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Executives

Portia Switzer – VP, IR

Ilan Daskal – CFO

Oleg Khaykin – President and CEO

Analysts

Craig Hettenbach – Goldman Sachs

Craig Berger – FBR Capital Markets

Steve Smigie – Raymond James

Craig Ellis – Citigroup

Sid Parakh – McAdams Wright Regan

International Rectifier Corporation (IRF) F1Q09 (Qtr End 09/30/08) Earnings Call Transcript November 6, 2008 5:15 PM ET

Operator

Good afternoon, my name is Rachel and I will be your conference operator today. At this time, I would like to welcome everyone to the International Rectifier's first fiscal quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

(Operator instructions) Ms. Switzer, you may begin your conference.

Portia Switzer

Thank you, operator. Good afternoon everyone and welcome to IR 2009 Fiscal Year First Quarter Conference Call. If you have not already read through our press release and SEC filing, it can be found on our website at www.irf.com in the investor relations section. This call has been broadcast over the Internet and can be accessed through IR's web address. A conference call replay will also be available through November 14, 2008. With me today are Oleg Khaykin, Chief Executive Officer, and for the first time, Ilan Daskal, Chief Financial Officer.

After our prepared comments, we will open the line for questions. Our discussion today will include some forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. We caution that such statements are subject to a number of uncertainties and actual results may differ materially. Risk factors that could affect the company’s actual results are included in our press release issued today and the company’s filings with the SEC including the most recent forms 10-K and 10-Q.

Before turning the call over to Ilan, I would like to mention that in our prepared remarks today, Oleg and Ilan will discuss our financial results which include changes in our segment categories that we have made available to you in our press release filed earlier today. I will provide a brief framework to help you understand these changes so you can adjust your model.

Our objective in making the segment changes is twofold; to better define performance of our product lines and to align with our organizational structure and focus how we manage the company. This new method that more closely matches our organizational focus and we will provide you with gross margins with each area going forward.

In our first quarter 2009 earnings detail described on this call, the major product categories for which we will be describing our ongoing customer revenue and margins are as follows, with more detailed information being provided in our 10-Q for the fiscal first quarter.

Power Management Devices; this segment includes discrete devices, medium voltage DirectFET, Epitaxial services, as well as a smaller group of various components that target multi-market applications.

Enterprise Power; this segment now includes our low-voltage ICs and low-voltage DirectFETs. Enterprise power now also includes products from the former segment titled power stage. Applications targeted include enterprise computing and communications infrastructure and consumer electronics.

Automotive Product; this is now a standalone reportable segment for IR. It includes automotive high-voltage ICs, IGBTs, and industrial integrated power supply which were previously reported in the energy saving products segment, and automotive HEXFET, which were previously reported in the power management devices segment.

Energy Saving Products; this segment includes our high-voltage ICs and IGBTs. Applications targeted include white goods, consumer electronics, industrial and alternative energy.

HiRel, formerly aerospace and defense, now called HiRel for high-reliability applications and includes aerospace, defense, and satellite customers as well as our recent expansion into broader market such as medical and heavy duty industrial applications. This segment include our industry leading radiation hardened MOSFET as well as other high-reliability discreets, modules, hybrids, and DC to DC converters.

Both intellectual property and transition services will continue to be reported as separate segments. I would also like to mention the following events of note. November 11 through the November 14, we will be at the Electronica Trade Conference in Munich, Germany, and during the week of December 8, we will be presenting at the Barclays Global Conference in San Francisco, as well as conducting investor meetings in Boston.

Now, Ilan will describe the segment financials in greater detail. Ilan?

Ilan Daskal

Thank you, Portia. Good afternoon and thank you for joining us. For the first quarter of 2009, IR report total revenue of $244.5 million, up about 20% sequentially and down 8% compared with the first quarter of fiscal year 2008. Excluding IP and transition services segments, our ongoing customer revenue was up 12% sequentially. This quarterly revenue increase was driven primarily by gaining enterprise computing consumer and industrial applications.

Our IP segment this quarter grew $18.9 million driven by $18.7 million of revenue associated with a one-time patent license amendment with an existing patent licensee. This $18.7 million in revenue represents the present value of $20 million in cash payments due to the company from the licensee as required in the patent license amendment. The $1.3 million remaining balance of the $20 million payment will be recognized as interest income over the time of the amendment which continues through the first quarter of fiscal year 2011.

On a GAAP basis, gross margin was 39.4%. This is up 660 basis points from the prior quarterly largely view to higher one time royalty revenue. Excluding our IP segment Transition Services, our gross margin on what we call our five ongoing customer segments also improved 140 basis points over the prior quarter.

Our gross margin improvement was driven by our Enterprise Power, Energy Saving Products and HiRel business segments. On a GAAP basis, we reported a net loss of $4.5 million or a loss of $0.06 per share. Our loss continuing operations before income tax was $4.7 million.

During the first quarter of 2009, we incurred a $15.2 million investment impairment charge, $14.4 million in consulting fees and expenses related to the audit committee led investigation, financial restatement and financial report preparation and filing, $2 million of cost related to the proxy contest and $0.5 million in restructuring expenses. Excluding these expenses, our pretax income would approximately be $27 million in the first fiscal quarter.

In the first fiscal quarter, R&D expenses were $24.7 million or about 10.1% of revenue which was about flat with the prior quarter. Selling and administrative expenses were approximately $65.3 million or about 26.7% of revenue. Of this $65.3 million approximately $16.4 million was associated with consulting cost and expenses related to the audit committee led investigation, financial restatement, financial report preparation and filing and proxy contest. Costs associated with the recent proxy contest during the quarter was $2 million.

Over the next several quarters, we expect to continue incurring expenses related to consulting support to assist us in preparation and filing of our financial statements and tax returns, investigation related litigation and third party proceedings on our 2007 and 2008 annual meetings, and 2007 contested proxy fees and cost.

Other expense net increased by $6.4 million from the prior quarter due primarily to an increase in our investment impairments which increased from $7.3 million in our fourth quarter of fiscal year 2008 to $15.2 million this quarter. Interest income net declined by $1.5 million from the prior quarter as interest rates declined during this quarter.

Our effective tax rate was 5.7% during the fiscal first quarter primarily due to discreet events in the period. Cash, cash equivalents and investments excluding $19.4 million of restricted cash were $692.4 million at the end of the first fiscal quarter. Our cash and cash equivalents total about $303 million. Our short-term and long-term investments are about $103 million and $287 million respectively. Included in investments are about $83 million in mortgage backed securities of which approximately $39 million are agency issued and $55 million are in asset-backed securities. The remaining short and long-term investments are mostly in corporate bonds and US government and agency bonds.

We used about $20 million in cash for operations activities in the quarter. Capital expenditures were $4.8 million compared to $7.9 million in the prior quarter. Depreciation and amortization expense during the quarter was $18.1 million. Inventory was $175.9 million which was flat compared to last quarter. Inventory weeks declined from 18.5 weeks last quarter to 16.9 weeks in the quarter due to the higher quarterly revenue.

Turning now to guidance, we expect second quarter revenue from our ongoing customer segments, excluding our IT segment and transition services segments to be down 10% to 25% sequentially.

Now, Oleg will give you the latest updates for the business and outlook. Oleg?

Oleg Khaykin

Thank you, Ilan, and thanks to everybody joining us today. It has been a short time since our last call but much has happened. On this call, I will provide commentary on several key areas relating to our business, namely a short recap on fiscal Q1 '09, updates on our strategic roadmap and comments on IR’s business conditions and outlook.

First, we are very pleased with the revenues growth from the June quarter. Ongoing customer revenue grew 12%. In the Enterprise Power, we had a strong quarter of 37% quarter-over-quarter growth. This was driven by strong demand from our server customers, an upside in gaming that came in from the holiday built, and end of life orders from a leading game station supplier.

We expect gaming demand to be down significantly in the December quarter as the large majority of the holiday demand has been built. We also expect the server demand to weaken significantly in the near term due to the composite effect of the (inaudible) generation transition and weakened end market demand. That said, we continue to gain share as our content increases with top tier OEMs. The new Intel server platform VR11.1 launch looks on track for the end of the March quarter and we are looking at expanding both our customer base and content for platform in that application.

In Energy Savings Products, we were able to grow our revenue 14% over the last quarter by continuing to focus on opportunities with our iMotion Integrated Design Platform and accompanying IGBTs. The growth came in despite softness in the consumer space that we suffered at the end of the quarter. As I mentioned on our earlier call, we continue to gain momentum at top tier air conditioner and washing machine OEMs worldwide. However, just like with servers, our share increase in this market is not enough to offset the weakening of the end market demand. So while we may see lower revenues in the short term, we are well-positioned for growth when the economy recovers. The situation is similar with other consumer-related areas such as class D audio and plasma displays.

The Automotive Product Segment is the only segment where we experienced negative quarter-on-quarter growth, much of it was due to traditional seasonality compounded with the general deterioration of automotive end market demand. However, during this difficult period, we are continuing to be focused on putting IR in a strong long-term competitive position by focusing on tier one customers in the automotive segment.

This quarter, we are launching many new automotive grade products we our high-voltage IC technology. We already have a good footprint in the automotive applications and we expect this to be one of our strongest growth vehicles going forward once the new programs begin to ramp. Because of the long design cycles, we anticipate this growth to begin towards the end of the calendar 2009 and into 2010.

In the September quarter, we are also pleased with our PMG segment performance. We saw a solid 15% growth compared with June quarter. Our reallocation of investment in marketing and R&D to the discrete products is starting to bear fruit. We continue to see good opportunities for discrete products in multiple markets and remain committed to reestablishing IR as the market leader in the discrete segment.

Finally, the HiRel business segment continues to see successful high-reliability power management products in our traditional markets such as commercial aviation, space, and military. Additionally, we are also pursuing market expansion opportunities with top tier OEMs in the medical devices and heavy duty industrial applications.

At this point, I would like to speak of more about our strategy road map and where we are today. In the first stage of our business plan, we set out to achieve the following objectives; rebuilding our management team, implement targeted cost reductions, consolidate and optimize our distribution channels, focus on accelerating near term revenue opportunities, and driving operational efficiencies.

I’m pleased with the progress to date. The IR management team is now complete with the addition of Ilan, and we are very pleased to have him on board. With our financial restatement and proxy battle behind us, we are now turning full management focus to our cost structure. We understand the importance of preserving cash during this recessionary period and we are diligently taking the appropriate measures. We will continue to resize our OpEx in view of the market downturn and I will undertake comprehensive measures to control cost.

The next thing I would like to address briefly is our inventory. Despite the 12% ongoing revenue growth in the September quarter, our internal inventory was flat and our channel inventory remained at 13 weeks, while decreasing in the absolute dollar terms. Additionally, we continued our effort to consolidate the distribution channel.

During Q1, we have seen initial success of our revenue acceleration measures. Our focus is on capturing high volume MOSFET and IGBT business. This is essential to our ability to regain operational efficiencies and economies of scale. Lastly, we are well on our way with our operational and manufacturing restructuring. Working closely with our Chief Operations Officer, Mike Barrow, we have taken a very methodical approach to this process. Currently, we have re-segmented our production, changed the way we plan and schedule production at our factories and with sub cons, implemented a new demand forecasting model, launched broad initiatives to improve (inaudible) activity, and started the process to rationalize and consolidate top guns.

Moving ahead to the December quarter, as you are well aware, the macroeconomic situation has deteriorated dramatically over the last two months. We are seeing a drop in worldwide demand across all market segments. Given the forecast we are getting from our customers, along with our own internal analysis, we estimate that our ongoing customer segment revenue for the December quarter to be between $160 million and $190 million. That is approximately 10% to 24 5% down.

While our business is obviously being impacted by the current market conditions that could last well into the next calendar year, our board and I remain confident in our long-term strategic road map. To underscore our competence in the future of our company and to increase our shareholders returns, on October 27 of 2008, the Board of Directors authorized a share repurchase of up to $100 million.

In the near term, we’ll continue to stay focused on the following three areas; design win and growing market share, controlling and reducing our expenses, and prudently allocating our capital.

This concludes our prepared remarks and I will now open it for your question-and-answer session. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Craig Hettenbach with Goldman Sachs.

Craig Hettenbach – Goldman Sachs

Yes. Thank you. Can you give us any update on the transition revenues in terms of the next couple of quarters, what that run rate might look like?

Oleg Khaykin

Well, clearly I do not know what Vishay demand is going to be but our expectation is that it will be not too far off from where the revenue was in Q1 but probably somewhat down. So it’s difficult for us to forecast as we do not see -- have a very good visibility into the Vishay internal business. But clearly it will continue in meaningful volumes. I would imagine they are preparing some inventories as they will transition business to other locations at the end of the current transition services agreement period.

Craig Hettenbach – Goldman Sachs

And then a follow up if I could, you mentioned controlling OpEx, are there any areas within R&D that you’re looking to – that you think you need to spend or you want to spend more even through the downturn or as we come out of the downturn here?

Oleg Khaykin

Let me just tell you that obviously all areas are up for reexamination including R&D, but I’m not going to go into any specific areas where we’re planning to make reductions.

Craig Hettenbach – Goldman Sachs

Okay. Thank you.

Operator

Your next question comes from the line of Craig Berger with FBR Capital Markets.

Craig Berger – FBR Capital Markets

Hey guys. Thanks for taking my questions. What do you think the gross margins look like next quarter given the expected drop in revenues?

Oleg Khaykin

Hello Craig. Well, I think at this point in time, I don’t want to speculate on the gross margins. Clearly, if we do nothing, the gross margins are going to decrease, but we are fully obviously undertaking a number of cost reduction measures among things like shutting down fabs for periods of time. So clearly, to the extent we’re going to be able to reduce our manufacturing costs, that would give the positive improvement on gross margin. So I think at this point in time, before we clearly define all the measures we’re going to execute in the next two months, it’s somewhat difficult for us to predict.

Craig Berger – FBR Capital Markets

Can you tell us the other expense of $14.6 million this quarter, what’s in that?

Ilan Daskal

Hi, Craig. The other expense of $14.6 million is mainly the $15.2 million impairment on our investment portfolio, and then the remaining is from foreign exchange income.

Craig Berger – FBR Capital Markets

Okay. Can you help us understand next year, your CapEx was really low this quarter, $5 million, what’s the CapEx profile look like for calendar 2009 and depreciation as well, so we can understand for cash flow purposes what that difference is?

Oleg Khaykin

As I said earlier, we are going to be very prudent with our allocation of capital. We initially projected capital for this year based on our outlook within the $40 million, $45 million. Clearly, as the economy slows down and demand drops, we are going to adjust CapEx meaningfully downwards to preserve cash and maintain discipline in our capital spending.

Craig Berger – FBR Capital Markets

Last question, on the share buyback, how aggressive do you guys intend to be on that?

Oleg Khaykin

Well, I mean, I think we are currently discussing our strategy and repurchase, but we are going to obviously keep a very close eye on the economy and the way things are going and that will probably determine the measure to which we’re going to be more or less aggressive.

Craig Berger – FBR Capital Markets

Thank you very much.

Oleg Khaykin

You’re welcome.

Operator

Your next question comes from the line of Steve Smigie with Raymond James.

Steve Smigie – Raymond James

Great, thank you. I was hoping you could talk a little bit about how orders have been trending. Some of the companies that reported, I think, before you didn’t guide down as much. I’m just wondering if it’s just been – some have reported, it seems as you’ve gone through this period, the numbers have been getting worse and worse. So, have you seen a continued deterioration here and into November, or is that not (inaudible) to look at?

Oleg Khaykin

Well, it’s a very good question, Steve. If you asked me that question two weeks ago, we would have had clearly a much more narrow and a lower range of decreases. But what we are seeing is normally by this time in the quarter, the quarterly forecast is very much set in stone, and everybody has placed orders and we start delivering on them. But, I tell you, what I’ve seen thus far even up to today and I’m going to give a basis, our distributors and customers are continuing to either cancel or push out the orders into the next quarter; and I just came back from Asia, I was there earlier this week.

And I mean, what we’re also seeing there, a number of distributors are facing liquidity issues with banks not giving them loans. So the only way they can free up any cash flow is by liquidating and reducing their inventories and converting them into cash. So in that respect, I think we’ve seen progressively and I would say that’s still ongoing in terms of the very erratic behavior in terms of the customer order profiles, cancellations then coming back reordering, then pushing it out, and I don’t feel that there is a complete stability to the situation for this quarter. That’s why without – it would be prudent to put a much higher limit in terms of the potential down for the quarter because I do believe – to be prudent, I want to make sure that we factor in that there’s any further potential deterioration throughout the quarter.

Steve Smigie – Raymond James

Okay. And I’m not – I think you talked about some cost cutting, but did you say what dollars you were expecting for SG&A and R&D in this quarter here, fourth quarter?

Oleg Khaykin

Well, we are currently studying all the areas of the company and analyzing it. And within the near-term, we will make our decision and given that it is probably going to be a material event, we are going to obviously put further notice -- further announcements.

Steve Smigie – Raymond James

I just meant not what’s in the cost cutting amount, but just the dollar amounts of spending for R&D initiative for the quarter.

Oleg Khaykin

Sorry, for the quarter?

Steve Smigie – Raymond James

Yes.

Oleg Khaykin

Well, given that we are planning various cost reductions, I probably would refrain from guiding those two categories.

Steve Smigie – Raymond James

Okay. And would you expect the R&D to probably get less cuts though?

Oleg Khaykin

Yes, R&D would be less.

Steve Smigie – Raymond James

Okay. All right, thank you.

Oleg Khaykin

Sure.

Operator

(Operators instructions) Your next question comes from the line of Craig Ellis with Citi.

Craig Ellis – Citigroup

Thanks guys. Oleg, can you just give us an update on where manufacturing utilization was in the third quarter, third calendar quarter, and where would you expect it to be in the current quarter?

Oleg Khaykin

Well, I mean, clearly, even though our revenue has gone up, I mean, our manufacturing utilization was kind of all over the map but I would probably, at this point, until I really restate how we measure our utilization, you’re probably going to have to keep up with me for another quarter or so. But I would say one thing. Clearly, our utilization is still significantly below where we expect it to be on an ongoing basis, and even with the higher revenue growth, actually in certain areas, our utilization was lower as we continued to lower the inventories by intentionally keeping down the production. So, there is somewhat of a disconnect between the revenue growth and actually utilization for some product lines that has declined, because one of the things we are trying to do, as I said, is lower the inventories. In terms of the inventories within the company, as I said, our internal inventories remain flat at $175 million. Our external inventories, as I mentioned, was at 13 weeks, but the absolute dollar amount has actually declined.

Craig Ellis – Citigroup

And from a channel inventory standpoint, where do you think that level needs to be as we look out over the next couple of quarters? Are you happy with 13 weeks or do you want to pull it down closer to the 8 to 10 week range?

Oleg Khaykin

Well, clearly, we’re going to continue pulling it down but we are going to do it in a iterative fashion, because one of the things in channel inventory is that you maintain a function of your lead time to deliver the product. As we optimize our operations and reduce cycle times, we will progressively take down our inventories. And frankly, I do not think there is an optimal level, but I think it varies by product line. So, for slow moving products, you probably want to have more inventory in the channel. For fast moving products, where you have high volume production, you will have significantly less inventory in the channel, but I think our long term goal of eight to nine weeks certainly is a good target to have and I hope that our manufacturing operation will be able to do better than that.

Craig Ellis – Citigroup

Okay. And then just lastly, as we take a step back and look at the actions that management will be taking in response to the near term environment, how should we think about those within the context of the longer term plan that the company had set out in its longer term financial targets? Are these new incremental actions that you think are needed now to bridge you towards those long term financial targets or how should we think about those set of financial targets that the company had put out there over the last few months?

Oleg Khaykin

Well, actually, a big chunk of what we are planning to do was always part of our plan. We haven’t had frankly much time to go out to that in the first six months since I joined. But now that we finally got opportunity to focus on the business with all the restatements and proxy battles and other issues behind us, we feel that's the prudent time to undertake those measures, and the only thing given the deterioration of the business, we are probably going to go up a bit further than we intended to reflect smaller manufacturing and operational footprint of the company.

Craig Ellis – Citigroup

Okay. So to be clear, a lot of what you’re talking about are items that you had previously identified but there is some incremental action that you would be taking as well.

Oleg Khaykin

Correct.

Craig Ellis – Citigroup

Okay. Thanks a lot.

Operator

Your next question is a follow up from the line of Craig Berger with FBR Capital Markets.

Craig Berger – FBR Capital Markets

Can you guys just help us understand how long it takes to grow the discreet business you said you kind of re-gone after that? How much are you investing in that area and how long does it take for that stuff to ramp smoothly?

Oleg Khaykin

Okay, that is a good question. I think the ramp there is really twofold. The first one, what we’ve done is obviously you sell what you got. So, there was number of older products that we used to sell in the market that we have of gotten out at this stage because of the lower margin profile on these products. Yet, there is still significant market demand. It is – half of those products happen to be very high volume runners, and all we have to do in that case is reengage with the customers and they were very eager to place the orders with IR product.

As you noticed, if you look at our power component, our revenue has gone up a little under – close to about $10 million per quarter, but our gross margin has declined by about 2%. So really what we’ve done here is part of what I would call line loading, where you take – given you have a lot of open capacity, you take business that is at a lower margin but it absorbs a lot of the open capacity and has lowered the cost from the rest of your business. So this is what I call the short-term opportunistic business opportunities.

Now, what we intend to do in the medium term is what we are already doing right now, is developing new product based on new process technologies that have significantly lower cost and obviously would have higher margin. So based on ramping up, we will gradually replace the lines in our business with this newer product at a better margin performance. And typically, this new product takes, on average, three months to design and launch, and it usually takes somewhere between five, six months after the launch before we see the early revenues. So, nine months from T-0 to the initial dollar revenue is what it takes for you to realize the initial revenue. In terms of investment, it is not a very high investment, it is – we are running productivity of something now close to 1 to 1.5 new products per engineer per quarter.

Craig Berger – FBR Capital Markets

Okay, thank you. Can I ask you a couple more? One is on the game console stuff, it sounded like you perhaps lost a position at one of the key gaming OEMs, can you tell us what’s going on there?

Oleg Khaykin

Well, I think as I mentioned in the earlier call, all the gaming OEMs even though the box looks the same, they continuously move from one revision of the motherboard to another revision. And in that particular revision we are talking about, as the customer moves to the next generation, it requires significantly less IR product. So, before the Christmas built, the customer decided to use the older revision and place an upside order and we have seen a significant pop in what used to be our power stage business unit and now it's called the enterprise power business unit, it has been integrated into our business unit. So that revenue was kind of one of the last time buys as they finished that current revision of the platform and we do not have products in the next generation platform, but that does not mean we will not have products in the follow on platforms.

Craig Berger – FBR Capital Markets

I see. Last one for me, on the royalties, I think you had previously said you are getting $2 million a quarter. Is that the $20 million present value that you just gotten so you are not going to be getting the $2 million a quarter going forward?

Ilan Daskal

Correct, that is correct. I mean, in terms of cash, we have not collected it yet, but in terms of the recognition, we recognized it up front, the $18.7 million net of the discounted interest rate.

Oleg Khaykin

And we will be getting $2 million a quarter over the next 10 quarters, cash.

Craig Berger – FBR Capital Markets

I see. But not in the revenues?

Ilan Daskal

Correct, not in the revenues. Only the portion of the interest rate will be on the revenues.

Craig Berger – FBR Capital Markets

And what's the prospects for getting the other royalty customers and did you say who that customer is?

Oleg Khaykin

I do not believe we disclosed the customer name, but it was one of our bigger licensees. We clearly have several other agreements with much smaller customers that we are working on. And the way I look at it, if any of them result in any meaningful licensing royalties or lost time payments or however they may be structured, that would be an icing on the cake but our ongoing business model is very much focused on deriving all our profits from the ongoing customer segment revenues.

Craig Berger – FBR Capital Markets

Okay, thank you.

Oleg Khaykin

But, clearly our business development people are working hard to see what they can do.

Operator

Your next question comes from the line of Sid Parakh with McAdams Wright Regan

Sid Parakh – McAdams Wright Regan

Good afternoon. Just a question here on your guidance, if you look at the low end of your guidance which is $160 million, does it imply current order behavior or does it include a better behavior or worse behavior, can you give us some directional guidance here?

Oleg Khaykin

Well, I think as I said, if you asked me that question two weeks ago, I would have given you a different answer. But, given what I see the behavior that I’m seeing in the order patterns, we felt it is prudent to really look at what would happen if the quarter further deteriorates, so it takes turn for the worse. And we felt rather than doing -- coming back and revising the guidance, given the high volatility over the bookings and push out and cancellations, it is prudent to extend the lower and to where we feel we will be within a strong confidence level that the quarter would not go beyond that. But obviously nothing is certain.

Sid Parakh – McAdams Wright Regan

So just I mean maybe I will probably try and put some words here. Would you say that is your best guess of the worse case scenario for the quarter?

Oleg Khaykin

Well that is generally what the lower and the higher end of the range is the worse case.

Sid Parakh – McAdams Wright Regan

Okay. And then just moving on, you made some comments on the automotive business in your prepared remarks and it sounded like you were fairly optimistic going forward. Can you help maybe -- help us understand, what we are seeing in terms of auto sales in general is the trends are pretty negative. And can you maybe talk about some of the programs and when they go online?

Oleg Khaykin

Right. As you noticed, we have now made automotive products a distinct business unit segment for us. And IR has been in automotive segment for a very long time. We have been in it – our revenues have been running there anywhere between $80 million to $90 million a year. The third calendar quarter or September quarter is what we call the seasonally weak quarter. We have a very strong presence with the European OEMs. And as you know, in Europe, the September quarter overlaps roughly six weeks of vacation. So generally, we expect a dip in the revenue and that's happened as well this quarter. However, as people came back from vacation, as you all know, the automotive sales have been really going down. So usually when people do comeback from vacation, we see some pickup in orders. And this time around, there was really no pickup in orders. So, our revenue in automotive products dropped about 21% quarter-over-quarter.

Now, that said is we do know where we have our design wins, we know who we are positioned with, and we also know where our design win pipeline is. And as I mentioned, we are launching a high number of new products this quarter that are designed to the automotive quality specifications of standards. So, it really comes down to we believe that over time, the automotive market is going to become progressively more focused and more efficient vehicle and hybrid segments in particular, and I believe that that is the future for automotive industry. And if I look at where we have our design win pipeline and where we are engaged with all the leading customers in Europe and Japan, as well as in US, we feel that when the automotive market does recover, we are well positioned to take advantage of the rebound and growth in the energy efficient vehicles.

Sid Parakh – McAdams Wright Regan

Okay, that is fair. And then final question for me, the cash and investments portfolio that you had, you took up $15.2 million impairment charge in the last quarter. That was out of September, is there probably another month into the next quarter and things have not gotten any better in the financial markets in general, what do you anticipate in terms of addition write offs on that front maybe in the current quarter?

Ilan Daskal

We do watch our portfolio on a daily basis and we cannot predict right now how we will end the December quarter. But if market will continue remaining to take an additional interment, we cannot assess it right now.

Sid Parakh – McAdams Wright Regan

Okay. But would you maybe be able to give us some directional sense of have you seen any deterioration on that front since the end of September?

Ilan Daskal

I don’t have the data here with me, but I did disclose to you what portion we have in the various securities.

Sid Parakh – McAdams Wright Regan

Alright, that is fair. Thank you.

Ilan Daskal

Thank you.

Operator

Your next question is a follow up from the line of Steve Smigie with Raymond James.

Steve Smigie – Raymond James

Great, thank you. Just a follow up on the guidance, it seems like you guys been pretty prudent in terms of where you took the numbers trying to build in some difficult scenarios. Does that suggest you that Q1 then would start to be a seasonal performance going forward or is there risk – further risk for Q1?

Oleg Khaykin

Well, it is very difficult to predict, I mean, my customers do not know, they customers do not seem to know, But you know, clearly the way we look at it, it is to hard to tell because I do not know to what extent liquidity crunch and distribution in particular is forcing people to liquidate inventories and free off as much cash as possible and whether or not how strong is the demand for the replacement. I guess the other is because no one is – how bad or how not so bad Christmas sales are going to be which will ultimately can full – can trigger some replenishment. So I think at this point in time it is too early for me to speculate on the Q1 but clearly, we are taking a very prudent and cautious view in terms of our way to start.

Steve Smigie – Raymond James

Okay. And on the server business, you mentioned it’s going to fall off here. I am wondering if you can quantify the drop there and also if you can talk about or quantify what that will be on a revenue run rate when all your designs wins kick in.

Oleg Khaykin

Well, I think, first of all, as you know, the industry is going to convert from the current generation observer to the new generation observer towards the end of the calendar Q1 next year, right? And what we have easily towards the end, everybody is liquidating their doing NII sales. Given the – from what we hear from our distributors and contract manufacturers, a strong drop in the customer demand for servers I can expect and also just seeing some of the leading enterprise equipment OEMs announcing that they are seeing significant sales drop off in this calendar quarter. I would imagine a lot of the corporate customers are pulling back on their capital spending and the unit demand for servers is dropping down significantly. So as a result from what I hear from my customers is the inventory that they had already in the channel is more than sufficient for them to last them through this quarter and towards the NII, the next generation platform starts to take off the end of next quarter.

So, that is what I am seeing in terms of the current generation of quarter, and in terms of the next generation, ultimately, I do not know how big the market is going to be or how fast it is going to recover but if I look at our contents for platform, there we – it ranges anywhere from 50% to 100% more content per box.

Steve Smigie – Raymond James

Will you talk about what your range of content would be in 50% to 100% so you can get wins in the high or low in servers or –?

Oleg Khaykin

It is across the board. All the servers we are playing today, we are playing tomorrow and possibly pick up some additional platforms as well and the customers.

Steve Smigie – Raymond James

And can I get the dollar content?

Oleg Khaykin

No, I am not going to talk about the dollar content because it is – you have two averages and weighted average across multiple platforms. There is no – if you give me a specific platform, I can probably get you a number.

Steve Smigie – Raymond James

Could you give me a range of dollars?

Oleg Khaykin

At this point, I do not have the numbers of dollars here. Generally, I do not disclose it.

Steve Smigie – Raymond James

Sorry. And finally, if you can just talk a little bit about how you see demand trends in military airspace satellite seems to be, generally, we consider that to be non-cyclical but I just wonder if that still seems the case to you and, I guess, that is the question.

Oleg Khaykin

Yes, at least in the short-term you are absolutely right. It is a non-cyclical business and especially in terms of space, these programs are already funded and the satellites is going to launch no matter what, so we really don’t view that as any risk coming. We know the program as we know the deliverable date and that is not an issue.

Commercial aviation it’s also fairly stable in that respect. Military in the short term, it is what it is and it is going to get delivered. Now, obviously what is going to happen to the military budget once it is out is anybody’s guess, but we do not expect any significant volatility in the high roll segment in the near future. We actually think it is going to be one of our most stable segments. But also, we are – it seems some very attractive opportunities where we will be going into production. We are already starting to go in production in medical devices and the heavy duty industrial applications which are also very stable demand stock [ph] segments.

Steve Smigie – Raymond James

Okay, thank you.

Portia Switzer

Next caller please, operator.

Operator

Your next question comes in the line of Craig Ellis with Citigroup

Craig Ellis – Citigroup

Thanks for taking a follow up. Oleg, can you just talk about your confidence in keeping the business free cash-flow positive as we go to the next two to four quarters?

Oleg Khaykin

Well, I think at this point, it is probably too early for me to tell. I mean, we are going to rack and stack all the majors we are going to undertake, and then I have to look at it over what period of time it can wait. It could be one or two or three quarters. Obviously, it will vary by different functions but ultimately, it also depend us to what is going to happen to the end-market demand; but clearly, our objective is to minimize any cash losses or keep it neutral as much as we can, without jeopardizing operational future of the company.

Craig Ellis – Citigroup

Okay, fair enough. And then, I know you cannot provide guidance for the March quarter but can you talk about the seasonal dynamics in the business given that there have been a number of changes in reclassification within the portfolio.

Oleg Khaykin

Well, I mean, Q1 typically and a lot of the consumer products get built prior to Christmas. However, there are a consumer product which actually have a strong seasonal Q1 and that is what normally the orders for air conditioning segments pick up right. So, I mean, I am hesitant to talk about seasonality because nothing is seasonal these days, so I do not know what the outcome of sell-through is going to be for any of the segments during Christmas. And I have seen the x1 Q4 comes in much lower than everybody expects, and then Q1 comes out stronger; and I have seen x1 Q1 comes in weaker. So, I mean, it really comes down to how much of the inventory in the channel gets consumed then what is the outlook for demand for Q1 and Q2 in the market. So I think at this point, given that we are not in what I call “steady state environment” or “typical times”, I do not want to speculate on the Q1 by any segment.

Portia Switzer

Operator?

Operator

We have no further questions at this time.

Portia Switzer

Very good. Thank you very much for your time today and that concludes our call.

Oleg Khaykin

Thank you.

Portia Switzer

Thank you.

Craig Ellis – Citigroup

Thank you.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: International Rectifier Corporation F1Q09 (Qtr End 09/30/08) Earnings Call Transcript
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