at our Santa Barbara R & D center, or whether they are now working in our office in La Sing, Wisconsin.
One of the ways we do this is that we find that great scientists and great engineers want to work in a place where they are valued.
So we try to make it clear that we value their role in innovation and that doesn\'t mean that we don\'t value managing all the other parts of the company and we try to make that more important.
I will tell you that we have actually added some R & D capabilities to our business in Hong Kong today, and we now have some R & D even in China because their base is getting bigger and bigger
Educated engineers, we will also take advantage of this in some of our businesses.
So we will go wherever we need.
I think the key is, do we create opportunities for these people to succeed?
In many cases, success is an opportunity for the best scientists to pursue science.
This is an opportunity to make important products.
I will tell you that there is a different thing for our best engineers and scientists, Corey, who want to develop a product that has the greatest impact on the business.
So I \'ve never had a conversation in the 10 + years Cree has worked, and I need to tell scientists, hey, don\'t focus too much on this esoteric idea and focus on here.
What our best scientists want to do, create shareholder value, I will tell you why.
Because we have never given up the idea that stock options are valid, that they are valid, that we have a group of scientists who benefit when we create shareholder value and are fully committed to achieving that goal.
I will tell you that is why we have a successful technology industry in this country and continue to work for us. Yes?
If you can comment on your market share, you don\'t know.
Obviously, your industry is growing.
Your income has increased.
Ruud\'s acquisition should be--
Of course, the market share has been increased, but basically, in terms of your market share, what is your market position? Charles M. SwobodaRight.
The question is, what is our market share?
As a lighting company or component company, I will try to answer both questions because I think you are interested in both.
As a lighting company, it\'s hard to get good market data today.
This is what we believe.
We believe that Cree plus Ruud makes US number one in the LED market
We mainly sell lighting products in North America.
Now, that doesn\'t mean there are other companies in the market, but in our competitive market, we believe that we have leading products in these areas and that our business is indeed a leader.
Again, these are just some parts of our competition today.
If you look at those products outside of North America, the situation will be different.
For example, in Europe, we have products sold under Ruud lighting brands outdoors, but indoors, we do not sell our own brand products, we actually sell through one of Zumtobel\'s partners who will do a good job, but the reality is that they are seen as leaders, even though we often offer a lot of products and technologies.
So I like our location, but I don\'t have any good exact market data for you, but I am confident to say that we are a leader in the market we are involved in.
Now, if I turn gears to components, we are very confident that we have the largest share today as an LED lighting component company.
Again, it\'s a bit difficult to calculate who has what share.
But we are very confident in the market for LED components, and we have market leadership.
You have to be careful because everyone has a different definition of lighting.
For example, we do not think that automotive lighting is part of the LED lighting market.
It\'s definitely an application for led and lighting, but since we didn\'t even try to get involved in it, we didn\'t measure it that way.
So you have to be careful about how we look at this, but where we are involved, we think we have both business leaders and technical leaders, but that doesn\'t mean we don\'t have much competition. So what else?
We have some questions here, my micro. -
Oh, here, let\'s start here.
As far as I know, manufacturing production is an area with a lot of room for improvement.
Can you go through what you do to increase manufacturing production?
If it\'s 9-
One game, which game are you in, and when you measure what your competitors do, which game do you think they are in? Charles M.
The question is, manufacturing output?
Where are we?
What is the opportunity?
If it\'s 9-
In a game, which game are we playing with our competitors?
Regarding production, interestingly, I spent several years in the operation of our business, we are very good at inventing new products that we have never tried, every time we launch new products, we all succeeded in lowering the threshold.
This means that for each new product, we are beginning to have the opportunity to increase the yield.
So it doesn\'t mean we go backwards, it means that when we push technology to new levels, we usually create processes that we \'ve never tried before.
In these processes, we usually release products that produce relatively low yields than this process, because we know that it sets us apart, and then we can increase production over time.
I would like to say that overall I feel that our yields and processes are as good or better as other good companies in the market, so there are some market-leading companies.
I would say that in many cases it is better than many other competitors, but this is just a little bit of apple and orange.
Our process is a little different.
We plant LEDs on silicon carbide.
Most of our competitors use sapphire.
Our led package is slightly different from our competitors and, in fact, our system itself is unique.
So it\'s hard to make a direct comparison, I think we are as good or better as the people who are competing today, but there is said to be a huge opportunity.
Which game are we in?
If you ask me about that mega bright LED chip we released in 2001, we will get an extra bonus.
There\'s not much we can do about that product. That\'s a 10-
Year product.
But if you look at the latest product, our XML.
This is a very high power packaged LED assembly that we launched 6 months or 9 months ago, and we may be in the fourth or fifth innings.
In some of the new technologies to be released, I think we have products today in the second or third innings.
This is actually a good thing.
This means that, as technology changes, there are innovative ways to emerge.
So that doesn\'t mean you go back and won\'t make it look more expensive.
This means that although new processes are often immature, the innovation curve allows us to reduce costs, and usually when we are nearing the end, we are inventing the next product with different process technologies.
So the way we make chips today or the way we make components is very different from the way we make chips in 2001.
The way the growth technology is different, the epi growth technology is different, the chip design and fab process are very different, we are on a larger wafer, so all of this is going to change.
I think there is a lot of room in the future to increase production, in part because it gives us the opportunity again and again as new products roll out.
So I want to say that production increases in the foreseeable future are things that you will hear me talking about and things that we talk about every week because we know how to make these costs lower than the previous week. Over here?
Unknown speakers would like to ask you the argument about returns is hard for the government because they have a budget every year --after-year.
So I want to know--
But on the other hand, it seems to be a very good way to show the advantages of LED lights.
Like, you say the street lights, the traffic lights, people can see the quality of the light is much better.
So I would like to know what Cree is doing to support the government in adopting LED fixtures, especially if you have any examples that support your hometown of Durham? Charles M.
So the question is, in terms of working with the government or municipalities, what examples do we have and how we can successfully drive the adoption of LED lighting, in particular, is there anything we can support in Durham?
I think our views on the government should be different.
I think you can think about the federal government and I think we can talk about more places and municipalities.
Over the years, we have been successful in a number of projects, such as putting our indoor LED lighting at the Pentagon and installing our LED lighting at some different military bases, these are very practical decisions.
They decided to use our technology, which reduced their maintenance costs.
So for them, this is actually a rewarding argument, but most of the \"government effort\" We really focus on is actually at the municipal level, and there are often people asking such a question, \"But the government has no money, so how do they buy LED lighting?
\"We are actually providing them with a way to get capital and turn it into instant cost savings.
One thing we learned when the city of Raleigh first installed was that if the product you bought had 7-
One year warranty, it pays for itself within 5 years, you can finance it throughout the life cycle of the product, you can get savings immediately from the cash flow statement as they finance it.
What we see is that in many cases, LED lighting is an important project to get some capital in a known return, and even through bonds or private financing, they are able to finance, and solve one of their shortages.
They have a problem with cash flow.
So we\'re going to turn a capital project into one.
From the ongoing operating costs, the idea of long-term cost savings is that you are financing within 7 years and you will be rewarded soon and you have reduced your short-term costs
Long-term costs in maintenance and energy saving.
Can all cities do it? No.
In some cases, these cities want shorter and shorter returns, and that\'s what we\'re going to do.
But if you look at the Los Angeles case, it\'s a rewarding argument.
They spent $57 million and got a 7-
One-year warranty and $10 million a year.
At the end of seven years, they were ahead of the game.
Because they were able to take advantage of the financing, they gotterm benefit.
In terms of what we do in Durham, I don\'t have any big projects.
I think what we\'re seeing is that more and more cities are starting to focus on LED lighting, both in Durham and anywhere else, and it\'s not just an important part of indoor Commerce, it is also an important part of the outdoor market.
The idea of street lights is a great opportunity.
I think you will see more and more examples on the municipal level where we are going to install the LED
Based on street lighting, this is indeed an argument in return.
So I don\'t think they are so different.
In fact, in some cases the municipality is willing to consider 5-
The return for a year is more than the company.
So for a company, they want to see their money come back faster, which is no different from talking to Cree\'s CFO.
They are interested in the return, but if you say 5 years, they want to get a return after 2 years.
So, I think what we\'re seeing is that over time, we\'re going beyond municipal opportunities.
But I think it\'s a good market.
As far as Durham is concerned, if we have some profile, I assure you that we will promote it.
Do we have it here?
Unknown speaker for understandable reasons, your speech, its discussion is focused on lighting, but you have another product line, which was the product line that originally attracted me to the company, that is power semiconductor
Only 10% of your business.
Obviously, you \'ve proved that, and that\'s not all of your focus.
So I think its positioning is to sell or split.
The quick question is, why don\'t you sell or spin off that business? Charles M.
The problem with SwobodaSo is that, again, we have power in our product line, less than 10% of our revenue.
I don\'t pay much attention to it, so why don\'t we sell it or tear it down?
Today, we have technologies that are still not available in mainstream applications.
But if one of the things we have proven in Cree for 24 years, it is that we will not give up this opportunity easily, and most importantly, in fact, we are now starting to see what these apps look like.
So we have a small business of our own.
Today, it is maintained both through product sales and through our continued funding to develop new technologies, many it governments-
We still believe that the opportunity to make this an important business for us.
Do I think this will happen in the short term?
I really don\'t know.
I think it will grow, but I think it will take a few years relative to lighting.
So I\'m not ready to give up yet, because I feel the opportunity is coming, 3 to 5 years from now, and it might be worth it for Kerry and his shareholders, more than anyone willing to pay for it.
What most people don\'t appreciate when a technology is replaced is that they underestimate the possibility of the market.
This is no different from the way people talked about LED lighting 5 years ago.
They will give as much discount as possible.
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