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Cree, Inc. (NASDAQ:CREE)
Q1 2019 Earnings Conference Call
Oct. 16, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to Cree's fiscal year 2019 first-quarter earnings call and webcast. At this time, all participants are in a listen-only mode so if anyone should require assistance during the call, please press * then 0 on your touchtone telephone to reach an operator. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, today's conference is being recorded. I'd now like to introduce your host for today's conference, Mr. Raiford Garrabrant, Director of Investor Relations. Sir, please go ahead.

Raiford Garrabrant -- Director of Investor Relations

Thank you, Liz, and good afternoon. Welcome to Cree's first quarter fiscal 2019 conference call. Today, Gregg Lowe, our CEO; and Neill Reynolds, our CFO, will report on our results for the first quarter of the fiscal year 2019. 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.

During the Q&A session, we ask that analysts limit themselves to one question and one follow-up so that each participant has the opportunity to ask a question within our allotted time of one hour. If you have additional questions, please contact us after the call. Now, I'd like to turn the call over to Gregg.

Gregg Lowe -- Chief Executive Officer

Thanks, Raiford, and good afternoon everyone. For today's call, I'll briefly discuss our financial results after which Neill will provide more detail regarding Q1 and our Q2 outlook. After that, I'll provide an update on how each business is performing along with some highlights from the quarter. The fiscal year 2019 is off to a great start with first quarter non-GAAP earnings per share that exceeded the top end of our target range, driven by another quarter of robust growth in Wolfspeed combined with strong gross margin improvement in LED and lighting.

This is an excellent result giving the headwinds related to global trade tensions, tariffs, and the challenges presented by Hurricane Florence in the US and Typhoon Mangkhut in Asia. While we know there'll be some bumps along the way as we execute our long-range transformation plan, Q1 representing another step in the right direction. I'll now turn it over to Neill to provide more detail on the quarterly results and the outlook for next quarter.

Neill Reynolds -- Chief Financial Officer

Thank you, Gregg. Before I get into the numbers, let me just say how excited I am to be here. Cree is a company with a long history of innovation and an opportunity to drive tremendous shareholder value by executing the strategy laid out by Gregg and the team at the investor day in February. With that, I do need to mention that 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 the first quarter of fiscal 2019, revenue increased 13% year-over-year to 408 million. While non-GAAP net income increased more than fivefold to 22 million or $0.22 per diluted share. The non-GAAP earnings per share exceeded our targeted ranges and first call consensus due to strong gross margin performance combined with favorability in OpEx. Our non-GAAP earnings exclude 33 million of expense net of tax or $0.33 per diluted share from non-cash stock-based compensation acquired intangibles amortization lighting right size in costs and other items.

Fiscal 2019 first-quarter revenue and non-GAAP gross profit for our reportable segments were as follows. Wolfspeed revenue grew 93% year-over-year and 16% sequentially to 127 million and was above our targets. Year-over-year growth exceeded 50% on an organic basis when excluding the acquisition of Infineon's RF power business. Wolfspeed gross margin was in-line with our targets at 47.4%. LED products revenue increased 2% year-over-year but decreased 6% sequentially to 147 million which was in line with our targets. LED gross margin of 28.1% exceeded our targets as strong factory execution, favorable mix, and better than targeted ASPs more than offset the lower revenue and tariff impact we discussed on our Q4 call.

Lighting products revenue was down 10% year-over-year and 7% sequentially to 134 million, which was in-line with our targets. Lighting gross margin of 23.2% exceeded our targets and increased 290 basis points sequentially due to the better mix, product cost reductions, improved operational efficiencies, and being more selective with respect to the business we pursue. Non-allocated cost totaled 1.5 million for the first quarter of fiscal 2019 and are included to reconcile to our 131 million non-GAAP gross profit for a 32.1% gross margin, which was well above our targets. Non-GAAP operating expenses for Q1 were 104 million and lower than our target primarily due to good discipline around discretionary spend and the timing of certain R&D projects.

As we said previously, our plan is to reinvest OpEx savings from our lighting restructure into Wolfspeed. So you shouldn't consider this OpEx level to be the new baseline. I'll provide more detail around that in a moment in providing Q2 guidance. Our non-GAAP operating income exceeded our targets at 27 million. Our non-GAAP tax rate was 18%, which was slightly higher than our targets due to the higher income. During the first quarter, cash from operations was 34 million and capital expenditures were 40 million, which resulted in negative free cash flow of 6 million. We ended the quarter with 666 million in cash and investments, zero borrowed on our line of credit, and convertible debt with a face value of 575 million.

Regarding the convert, it was issued with a coupon rate of 0.875% and a conversion premium of 31% or 59.97 per share. This financing is attractive because it allows us to reduce interest expense, lock in at a fixed rate, add cash to the balance sheet, and it's accretive. As a result of the increased cash available to invest, and a lower interest rate relative to our working capital line of credit, we will move from a position of incurring net interest expense each quarter to earning net interest income. Also, the risk of dilution is quite modest as our stock price could double from the issue price and the additional shares required would only amount to a few percents compared to the current share count.

Our capital allocation priorities remain focused on expanding capacity in our Wolfspeed business. For fiscal 2019, we still target capital investment of approximately 220 million, primarily driven by expanding most feeds' production capacity to support forecasted, long-term customer demand. As we continue to ramp this new capacity, we could have some variability in our initial production yields and factory utilization that may reduce our near-term Wolfspeed gross margins. Day sales outstanding of 34 was flat compared to Q4. Inventory days on hand of 98 increased seven days from June and is within our target range of approximately 90 days.

With respect to the tariffs in effect at this time, we target the combined impact will reduce Q2 earnings by $0.03 per share, consistent with prior guidance and will reduce Q3 earnings by up to $0.05 per share. The additional impact targeted for Q3 relates to tariffs applied to some of our lighting products that went into effect on September 24th. We are evaluating ways to further mitigate the impact of these tariffs. We target Q2 company revenue in a range of 398 million to 418 million based on the following segment trends: Wolfspeed revenue up approximately 5% sequentially based on solid growth across our businesses, LED revenue down slightly sequentially as a positive growth trend in our four focus areas is more than offset by softer demand in China related to the latest round of tariffs.

Lighting revenue down slightly sequentially as we focus on increasing gross margins by improving the mix in our business. We target Cree's consolidated Q2 non-GAAP gross margins to be incrementally higher net of a targeted 75 basis point or so reduction from the tariffs. Targets for all three segments are targeted to be incrementally higher compared to Q1. We are targeting Q2 non-GAAP operating expenses to be approximately 111 million. The sequential increase in non-GAAP operating expenses is primarily due to higher Wolfspeed R&D and a higher number of days in the quarter as well as a full quarter impact of the annual merit increases that went into effect in September plus other items.

While changes in OpEx can vary from quarter to quarter for a variety of reasons, including the timing of R&D projects, marketing spends around trade shows, and when IP cases go to trial, our long-term objective remains to drive OpEx lower as a percent of sales even as we increase our investments in growth initiatives. We target Q2 non-GAAP operating profit to be between 18 to 23 million. Q2 invested cash and revolver borrowings are targeted to be at similar levels to where we exited Q1. And as a result of a full quarter benefit of the convertible offering, we target net interest income to be approximately 1 million compared to net interest expense of 575,000 in Q1.

We target a non-GAAP effective tax rate of 18% for Q2 and fiscal 2019 and Q2 non-GAAP net income to be between 15 million to 19 million or $0.15 to $0.19 per diluted share. Our non-GAAP EPS target already includes a $0.03 decrease from the impact of the tariffs that went into effect in Q1. Our non-GAAP EPS target excludes acquired intangibles amortization, non-cash stock-based compensation, interest accretion on our convertible notes, and other items. Our GAAP and non-GAAP targets do not include the impact of any changes to the fair value of our Lextar investment. Our Q2 targets are based on several factors that could vary, including overall demand, product mix, factory execution, and the competitive environment. I will now turn the discussion back to Gregg.

Gregg Lowe -- Chief Executive Officer

Thanks, Neill. All three of our businesses performed well and demonstrated progress in Q1. Wolfspeed continues to lead the way from a growth perspective, delivering better than targeted revenue in Q1 resulting in year-on-year growth of 93% or more than 50% on an organic basis. Wolfspeed gross margins were in-line with our targets as the team did an excellent job balancing the challenges of rapidly increasing capacity while maintaining margins. In fact, we accomplished our goal of doubling capacity for power devices and material sales a full quarter ahead of plan. The result is a business where revenues have more than doubled and gross margins have improved by roughly 200 basis points over the five quarters since we embarked on the expansion plan.

We're not stopping there, however, as we plan to double our materials and power device capacity again over the next couple of years to meet growing demand for our products and to expand our leadership position in these technologies. The Wolfspeed sales funnel is growing rapidly for power devices, materials, and RF. In power devices alone, we're engaged with dozens of partners working on projects with a total opportunity well in excess of $1 billion. These projects, which span the timeframe of our long-range plan, include segments such as electric vehicle drivetrain, onboard charging, DC-to-DC conversion, and charging infrastructure.

Additionally, today we announce that we have signed another strategic long-term agreement to produce and supply our silicon carbide wafers to one of the world's leading power device companies. This agreement is valued at more than $85 million and covers 150-millimeter silicon bare and epi wafers. The agreement is another validation of our technology and scale advantages in silicon carbide.

Turning to LED products, the business demonstrated further progress relative to its objective of driving value through greater focus, while LED revenue was in-line with our targets and was down a bit quarter-on-quarter, gross margins actually increased quarter-on-quarter to its highest level in almost two years. Great execution by the team combined with the strategy of focusing where our products are differentiated in value more than offset the effects of lower revenue and tariff related cost. During the quarter, we introduce the x-lamp XPG-3S line, an LED that is optimized for connected lighting.

Through innovations and component architecture, this new line can withstand double the number of switching cycles when compared to competing LEDs in its class. This is significant because connected lighting systems will dim or switch off lights up to 10 times more often than standard lighting systems. With regard to lighting, Q1 demonstrated continued progress in the path to fixing this business. Revenue was in-line with our targets and gross margin was better than targeted. For the third quarter in a row, we have improved gross margins by more than 100 basis points driven by the factors that Neill touched on earlier.

The team has done an outstanding job of improving quality through improved processes. In fact, over the last three quarters, we've released 21 new products and shipped over 220,000 of those new products with excellent quality metrics that demonstrate our new processes are paying off. I recently passed my one year anniversary, and as I reflect back it's very gratifying to see the progress that the team has made. The company has a clear, strategic vision. Employee engagement has improved materially. And execution is improving in all three of the businesses. One terrific example of that is in our materials business where we exited Q1 achieving record output, improved yield, and shorter cycle times.

Of course, it's important to note that as we've said many times, progress won't happen in a straight line. I'm really pleased with how we're performing with respect to the things that we control, yet we must acknowledge that there are numerous headwinds facing our businesses in the short-term. These include direct and indirect impacts of tariffs in our LED and lighting business, the impact of trade tensions on the global economy, and the seasonality that our LED and lighting businesses typically experience in the March quarter. In closing, I'd like to say thanks to all the employees that have helped make my first year here so rewarding and share my belief that we are just getting started in terms of what's possible for Cree. With that, I'd like to turn it back over to Liz so we can take any questions you might have.

Questions and Answers:

Operator

Ladies and Gentlemen: if you'd like to ask a question at this time, please press the * then the number 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you may do so by pressing the # key. In the interest of time, we ask that you limit yourself to one question and one follow-up and rejoin the queue for any further questions.

Our first question comes from the line of Jed Dorsheimer with Canaccord Genuity. Your line is now open.

Jed Dorscheimer -- Canaccord Genuity -- Analyst

Hi, thanks, and congratulations. Turnarounds are not easy so it looks like pretty strong results in the face of difficult markets. So, I guess, the first question, though on the Wolfspeed, Gregg. As I look at this agreement and I talk to charging companies, it's undeniable in terms of the use of silicon carbide. I was wondering if you might be able to provide your perspective on what you think -- how much of the base silicon carbide that's out there is Cree actually supplying?

Gregg Lowe -- Chief Executive Officer

Thanks for the comment, by the way, Jed. What I would say is, in terms of manufacturing silicon carbide materials, we have something north of 65% share. We're a very strong leading company and I think over the past year since we've been expanding our capacity, that leadership has just increased. I think there's a tremendous opportunity for a pretty significant transformation across the entire power industry led by things like electric vehicle and charging and so forth.

The advantages that silicon carbide bring to the table are undeniable and I think the transition to silicon carbide is happening very rapidly and thus, we're expanding the capacity. As we expand that capacity, it's giving us a scale advantage. That scale advantage is helping us improve yield, which scale plus yield improvement is helping us drive costs down and driving the cost delta between silicon and silicon carbide down as well. Our mission is really to expand the usage of silicon carbide throughout the industry and I think the supply agreement is one example of us doing just that.

Jed Dorscheimer -- Canaccord Genuity -- Analyst

Okay. And Neill, welcome, I look forward to meeting you in person. I guess just on the LED products. Historically, margins in that business were almost completely a function of the combination of utilization and just spreading your fixed costs on the number of actual units. Has there been any change in terms of the manufacturing platform from 150 to 200 or could you give an update on the LED just as a refresher and whether or not we should expect any changes in that margin function as we look forward here over the next year?

Gregg Lowe -- Chief Executive Officer

Let me take a shot at that and I'll see if Neill wants to add any color to it. We're largely 150-millimeter. We haven't had a transition to 200-millimeter. What I would say is the dynamic of that business has changed in two contexts. One is our strategy is much more focused going after segments of the market that more highly value -- the technology of the capability and the performance that our LEDs deliver to customers. I think Q1 is a good example of that with lower revenue and higher margin and so forth. The second thing that I would say is, there is fungibility between the manufacturing assets associated with LED and Wolfspeed.

We're using that fungibility to increase our capability to drive Wolfspeed growth. As we see if there are changes in demand on LED or what have you, we've got the capability to move that capacity to Wolfspeed. In fact, we're doing that sort of proactively as well. I don't know that it's so much a utilization issue. Of course, there are elements I guess of that. But I would say that the margin of our LED business -- the dynamics have changed from maybe two years ago so we're more focused on better segments of the market and to the extent that we choose to do so, we can move some of that manufacturing capability to Wolfspeed.

Operator

Our next question comes from Joe Osha with JMP Securities. Your line is now open.

Joe Osha -- JMP Securities -- Analyst

Hi, this is actually Hillary on for Joe. My first question just kind of follows up on the first Wolfspeed question there and just kind of looking out the next year how much room there is for further improvement on yields for that added capacity coming from capex?

Gregg Lowe -- Chief Executive Officer

We think we've got some good room for continued improvement in yield, in cycle times, in manufacturing throughput and so forth. We put our manufacturing organizations -- our semiconductor manufacturing organizations together about six to nine months ago or so under one leader. That's Rick McFarlane, he's done a terrific job of getting the team kind of unified and it's allowing us to go attack things across the broader spectrum of the manufacturing asset.

We had great improvements in cycle time, we had great improvements in yield, we had good improvements in cost in Q1, and we see for the foreseeable future continued opportunity for us to continue driving costs down and adoption of silicon carbide up across the industry. I think the team's driving really hard on that. I think we've made some amazing progress. But I would say we're kind of early with some of the first steps. There's still a long way to go and we have the line of sight to some pretty decent further cost reductions.

Joe Osha -- JMP Securities -- Analyst

Okay, great. And then one more from me. Congratulations on meeting your year-end target to double the power capacity. I was just wondering if you could provide a little more color on what that ramp toward doubling the capacity again might look like?

Gregg Lowe -- Chief Executive Officer

It definitely won't be a straight line. There's going to be some incremental things that happen one quarter and more dramatic things that happen in a different quarter. What we're targeting is over the next 24 months to double that capacity and so that will have quadrupled our capacity from 18 months ago. So pretty significant and what I would describe as some pretty high stepping. It's a lot of activity that's a lot of work. And I'm sure we'll meet a million challenges along the way.

But what I would say is, we had that same set of challenges as we double capacity over the 18 month time period that we had talked about before. And the team has just done a remarkable job manufacturing, working together with R&D, working together with the product groups to really overcome all those challenges. When you look at our business being double from where we were when we began this process and yet gross margin being 200 basis points ahead of that. I think that says the team's done a really good job.

Operator

Our next question comes from Krysten Sciacca with Nomura Instinet. Your line is now open.

Krysten Sciacca -- Nomura Instinet -- Analyst

Hi, good evening. Congrats on the really good results. My first question has to do -- I would just like a clarification on the $1 billion opportunity you noted for the power devices, or the silicon carbide based power devices. Is that just the overall SAM in the market or is that the potential revenue generation assuming that you win all the design winds with the OEMs that you're currently engaged with?

Gregg Lowe -- Chief Executive Officer

It's definitely not the SAM in the market, it's an opportunity that we have for revenue generation. You don't win everything of that, you don't win all of that, but that is the designing activity that we are currently engaged in at this time. Certainly, the SAM is bigger than that.

Krysten Sciacca -- Nomura Instinet -- Analyst

Got it, thank you. And then maybe -- I know the tariffs are definitely an impact this year and maybe if you can just describe some of the remedies or actions that you're taking either in the shorter term or the longer term to defuse the impacts of these tariffs?

Gregg Lowe -- Chief Executive Officer

Well, we're looking at a number of different things and I don't want to go through all the detail on it but obviously, the supply chain is one of them. Really, the important thing is as these tariffs come up, there's the direct impact that we see and I think we've done a pretty decent job of minimizing or at least attenuating what could've been a much bigger impact than it was. It's looking at $0.03 this quarter and $0.05 in the out quarters. So we'll continue looking at things to continue driving the impact of those tariffs down.

And then the second related impact is kind of a secondary impact of just uncertainty that customers have and so forth that's also related to the trade tensions that are going on right now. Our belief is that the tensions will eventually abate and I would imagine that the US and China will end up figuring out some way to have a trade agreement that works for all parties. In the meantime, we're just dealing with the headwinds and I think we've done a really good job.

Operator

Our next question comes from Harsh Kumar with Piper Jaffray. Your line is now open.

Harsh Kumar -- Piper Jaffray -- Analyst

Hey, guys. First of all, congratulations on stellar results. Great job, guys. Two questions from me. Gregg, I was wondering if you could give us some color on how big your materials will be for businesses versus your device business and what do you think the growth rates are for those two? You don't have to give us exact numbers but even some color would be appreciated. And I've got a follow-up.

Raiford Garrabrant -- Director of Investor Relations

Hey, Harsh, it's Raiford. As you know, we're not breaking that out specifically. It's been a while since we've provided any specifics around that and I think it's fair to say that all three of the businesses are showing good growth there, including the RF business with the acquisition of the Infineon RF power business -- materials and power for sure have shown strong, organic growth of late.

Harsh Kumar -- Piper Jaffray -- Analyst

That's a fair point. For my follow-up, can I ask you, Gregg, maybe you could outline for us some of the opportunities that gamin silicon carbide has perhaps in 5G? The obvious one is the PA that should replace the early MosChips. Are there other opportunities perhaps in antennas or massive MIMO or some of these custom antennas that people are talking about?

Gregg Lowe -- Chief Executive Officer

We're looking at all those three areas that you had just talked about. Certainly, the power amplifier side of it is ripe with opportunity as we engage with customers in that space, they like what we're doing in terms of the technology -- again, on silicon carbide, offers some really unique advantages. The fact that ZTE is starting to come back is gonna give us a little bit of a lift as well. But we're pretty bullish about that opportunity and so I think bringing in the team from Infineon and integrating them in very, very well has given us a nice tailwind in terms of opportunity to grow that business.

Operator

Our next question comes from Brian Lee with Goldman Sachs. Your line is now open.

Brian Lee -- Goldman Sachs -- Analyst

Hey, guys, thanks for taking the questions. I actually had two on margins specifically. First one is just sort of a clarification on the outlook for Q2. Neill, you mentioned consolidated gross margins would be up sequentially net of 75 basis points dragged from tariffs if I got that right. So you're basically calling out that reported gross margin we should expect to be down sequentially. And then, given seasonality in addition to lighting tariffs as we head into the new calendar year, what do you think that 75 basis point drag will look like in the March quarter?

Neill Reynolds -- Chief Financial Officer

Just to be clear on that, we said that's net of -- in the gross margin -- target would be to go up sequentially even after the tariffs. We'll see a bit of an increase in the margins. And then on the tariffs, I think what we said there was in the Q2 we'll see a $0.03 full impact, which was consistent with what we said previously. And then a $0.05 impact going Q3 and beyond.

Brian Lee -- Goldman Sachs -- Analyst

Okay, thanks for the clarification. So gross margins are up even with the tariff impact into Q2?

Neill Reynolds -- Chief Financial Officer

That's correct.

Brian Lee -- Goldman Sachs -- Analyst

And then just maybe a bigger picture question around margins. I know you don't want to break out the mix between how much wafer business you're doing relative to device basing this on the silicon carbide portion of Wolfspeed. But can you give us any sense of -- when we're seeing you sign these long-term wafer contracts with different chip makers, what are the economics for you like in one product class versus another? I.e., are you seeing an appreciable or are you expecting an appreciable difference in gross margins that you earn as a wafer supplier versus eventually seeing more of a mix shift toward devices?

Raiford Garrabrant -- Director of Investor Relations

Hey, Brian, it's Raiford again. Understand the interest in that question but that's just an area we can't get specific about for a number of reasons. I would just point back to what we said at the investor day in terms of the long-range plan for the company is to grow Wolfspeed's top line significantly. We talked about roughly almost quadrupling to an 850 million level and also striving for gross margin improvement over that horizon, which factors in all of these things that we're working on.

Operator

Our next question comes from Colin Rusch with Oppenheimer. Your line is now open.

Colin Rusch -- Oppenheimer -- Analyst

Thanks so much. Just following up on that question. Can you give us a sense of where you're at in terms of the sale cycle and the progress you're making in getting silicon carbide MOSFETs diode power modules designed into platforms in the automotive industry at this point?

Gregg Lowe -- Chief Executive Officer

I kind of touched on that a little bit. We've got a pipeline in just power itself of greater than $1 billion -- well in excess of $1 billion in all of those different applications associated with electric vehicles. I would say that we've got really good traction in terms of engagement with customers. The number of customers that we're working with that are committed to silicon carbide is significantly higher than it was a year ago. I think the customers -- the value proposition in electric vehicles is really pretty straightforward.

If you have an electric vehicle that has a certain amount of battery -- if you use silicon carbide versus silicon IGBTs, the car's gonna go further on the same charge. Or if you have a car that goes a certain number of miles, if you use silicon carbide you need less battery for that versus silicon. I think the car manufacturers have seen that. They understand it and it's a huge value proposition because I believe the number one cost item in the electric vehicle is the battery. But there are additional things, too. And that is the size of the inverter goes down pretty substantially as well.

There's not a whole lot of room in cars for all the electronics that go in there. The size of the module goes down by a factor of 2x, 3x. It's also a substantial improvement. And so I think we've got really good traction in that space. The conversion to electric vehicle in the industry has certainly hit a tipping point and you're seeing more and more traction on that with the challenges that the car manufacturers have with the new emission standards.

And Europe, WLTP, basically it says, not having the option of really anymore having diesel. Car companies are really driving more and more to introducing significantly more amount of their platforms being based on battery electric vehicles. I think it's a great opportunity for us. we've said before that we see this as a multi-decade growth opportunity. We caught it right at the right spot, I think.

Colin Rusch -- Oppenheimer -- Analyst

I'll follow-up on that with some more specifics offline. But changing gears to the LAN business, can you talk about what the near-term focus areas are for optimizing that business and what the initiatives are over the next one to three quarters in terms of driving costs out and generating a better cash flow on that business?

Gregg Lowe -- Chief Executive Officer

The team really is -- the focus of that business is really straightforward and that is to fix the business. That primarily means, get the quality of revenue up such that the margin looks like -- I would say, a well-run lighting company. We have made significant improvement there. We're now three quarters in a row of a couple hundred or more basis points improvement in gross margin. We're forecasting for this quarter additional gross margin improvement for the quarter. And that's been done primarily through better quality of the product, lower warranty sorts of issues, improved channel alignment and so forth.

I think we have still several -- at least 500-700 more basis points of improvement in gross margin in that business just to be sort of normal in lighting. I think we've got a lot of opportunity for continued improvement; kind of focused on getting the basics right. I think the team's done a marvelous job over the last year making the improvements. We still have a lot of opportunities ahead of us. That opportunity is -- I'll describe it as more blocking and tackling, and I think the team's really focused on that.

Operator

Our next question comes from Paul Coster with JP Morgan. Your line is now open.

Paul Coster -- JP Morgan -- Analyst

Thank you for taking my questions. First up, why does the cost share impacts of the tariffs increase sequentially?

Gregg Lowe -- Chief Executive Officer

Paul, that relates to the latest round of tariffs that went into effect on September 24th that applies to lighting products that are coming in from China. Our lighting business does source some products from manufacturers in China and there's about a lag period from when some of the products we have already sourced would hit the P&L. Not much of an impact in Q2. We'll start to feel the effects of that in Q3.

Paul Coster -- JP Morgan -- Analyst

Got it, thank you. And then a two-part question really on the impact this is having on your Chinese counterparts. First of all, your JV, has it impacted it from a day-to-day perspective? Are all Chinese customers sort of seeking alternative supply chains in view of this tit for tat situation? Thank you.

Gregg Lowe -- Chief Executive Officer

The JV impact has been relatively small at this point of the JV sales globally, not just in the US. And in terms of our customers in China, we did mention the fact that our LED sales into China have been impacted -- both we talked about it for Q1 and also mentioned that in Q2 demand for our LEDs in China for lighting customers there that export is lower. And that's why we talked about excluding that in our LED business would probably be up from Q1 to Q2 based on the trends and the four focus areas. But the weaker demand because of tariffs is being felt in that business.

Operator

Our next question comes from Craig Irwin with ROTH Capital Partners. Your line is now open.

Craig Irwin -- ROTH Capital Partners -- Analyst

Good evening and thank you for taking my questions. So, Gregg, the first question I wanted to ask is about this $85 million six-inch wafer contract. Can you clarify for us whether this contract was inked very recently, in the last couple of weeks or if this was maybe signed a number of months ago and you've been waiting for approvals from the customer to press release it? And is there any other color that you can give us on this contract as far as pricing with the move from four-inch to six-inch?

Gregg Lowe -- Chief Executive Officer

So a couple of things. This deal was agreed to literally days ago, so within the last few days. It's not something that's been agreed to any long period of time. And we released it -- we did the press release as soon as we had the wording and the press release agreed. It's a very new thing. We can't give a lot of details on it. What I would say is it's a multi-year agreement that kind of spans the timeframe of our long-term forecast that we set out in the February investor day.

You can kind of think of it as there's an element of a pretty decent amount of upfront cash deposit to secure purchase obligations and obviously secure the capacity from the customer standpoint. The pricing is in-line with what we think will drive the model that we laid out in the long-term plan. Recall, as Raiford had mentioned, our long-term plan said that fiscal 2022 we would have a Wolfspeed business in the area of $850 million and we'd have gross margins that would be up from where we're at today. It all kind of lines up with that.

Craig Irwin -- ROTH Capital Partners -- Analyst

Great, thank you for that. My follow-up question is about your capex plans for 2019. Can you maybe refresh for us what you're looking to spend at Wolfspeed for wafer expansion for your silicon carbide power semis business and what you expect to spend on the lighting and LED business?

Gregg Lowe -- Chief Executive Officer

We don't relatively break that out. I think our capex plan for the year to invest at most speed capacity is kind of the same. I think as things kind of move forward here, which you'll see, that'll be kind of ebbs and flows in terms of the long lead time type of equipment that we've already purchased. I think that'll kind of play itself out here throughout the year.

Operator

Our next question comes from Jeff Osborne with Cowen. Your line is now open.

Jeff Osborne -- Cowen and Company -- Analyst

Hey, good afternoon, guys. Two quick ones. Gregg, on the billion opportunity or pipeline for automotive, can you just talk about what the lag is between when that would start flowing through the P&L? I think most tier-one suppliers have about a three-year lag from when a car goes into production?

Gregg Lowe -- Chief Executive Officer

I think that's about right. Some of the things that we're engaged in will be ramping before that but yeah, if we designed something in today it's not gonna ramp tomorrow. Three years, that sounds probably about right from a ramp perspective.

Jeff Osborne -- Cowen and Company -- Analyst

Got it. And then, how do you navigate the wafer supply agreements like you signed today with the longer term ambitions of competing with your customers? Is that a tension point?

Gregg Lowe -- Chief Executive Officer

You would think it would be but quite frankly, what we're really focused on is trying to convert the silicon -- the power industry from silicon to silicon carbide. Very similar to what happened with bipolar when CMOS came in 30 years ago. To the extent that we continue expanding our capacity, we'll be able to deliver materials to our customers that are helping drive the adoption of silicon carbide into the power industry. We believe that will expand the SAM of that silicon carbide substantially and as we expand our capacity and drive scale, we'll get the obvious cost advantages of scale.

But in addition, we'll get advantages of faster learning, which drives yield improvements. We saw that last quarter where we had record output, we had increased yields, which drove lower cost. We're able to sign these agreements with customers because they like the quality of product that we put out. They like the fact that we're investing in the capacity and that capacity capability is real today. The fact that we've got something north of 65% share and that we're trying to expand that because we're growing the capacity, I think leads them all to getting comfortable in doing these long-term deals with us.

As you can imagine, we've got a number of other discussions ongoing right now. We're very pleased with the one we just announced. It's a great deal for, we think, both parties. And so, we're kind of in a whole new ball game here where we're really trying to change an industry from silicon to silicon carbide. And the fundamental advantages you get with silicon carbide are exactly the kind of things that people are looking for in terms of efficiency and improved mileage for the same amount of battery, and so forth. I think it's working well for us right now and we've now announced two agreements: the Infineon One six or so months ago or so. This one today. We're hoping to have some more in the future. We anticipate we'll have some more in the future. So I'd say just stay tuned.

Operator

And I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. Lowe for closing remarks.

Gregg Lowe -- Chief Executive Officer

Thanks a lot, everybody, for your interest and your time today. We appreciate your interest and support and look forward to speaking with you again when we report our second quarter results. Thank you.

Operator

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

Duration: 47 minutes

Call participants:

Raiford Garrabrant -- Director of Investor Relations

Gregg Lowe -- Chief Executive Officer

Neill Reynolds -- Chief Financial Officer

Jed Dorscheimer -- Canaccord Genuity -- Analyst

Joe Osha -- JMP Securities -- Analyst

Krysten Sciacca -- Nomura Instinet -- Analyst

Harsh Kumar -- Piper Jaffray -- Analyst

Brian Lee -- Goldman Sachs -- Analyst

Colin Rusch -- Oppenheimer -- Analyst

Paul Coster -- JP Morgan -- Analyst

Craig Irwin -- ROTH Capital Partners -- Analyst

Jeff Osborne -- Cowen and Company -- Analyst

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