Good day, ladies and gentlemen, and welcome to the Cree's Fiscal Year 2017 Fourth Quarter Earnings Conference Call and Webcast. [Operator Instructions] And as a reminder, this conference 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, Caron, and good afternoon. Welcome to Cree's fourth quarter fiscal 2017 conference call. Today, Chuck Swoboda, our Chairman and CEO; Mike McDevitt, our CFO; and Danny Castillo, EVP and Head of our Lighting business, will report on our results for the fourth quarter of fiscal year 2017. Please note that we will be presenting non-GAAP financial results during today's call and a 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, we'd like to note that we will be limiting our comments regarding Cree's fourth quarter of fiscal year 2017 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 are requesting that only sell-side analysts ask questions during the Q&A session. Also, since we plan to complete the call in the allotted time of one hour, we ask that analysts limit themselves to one question and one follow-up. If you have additional questions, please contact us after the call. Now I'd like to turn the call over to Chuck.

Thank you, Raiford. Fiscal 2017 revenue was $1.5 billion with non-GAAP EPS of $0.50 per share. Wolfspeed revenue grew 25% year-over-year to $221 million due to strong growth in Power, RF and Materials. LED revenue was similar to FY '16 at $550 million as higher product sales offset lower license revenue. Lighting revenue declined $702 million due to lower sales caused primarily by disruptions related to Q2 commercial product holds and lower consumer bulb sales. Q4 revenue increased 5% sequentially to $359 million with non-GAAP EPS of $0.04 per share which was in the middle of our target range. We made good progress in Q4 as all three businesses were within their target range. Wolfspeed grew 8%, and LEDs grew 9% sequentially from Q3 while commercial lighting sales increased to offset the seasonal decline in consumer sales. Our Wolfspeed business continues to perform very well despite being capacity constrained. We are fully booked for Q1 and our capacity limited in Q2 with lead times now stretching into fiscal Q3 for Materials, Power and RF. Our focus is on expanding capacity for all three product lines while closely managing execution to optimize output from our existing capacity through yield and process improvements. We started making significant capital investments last year and are working through the qualification process. We target additional materials capacity to start coming online in our fiscal Q2 with a plan to double wafer capacity for external materials customers by the end of calendar 2018. We target additional power and RF device capacity to start coming online in fiscal Q4 due to time required to qualify 150 millimeter line both internally and at our customers. This plan should double our current power device capacity by the end of calendar 2018. The significant increase in demand for both materials and…

Thank you, Chuck. I will be providing commentary on our financial statements on a 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 a historical summary of other key metrics. For fiscal 2017 revenue was $1.5 billion and non-GAAP earnings were $50 million or $0.50 per share which were in line with our most recent targets. Non-GAAP earnings exclude $148 million of expense net of tax or $1.50 per share from a non-cash stock-based compensation, acquired intangibles amortization, tax valuation allowances and other items. Fiscal 2017 revenue and non-GAAP gross profit for our reportable segments were as follows; lighting products revenue declined 21% to $702 million and gross profit was $196 million for a 28% gross margin which is an 80 basis point increase year-over-year. As Chuck mentioned earlier, our lower lighting revenue was caused primarily by Q2 commercial product holds and lower consumer sales. Gross margin improved year-over-year due primarily to patent license revenue related to the Feit settlement which was received during the second quarter of fiscal 2017. LED products revenue was similar year-over-year at $550 million as higher product sales offset certain fiscal 2016 license issuance fees that did not reoccur in fiscal 2017. Gross profit was $152 million for a 27.6% gross margin. Gross profit and margin were lower year-over-year due to lower license revenue and costs associated with the new…

Thanks Mike. We are uniquely positioned as a market leading innovator in all three businesses and target growth in each of these segments over the next several years. We are focused on the following priorities to support our strategy to deliver higher revenue and profit. We're investing in the Wolfspeed business to increase capacity and further develop the technology to support longer term growth opportunities in silicon carbide materials, silicon carbide power devices and modules and gallium nitride RF devices. We're now starting to see significant growth due to our investment in these areas over the last 30 years. The combination of growth in electric vehicle systems and battery storage plus other industrial applications is quickly brings silicon carbide power into the mainstream and putting pressure on the supply chain in the near-term. With all three product lines and allocation are challenges to maximize our existing capacity to meet current customer needs, this is a very exciting time for the Wolfspeed business as the increased demand validates the importance of this technology for current and future applications. That being said, we're likely going to be capacity limited through fiscal 2018. We plan to grow the LED products business by expanding our product offering with new high power and mid power products that leverage our market leadership to increase our share of existing LED customers, while also opening new applications for our technology. As I mentioned earlier, we recently started shipping to our first Tier 1 automotive forward lighting customer. Our JV has started sampling the first mid power LED products with target customers. Both the automotive and JV activities should expand the market opportunity for our LED business. In addition, we continue to innovate with the introduction of our new RGVW lighting class LEDs for architectural applications. The LED business continue to execute well in Q4 and is in a good position heading into fiscal 2018. We target growing lighting products revenue and increasing margins in fiscal 2018. I'm now going to turn the call over to Danny Castillo to provide insight how we plan to do this in our lighting business.

Thanks Chuck. We made progress in Q4 investing in channel relationships and improving execution while continuing to bring innovative new products to the market. As we discussed last quarter, we continue to invest in talent with industry relationship and experiences. With respect to channel relationships, we've strengthened our agent-based in certain key markets, launched the CLEC product family which represents over 150 new products for the C&I distribution channel and increased our partnership with key distributors in strategic markets. While the U.S. lighting market has been slower than forecast over the last two quarters, our internal fundamentals continue to improve in Q4 specifically in North American C&I business driven by an improvement in service levels. With respect to new products, we launched a High Output Area lighting product family OSQ that is first to market and an industry leader in performance in its category. Additionally, we expanded our indoor lighting product portfolio to further strengthen our commercial project-based offering. Lastly, our smart lighting PoE platform won the EC&M product of the year award in the controls category and we launched our IoT application, SmartCast Advisor which provides Smart building solutions. Q1 commercial lighting revenues started to be similar to Q4 with consumer lightings slightly lower prior to a targeted seasonal increase in Q2. We continue to target incremental improvement in lighting margins and I'm confident that our focus on service, execution and innovative new products can drive solid revenue growth and deliver improved profits during fiscal 2018. I will now turn the call back to Chuck.

Thanks Danny. This is an exciting time at Cree as we're making good progress in all three business areas. The LED business is positioned to gain share with new customers as well as opening new markets for our products. We’re expanding capacity to support the growing demand for our Wolfspeed product lines and the commercial lighting business is regaining momentum as our service levels improved. The strength of our balance sheet gives us the ability to invest in capacity for Wolfspeed while also pursuing potential acquisitions in lighting. I believe we're well-positioned to grow revenue and earnings in the year ahead. On a personal note, I want to thank the many investors for their support over the last 16 years. It has been very rewarding to lead Cree as we’ve grown from a small blue LED chip and silicon carbide wafer company to a global leader in LEDs, lighting, and power and RF devices and build a global brand as a market innovator. During my time as CEO we set out to build a great company for our shareholders, customers and employees by inventing new technology to make the world better. I believe we made excellent progress in all aspects, but when you're in the innovation business there is no finish line there is only the future. While the CEO often gets most of the credit, I want to make it clear that our success is the result of great teamwork by many talented people across the company and I'm confident that they are poised to continue to deliver exciting innovations and grow the company in the years ahead. I look forward to continuing to lead the company in the interim and supporting the new CEO as they lead the company to the next level of success. We will now take analyst questions.

[Operator Instructions] And our first question for today comes from the line of Brian Lee with Goldman Sachs.

Chuck in case this ends up being your farewell call, I just wanted to say it's been a pleasure working with you. I learned a lot about the industry during your time so you will be missed. Couple of questions, maybe first off housekeeping one, the free cash flow guidance it implies cash flow from operations is going to be down a smidge year-on-year. So wondering why that will be the case given the view for better revenue and profits across all three segments at least at high level that seems to be what you're inferring?

So if you think about it as we grow throughout the year, we’ll be deploying a little bit more on working capital as we exit FY '18 would be our target versus this year where we generated some cash from working capital. So just as the business grows, we have a little bit more on working capital.

And then I guess - two quick things just around the model, you alluded to some increasing impact from the San'an JV. Can you quantify a bit Mike as to starting from fiscal Q2 what we should be thinking about in terms of that? And then on Wolfspeed specifically, you’re capacity constrained, but you are still annualizing to about $250 million in revenue and you are doubling capacity on both the substrates and devices side. So by the end of calendar '18 fair to assume you’re going to be running at $500 million revenue capacity in that segment. Just wondering if that's the right way to think about it?

Brian, let me take the Wolfspeed one first. So, we are planning to double capacity in materials for external sales, as well as in our power device fab. That's wafer capacity, so there obviously could be some ASP erosion, so I think doubling might be a little aggressive. But we're planning to double the capacity. So, if you put in some factor for whatever you want on ASP erosion over that time, you got the right sense of the order of magnitude. There is significant growth opportunity in Wolfspeed in both power and materials. And the other thing I would tell you is, we’re also targeting not at the same level, but RF should also grow over that period of time. As far as the impact of San'an at a high level, what we’re talking about now is really just starting to sample those products. So, I think we should see some initial revenue in Q2. But really it’s going to be more of a second half of the year. And what we said originally on San'an is, we would target generating some incremental revenue, as well as accretive both from a gross profit and a operating profit standpoint, but it will have lower gross margins than our current business today. Now in terms of next quarter, I think what Mike was suggesting is, we will start to see some of the revenue in the OpEx in next quarter for the first time. But I don’t know if we have a specific target or not at this time, Mike.

Yes, we don't have a specific target, but think of it as incremental.

And our next question comes from line of Harsh Kumar with Stephens.

Chuck again, in case this is your last call, I’ve worked with you over a decade, will miss you. Question for you, so, we've got, kind of a - I’ll call it a modest or booming recovery, whatever you want to call it depending on who you are. But there is pretty good activity in commercial real estate that's going on and I'm curious why you're not able to see better than a flat pick up on a sequential basis or perhaps even on a mid-term basis, why are you not more optimistic about everything coming back that you lost in the last 6 or 7 quarters?

So Harsh, a couple of things. First off, you look at the overall market, actually the projections right now that we’re seeing that are - to the lighting industry is generally talking a fairly conservative outlook over the next couple of quarters and most people would say, flat or up slightly, and that’s really being driven off a lowered outlook for non-resi construction. So, that’s actually, what’s driving that. From a Cree standpoint, we got a couple things going on. First of all in Q4, we actually had a nice recovery in the C&I business. And I would say that’s the best leading indicator. Obviously, there is some softness in the value segment and the consumer is seasonally down. But I think if you take those two out, the core C&I, we started to see that recovery. Now, this quarter it’s probably going to be a similar range as last, that’s more of a timing issue. But I think we’re on the right track overall to seeing that grow and then as well as by the time we get into our Q2, we should see consumer start to come back little bit seasonally as well. The third piece of that strategy from a lighting standpoint is, although we were softer in the value segment, we really haven't had a significant product line for that. So one of things we announced in May was the C-Lite business and that's really our first time to have a real product offering for that distributors stock and flow business. So, I think that's an opportunity, if I look out over the next year, it is a little softer in the short term and I think that’s more of an industry dynamic. But you know when we look at the lighting business, we would expect that the combination of a seasonal rebound in consumer, some benefit from C-Lite as we get over the next year. But most importantly the C&I business in rebuilding momentum there like we saw in Q4, we think that would be the growth driver. And I do think we'll see some growth over the next year. Maybe a little slower to start out with, but I still remain optimistic that the lighting business should definitely grow from this point forward over the next year.

And then from a follow-up, I was curious on Wolfspeed. Initially we're going to IPO it, and then there was almost a deal that didn't quite happen. Is it fair for us to assume that that you’ll intend with all the actions you outlined today, that you’ll intend on keeping it at this point in time?

The Infineon deal was not approved. We made a decision then, we're going to reintegrate it and run the business. Obviously, I think you know at some point here, we’re going to have a new CEO in place, and I'm sure that the Board and that CEO will have discussions about, what they want to do with the portfolio long-term. In the near-term, we have a business that has incredible demand right now. I think something that's really changed that IPO was announced a little more than two years ago, what really changed is, over the last year a couple major applications really the ones that are driving it, that have changed the most is, both electric vehicle and battery storage have really started to move and silicon carbide has been a key part of both of those applications. And I'd say that is the driver that's really changed the trajectory of that business really mostly over the last couple of quarters. So the great news is that we have a growth business that has an exciting opportunity, we’re going to invest in it to grow it, but I think long-term as far as what the company maybe from a portfolio of standpoint that will really be a question that will be best answered by the next CEO and the Board at that time.

Our next question comes from the line of Tom Sepenzis with Northland Capital. Please go ahead sir.

Just want to echo my congratulations and thank you for all your support over the years. I was wondering if you could talk a little bit about the margin weakness in Wolfspeed, I think you said it was - it had to do with the mix I’m just wondering what the mix was there that caused that weakness?

Yes, so what we had going on the Wolfspeed there is really four major product lines, there is obviously our wafer business, our RF business and then within power we have both diodes and MOSFETs and it's really as that mix - there’s different margins between those but we don't break them out. But as that mix just from quarter-to-quarter we’re getting some different blending. I’d say each of those product lines remains relatively steady, but you saw just there is a little higher volume on the stuff that is on average a little bit lower margin. So no real change in any of those four product lines it was really the mix between them. And I think you'll see some of that fluctuations going forward, because being at capacity we’re really doing everything we can to maximize customer needs to keep them going as we go through this - the allocation period right now. So I think that's a little bit of variability probably in this range plus or minus for the next few quarters. And then I think as you look out beyond fiscal '18 and you start looking at beginning of fiscal '19 as we get the 150 millimeter product line online it probably give us some opportunity then to not only address the mandate more fully, but also have some flexibility from a margin standpoint.

And then in terms of the excess capacity, I think you mentioned that would be Q4 of 2018. Is it ramping up into Q4 or is it all online ones at the end of the year?

So you have to breakout materials or the silicon carbide wafer business versus the power business. So the silicon carbide wafer business that actually we're doing things right now and we should start to see some additional capacity coming online by the end of calendar Q4 or our fiscal Q2. So I think in our fiscal Q3 we’ll start to see some opportunity on materials in that quarter and that will ramp over the next 12 months through calendar 2018 to get into that doubling of capacity for external material sales. As far as the power business goes, that has a longer lead time so we've been making the same investments, but there's a lag so what's happening that capacity is coming online it’s 150 millimeter. So we’ve qualified it on diodes, but our customers have a period of time until they’ll qualify so we’ll see the diodes likely to start to get qualified by the end of our fiscal Q2 so we’ll get a little bit of benefit in fiscal Q3. And then MOSFETs which is the bigger part of that, they'll likely be qualified by the customer by the end of our fiscal Q4 so there is a lag to the power device and that’s mostly just based on qualification time.

And our next question comes from the line of Edwin Mok with Needham & Company.

Just a follow on you - mentioned EBM batteries shortage being end market - that you see growth. And if I understand it correctly then when power will be growing faster and RF maybe faster in material?

So power is growing faster than RF I think from an overall industry standpoint, we happen to be capacity constrained on both Edwin. So there is a muting of the actual demand, the natural space and our ability to deliver - RF actually though is also growing so I wouldn't underestimate it, but it’s not to the level we’re seeing in power. On the material side, material is primarily for power. Yes we saw materials for RF, but our RF devices consume it - silicon carbide wafers had a fraction of what power devices do. So really what you're seeing is both the materials and the power device whether it be MOSFETs or diodes are being driven by the same market dynamic overall.

And just moving on the lighting you talk about you're stronger this quarter in your C&I business. Just curious how much of that is driven by kind of new products launch of life sale and new products you have launched in the last six or 12 months versus just - you guys have some issue with the channel and recovery from that how much is that from recovery versus kind of new product ramping?

Edwin I would say it’s probably what we’re seeing in the short-term what we saw in Q4 is probably more recovery in terms of getting - the benefit of having service levels come back up some of the things we've done on channel investment side and some of the people investment we’re making. I really think all three of those things is really I would call rebuilding some of that base momentum. I think the new products we have been announcing them but typically in lighting a new product is probably two, three maybe four quarters from when you see a real significant uptick especially they have to be specified if it’s specified it could be six quarters. So I think C-Lite maybe has a better short-term opportunity just because it's more of a stock and flow product but a lot of those new products at light there you really won't see the benefit until probably early calendar 2018.

And our next question comes from the line of Vishal Shah with Deutsche Bank.

Chuck just curious to hear your thoughts on what's going on with the stock and flow business so you’re assuming that business remains soft in the next couple of quarters or do you see a recovery there. And then maybe you can talk a little bit about the auto win that you mentioned in your prepared remarks around the traction you’re seeing in the auto segment and the expectations for that part of the business over the next 12 to 18 months? Thank you.

Sure so on the stock and flow side, what I would tell you is that what we saw is really I would clarify as we have a set of more value oriented products that some of them are sold in stock and flow some are sold in other channels that we saw the weakness. For us really our challenge in stock and flow is that we haven't really had a product line dedicated to what I’ll call the value segment for distribution. So we sell that greater product but we haven't had a big presence in distribution in the past so for us C-Lite an opportunity to address the gap and the product line. I think that in terms of demand there, I don't know that stock and flow was any softer than any other part of the business. I'm sure it's not growing a lot, but really our strategy there is a little different which is we’re going to go try to use C-Lite to gain some share in that application. In the other parts of the channels where we sell the value stuff, we did see some softness although I think that that some of that is just a normal seasonal pattern and some of that is frankly just product selection which will be able to address. So I’m pretty optimistic if you take our overall value part of our business that the combination of what we’re doing and the core part of it plus what we’re going to do is C-Lite that should be a segment that we should see some growth in over the next 12 months. As far as shifting gears there to the LED business, it’s great for us - we started a couple of years ago getting qualified for automotive and having our first LED shipping to a Tier 1 forward lighting supplier is important. But we’re really that’s the first project and for that business to be significant, it’s going to take a series of design wins. We have those projects in the queue, I'd say it's really an 18-month cycle before we see a significant impact we should see some incremental impact probably in the second half of our fiscal year. But really this is more of fiscal 2019 because as you know in automotive you’re couple years into the process of design wins before they start to ramp up. So I would say given the queue of things we’re working on, I’d say the bigger impact will be in fiscal 2019, but the encouraging thing there as it’s a new segment we haven’t significantly participated in the past and it really gives us another area to use our high-power technology to grow that business. So the combination of that plus the San'an JV we think really puts LEDs in more of a growth scenario than it has been over the last few years?

Our next question comes from the line of John Quealy from Canaccord Genuity.

First question just following up on the automotive win, congratulations on that. Was it competitive win and then Chuck when you talk about 2019 is this head lamps tail in cabin or can you give us a scope of that initial design win?

The initial design win is forward lighting, I can't get any more specifics than that and I would say most of the activity we’re focused on is exterior right now. So really the idea is that our high-power technology fits better with the exterior although I will say we will certainly - now we’re going to the process to get qualified for automotive I think interior will be a natural extension but it's really secondary to the work we’re doing right now on the exterior of the car.

And then the follow-up, in terms of M&A would you let the next CEO take the strategy there or do you have a pipeline that you might be able to grab a couple small ones before you head out? Thank you very much.

I would say that M&A in lighting is something we've been working on we have a pipeline. We really have been hesitant to push that pipeline over the last few quarters because really we were focused on giving Danny a chance to get the team in place and really start to improve some of the basic service levels and build some momentum with the channel before we went down that path. Given the progress we've made over the last couple of quarters, I think we’re in a much better position to look at some M&A in the near-term. So if a smaller project is able to be done here in the near-term we’ll certainly consider that while I’m still the CEO and then we'll let the next CEO take it from there. But I think the strategy is sound enough that if there is an opportunity here over the next one or two quarters, we’ll be prepared to act on it if it presents itself and I think that's where the Board head's as well.

And our next question comes from the line of Jeff Osborne with Cowen & Company.

Most of my questions have been asked, but just two quick ones here on the consumer side Chuck can you just talk about what the year-over-year change was, I think the last 10-K you mentioned that consumer was down about 50 million versus the prior fiscal year. Can you just discuss what that is and the expectations for the next four quarters do you think we’ve kind of reached a flat line there or do you still expect that to erode?

Jeff look I don't have the specific number in front of me right now, but I will tell you that it was down year-over-year, but I think at the level we’re at today plus or minus this is kind of the baseline for what I'll call a premium category with the current channel partners we have. It could fluctuate up a little bit from here in the high quarters and back to these levels I would say in the more seasonally slower quarters but we’re in the right range, I don't see it growing a lot from here though so if you think about the lighting portfolio a year from now and two years from now, consumer will remain a piece of it, but it will likely - because I don't expect it to grow in terms of total dollars, it will be a declining percentage. But it will still remain a key part of the overall strategy and complementary because I think that in addition to how we sell it and consumer and I think as Danny been working on some things there is an opportunity to bring those products into the commercial channel and I think that's an area we really have been take advantage of it in the past.

That kind of leads into my follow-up question just as we think about fiscal 2018 for the lighting segment as a whole certainly mix will play so you mentioned gross margins would expand for that segment so certainly mix will be a tailwind for you if consumer is less I imagine warranty expense will be less. But can you just talk about what the other initiatives or other priorities are for yourself and Danny to expand gross margins in any quantification about how to think about that moving forward especially as you try to march towards your mid-30s gross margin target?

Yes let me give a high-level view of that and then maybe if Danny wants to add something there. What I would tell you is that clearly as commercial grows versus consumer there's a mix benefit. I think obviously as we improve execution we should see some benefits there as you pointed out. And then I think really as we increase the volume there is a scale benefit both on the operation side and on the purchasing side that we’ve not really been able to take advantage over the last year just because of the change in the business. So I would say those would be the three areas that are likely to give us the leverage. Obviously mix a straightforward obviously as we improve the warranty side of it that's an obvious one, but I think that the volume leverage is another important piece and the purchasing that goes along with it that I'll take a little longer but I think that's probably is bigger levers. And Danny any further thought on that?

No, I think the only thing I would add is around the new products it will be around the intelligent lighting and SmartCast.

Yes, so the new products are likely to have higher margin as well. So there is a secondary mix benefit was as the new products we’re introducing especially the higher end ones are likely to have more margin than our average portfolio of today.

And our next question comes from the line of Krish Sankar with Bank of America/Merrill Lynch.

I had two questions, I don’t know if can say its steady state, but is there a way to think about what the long-term of steady-state gross margin for the LED lighting and Wolfspeed business are going to be?

So how could I give you - I don’t have a specific number but let me give you a way to think about it. I think LEDs right now are likely to be in a similar range plus or minus. I think there's some leverage on the high-end of LEDs so as we push into some higher-end applications I think those are better margin and give us some upside. But the JV as we said before while it will be accretive from an operating margin and operating profit standpoint it will have lower gross margin. So I think net-net I think about LEDs over the next couple years in a similar range as we’re running today plus or minus because we have - the high power stuff being offset by the JV but net-net it's accretive overall. On lighting, I think we should be seeing - we’re targeting incremental improvement over this year and probably the year after that based on the factors we just said. So, I don't have a specific target for you. But I think we said in the past, the industry has demonstrated that the lighting business when it's up and running and has a good portfolio balance, should be able to operate in mid 30 plus or minus. So, I think that remains our target. No timeline for it, but that is still what we’re shooting for here. And then in terms of Wolfspeed, I think we have a lot of moving pieces right now. We’re pushing very hard to wrap up new product, technology, bring capacity on. I think the current level maybe slightly higher over the next year is an opportunity. But I would model, kind of where we're at today. But I think if you look out a little bit longer-term. As we get a little bit scale in that business, we get to fully on to 150. There's probably a couple points of upside there. But I wouldn’t imagine that, I think that's more of a fiscal ‘19 and a fiscal ’18, and again that will depend a little bit on the market dynamics. But if demand continues to be strong that obviously as you know plays in the favor of the semi guys, when you got - when demand exceeds capacity, that’s a good pricing situation.

And then as a follow-up, you kind of argue the fact that, this very strong demand in Wolfspeed, which kind of makes sense and when you get into like autos and eventually 5G down the road. And you have pretty good unit growth in the lighting side. Looks like there is still, more ASP erosion, much higher than the Wolfspeed side. Is it fair to assume that two, three years down the road, Wolfspeed from a revenue or may be a profit dollar standpoint, could be much bigger than LED and lighting?

So, I think if you look at Wolfspeed versus LED, obviously it’s a significantly smaller business today. I think the margins are obviously significantly higher. So, depending on how fast Wolfspeed grows, it could over time generate more profits than the LED business. That being said, I think you know with the growth initiatives in LEDs, it’s not a – it’s a moving target, right. We're doing things, whether it would be the stuff on automotive on the high end or the JV on the other side to drive those profits up. So, I think the Wolfspeed team can grow fast, but they have some work to do to catch the LED guys. And I think that's a great opportunity for us in both cases. Lighting, I think in lighting we certainly have margin leverage there, and I think the growth there will be both organic and little bit of M&A. So, it’s a little hard to call that one because it’s going to be a part of what we do - what we control ourselves in terms of execution, but also part of what happens from an M&A strategy in terms of bringing a new part of that portfolio. So, I think lighting it’s a little harder to just give you a linear projection there because there is some inorganic opportunities that could change the map. I don’t know if you want to add anything to that, Mike.

That’s good answer.

And our next question comes from the line of Daniel Baksht with KeyBanc.

I just had a quick - I just wanted to get a quick clarification on the lighting margins. So, your target is to increase, just whether you're targeting gross margin to increase including or excluding the impact from the five upfront licensing agreement in fiscal 2017?

So overall margins for the segment in '18, we would expect it to be incrementally higher than '17 including five.

And then, a question on your on your CapEx for fiscal 2018. So, could you just provide just a little bit of additional color on, you know where you plan to allocate that. Like, whether it’s brick-and-mortar or any amount outlook or certain percentage of you're planning to allocate the Wolfspeed or just timing in general around that?

So, the 220 is heavily weighted to Wolfspeed. There is some incremental stuff for lighting and LED for capabilities and all that. But the bulk of it is, Wolfspeed, and think of it as, there is a chunk of it, that infrastructure to be able to put future capacity as well as the existing stuff that we have now. And then there's the toolsets itself. So, some of it is longer-range that will fuel growth in ‘19 and beyond from an infrastructure standpoint. But I would say, you’re talking about 150 plus is Wolfspeed.

And Mike what percentage of that is likely brick-and-mortar versus CapEx by 50-50.

It's probably close to 50-50, 40-60.

And our next question comes from the line of Colin Rusch with Oppenheimer.

Given the growth in Wolfspeed side of things, are you seeing anything within the supply chain that you're worried about at this point or preparing for just to make sure, that you run into a bottleneck as you go through this round?

No nothing specific, I’d say any time that market, an industry something ramps up, you’re obviously going to put pressure on everything from the equipment suppliers to the raw material suppliers. But there's no one area specifically that I’d be concerned about. I'd say we’re putting the pressure on the entire supply chain to ramp up. But so far, I think it's just a matter of time to work through it. I don't see any specific items I would call out that are an area of concern just general ramping up the supply chain.

Just with the other opportunity, I see those design wins are big and then they have a pretty long tail around them, with where you are at now, could you just talk a little bit about the activity around, you know early stage designs and which sorts of - what percentage of some of the - lot of demand is really moving into production over the next year and what you are expecting over the next two or three years understanding fully that you are not guiding to anything. Just wanted to get a sense of the production order that you are looking at versus the design wins that you're starting to see with that design cycle?

This is really our first - this is the first project that’s using our LEDs. It’s for a single project. So I would say, we want to make sure we keep it, in fact is a relatively small initial one. It's really what this does though is, by now giving qualified and in the queue, we have a whole list of additional projects that we’re working on that can come online. I would say that there's probably a incremental impact in FY’18. A more significant one in ‘19 and if I look at the Q, the ramp is really more in ‘19 and then in the '20, if you look at the projects, we’re working on right now. And again obviously, there's - that is a lot of different activity. Right now, it’s primarily focused with one major lighting supplier. Obviously, there's work being done that expand to other ones. But the way, I think about automotive is this is an investment that we've been working on it for a few years. It's a good first tangible initial sign. But it's really a multiyear benefit that it’s going to take to see this. I think it's just - it's a really good complement both to the overall portfolio going forward. But I would want to temper that, it’s not a - the significant benefit is not in FY '18 when you will start to see more significant in FY '19 based on the projects we have in the queue today.

[Operator Instructions] Our next question is a follow-up from the line of Harsh Kumar with Stephens.

Chuck, on Wolfspeed side, I was curious, you guys are obviously doing the silicon carbide wafer but are you actually putting again FP or some kind of other FP material on top. Before you sell it, could you just help me understand that piece?

In the materials of the silicon carbine wafer business, we see bare wafers, so silicon carbide wafers both 100 millimeter and 150 millimeter. And then we also sell wafers with FP and we sell both power FP which is silicon carbide FP on a silicon carbide wafer. We’re growing that FP ourselves and selling those. And then on the RF side, RF customers are buying, gallium nitride FP on a silken carbide wafer. So actually, we’re offering that as well. I would say the growth is in more on the bare wafers than on the FP but there is also an increase in FP demand. So typically what happens is, some customers, they buy all their FP and some in source some of their FP and buy some of their FP. So, we’re servicing customers in both situations today, both for Power and RF. So, when we’re making capital investments, it’s not just to grow the wafers but we’re also having to expand capacity to grow FP for those two applications.

And then competitively, who do you guys see and it’s such a niche kind of like, such a small marketplace, with you guys being a pretty good player. But who else is out there?

Harsh, it just depends. The FP business is very niche. I don’t know that there is any one I would call out there. On the substrate side, today, we believe we have the largest market share in substrate. I know there are other players out there. But there is no data to tell you, what size there are. So, there is at least one other major supplier in the U.S. and there is some smaller ones around the world. But I would say today, it’s probably Cree plus another larger one in the U.S. that will make up. They are probably the largest non-captive supplier of the silicon carbide and even the captive ones are relatively small scale today. So, there are some other players of a different scale around the world. But I would say, the two of us probably would make up the majority of the demand that’s been consumed out there today.

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the floor back over to Mike McDevitt for any closing comments.

Thank you for your time today. We appreciate your interest and support, and look forward to reporting our first quarter results on October 17. Good night.

Good night.

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