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Executives

Chris Toth - Investor Relations

Oleg Khaykin - Chief Executive Officer

Ilan Daskal - Chief Financial Officer

Analysts

Amit Chanda - Wells Fargo

Alex Gauna - JMP Securities

Terence Whalen - Citi

Craig Berger - FBR Capital Markets

Stephen Chin - UBS

James Schneider - Goldman Sachs

Steve Smigie - Raymond James

International Rectifier Corporation (IRF) F2Q 2013 Earnings Conference Call January 28, 2013 5:00 PM ET

Operator

Good afternoon. My name is Jessica and I will be your conference operator today. At this time, I would like to welcome everyone to the investors at International Rectifier’s 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) Thank you.

Mr. Chris Toth, you may begin your call.

Chris Toth

Thank you, operator. Hello and good afternoon. We all welcome you to the International Rectifier conference call. On the call today are Chief Executive Officer, Oleg Khaykin and Chief Financial Officer, Ilan Daskal. I trust you’ve all seen copies of our press release, which was published about an hour ago. If not, the press release can be found on our website at investor.irf.com in the Investor Relations section.

Before we begin, I would like to remind you that except for historical information the matters that we will be describing this afternoon will be forward-looking statements that are dependent upon certain risks and uncertainties, including factors such as orders shipped and received during the quarter, the timing and introduction of new technologies and products, general semiconductor industry conditions, and the overall economy and financial markets. In addition to these risks, we refer you to the risk factors included in our press release that we issued about an hour ago and in our most recent SEC filings.

I would also like to mention that in addition to reporting our GAAP financial results, we are presenting supplemental non-GAAP financial data. A reconciliation of the non-GAAP to GAAP measures set out in our release and discussion today can be found on the website and in our press release. We believe providing non-GAAP measures combined with our GAAP results provides a more meaningful representation regarding the company’s operational performance. Our non-GAAP presentation and EPS calculations exclude certain items such as accelerated depreciation, restructuring and severance charges, amortization of acquisition-related intangibles, and certain discrete tax items, among others.

Lastly, I would like to highlight the following upcoming events. On Wednesday, February 13, we will be attending the 2013 Goldman Sachs Technology Conference in San Francisco; Tuesday, February 26, we will be attending the UBS Small-Mid Cap One-on-One Symposium in Boston; and Wednesday, February 27, we will be attending the Morgan Stanley Technology Conference in San Francisco.

Now, Ilan will discuss our most recent financials. Ilan?

Ilan Daskal

Thank you, Chris. Good afternoon and thank you all for joining us. For the second quarter of fiscal 2013, IR reported a revenue of $223.8 million, which was 11.4% decrease from the prior quarter and a 2.7% decrease from the year ago quarter.

Gross margin on a GAAP basis was 21.9%. Non-GAAP gross margin was 22.2% and excluded $551,000 of accelerated depreciation primarily associated with the closure of our El Segundo facility. The gross margin decline from the prior quarter was primarily due to absorption and underutilization as we significantly reduced inventory in the quarter. Overall, the GAAP net loss was $32.7 million or $0.47 per share for the quarter. This compares with a GAAP net loss of $28.8 million, or $0.42 per share in the prior quarter, and a GAAP net loss of $6.3 million, or $0.09 per share in the prior year quarter.

Non-GAAP net loss was $30.3 million or $0.44 per share for the quarter. The non-GAAP net loss excluded $551,000 of accelerated depreciation, $4.9 million of asset impairment, restructuring and other charges, amortization of intangibles of $1.7 million, and a net tax benefit of $4.7 million. This compares with a non-GAAP net loss of $13.9 million or $0.20 per share in the September quarter, and a non-GAAP net loss of $2.9 million or $0.04 per share in the December quarter of last year.

Moving on to operating expenses, for the December quarter R&D expenses declined to $32.1 million, which represented 14.4% of revenue. SG&A expenses declined to $45.1 million and represented 20.1% of revenue. The reduction in SG&A and R&D expenses from the prior quarter was a result of actions to reduce cost. Amortization of acquisition-related intangibles was $1.7 million.

During the quarter we recorded $4.9 million in asset impairment restructuring and other charges. GAAP tax for the quarter was a $2.4 million benefit, excluding a net tax benefit of $4.7 million, mainly due to one-time release of tax reserve and adjusting for net tax effects on one-time items, our non-GAAP tax expense for the quarter was $2.3 million.

Turning to the balance sheet, total cash, cash equivalent, and investments increased $16 million to $383.3 million at the end of the second quarter, which included $1.6 million of restricted cash. During the quarter we decrease inventory by about $23 million to $260.7 million. Weeks of inventory decreased about one week and are now about 19 weeks.

In the December quarter, we generated $41.9 million in cash from operating activities, mainly due to improved working capital. Cash capital expenditures for the quarter was $26.1 million or about 11.6% of revenue. Free cash flow was $15.9 million. Depreciation and amortization expense was $23.1 million, and stock-based compensation was $5.4 million.

Now, moving on to our outlook, we currently expect revenue for the March quarter to be between $220 million and $235 million. For this projected revenue range, we currently estimate gross margin to be between 22% and 23%. We expect R&D expenses to be about $31 million. SG&A expenses are expected to remain flat at about $45 million. Amortization of acquisition-related intangibles is expected to be about $1.7 million.

For the March quarter, we expect approximately $2 million to $3 million in restructuring and other charges resulting from the resizing of our manufacturing facilities and other cost reduction efforts. Other expense net is expected to be about $1 million. Tax for the quarter is expected to be between a $2 million to $3 million expense mainly due to foreign tax accruals.

And finally, for the March quarter, we expect our cash capital expenditures to be about $23 million. Capital expenditures are now expected to be about 9% of revenue for the 2013 fiscal year. Finally, as you update your financial models in calendar 2013, please be aware that there will be 14 weeks in our June quarter this year as part of our fiscal calendar.

Now, Oleg will give you the latest update on our business. Oleg?

Oleg Khaykin

Thank you, Ilan. Despite the challenging market environment during the December quarter we managed to significantly reduce our inventory, continued to execute on cost reduction initiatives, and increased our cash balance by $16 million. Tough December quarter notwithstanding, as the quarter progressed all of our business end markets were improving orders with the exception of computing. The month of December was better than November and the trend was continued into January, giving us optimism that business conditions are starting to improve. In addition our six-month booking outlook is trending higher than at the same time last quarter giving us optimism that December quarter was the bottom.

Geographically all end markets were down in the December quarter. Asia was impacted by weak computing demand. Americas were down slightly as weakness in industrial were somewhat offset by increases in our HiRel end markets. And Europe and Japan remained weak as customers continued to reduce inventory. In particular we saw a significant weakness in industrial and appliance demand. The enterprise power business unit revenue decreased significantly to $29 million, in line with our expectations for weakness in the computing and server end markets mainly driven by platform transition to Romley and the year end seasonality.

For the March quarter, we expect server revenue to be down slightly. However, significant weakness is expected to continue in the notebook and desktop market due to customer push-outs and transition to the Haswell platform expected to launch in June. As such, we expect enterprise power revenue to decline significantly in the March quarter before starting to rebound in June and into the second half of the year. We have secured strong design wins in computing, gaming, and several programs. They are expected to start ramping in June quarter. In addition for calendar 2014, we are well-positioned on the Grantley server platform as Tier 1 customers adopt our digital power management solutions. Early design win activity has been strong and we expect to increase our share.

Our Power Management Devices business unit, revenue decreased 8% from the prior quarter. The decrease was mainly due to the weak demand in the industrial and computing end markets. Overall, our MOSFET inventory is very low and we are starting to see signs of life in the industrial market. As such, we currently expect revenue in March quarter to grow modestly.

Our Energy Saving Products business unit revenue decreased 19% compared to the September quarter. Demand remained weak mainly as a result of slow customer demands in the appliance end market, particularly in China. However, we believe that demands bottomed out in December. We are starting to see a recovery in orders and currently expect a nice revenue rebound in the March quarter boosted by customers starting to raise production levels and seasonal strength in appliances.

Our Automotive Products business unit revenue was about flat compared to the prior quarter. The continued ramp in our new products was offset by overall demand weakness and seasonality in Europe. With fewer holidays in March quarter compared to December and continued ramp of new products, we expect our overall automotive demand to increase this quarter.

Lastly, our HiRel business unit revenue decreased 3% compared to September quarter. Gross margin, as expected was lower, driven by sales of higher cost inventory and product mix. For March, we expect revenue to remain stable and we expect gross margin to remain at the current level for the next several quarters due to sales of higher cost inventory. Overall, bookings and backlog continued to be strong in all of our HiRel markets. We continue to see steady growth in our business.

Now, an update on channel inventories. During the December quarter, POS decreased 8% compared to the September quarter. Sell-in versus sell-through during the December quarter was about in equilibrium, with channel inventory decreasing to about 12 weeks overall. During the quarter, we consciously prioritized the inventory reduction at the expense of gross margin. By lowering utilization in the phase of revenue decline, we reduced our inventories by about $23 million. With business conditions starting to improve, we believe the March quarter will be the last quarter of active inventory reduction. As we reach equilibrium in terms of what we produce and what we ship, utilization is expected to rise. As such, we anticipate gross margin will slowly start to recover in the June quarter and accelerate its recovery into the September quarter as improving utilization, lower unit cost inventory, and cost reduction benefits flow through to our cost of sales.

Now, I would like to provide a few comments about our business and some of our ongoing initiatives. Overall, we continued to prioritize on three key areas, focusing on our core market, power management technologies now aligning with Tier 1 customers, creating an efficient and flexible supply chain, and reducing our fixed cost. Despite the current macro headwinds, we believe power management has excellent long-term growth prospects. Our core technologies ranging from digital power controllers to benchmark MOSFETs to industrial and automotive power modules are being adopted by large published market segments. We continue to invest in these high growth end markets and believe our strategy will allow IR to how to grow the industry over the long-term and position the company for sustainable profitable growth.

To achieve our objective, we took a number of strategic actions throughout the second half of 2012 to reduce our manufacturing footprint and optimize our supply chain. Our El Segundo facility will be closed by the end of this quarter and our 6-inch Newport fabric sizing remains on track. Our total cost reduction measures today have resulted in headcount reduction of 13% since June quarter of 2012. This includes the restructuring actions in our manufacturing, SG&A, and R&D.

Also, with our new Chief Operations Officer, Gary Tanner, we are taking a fresh look at areas where we can further increase efficiency in our manufacturing. This includes accelerating our manufacturing plan to target up to 50% external manufacturing on the front end and up to 70% on the assembly and test. We believe doing so will allow us to more effectively scale the business, manage inventories, reduce volatility in a down cycle, and expand our margins.

2013 is also a milestone year for our GaN technology as we transitioned into the commercialization phase. Earlier this month, our mid-voltage GaN technology was prominently highlighted by a Tier 1 customer at CES for high-end home theater system and we expect product shipments to commence in the first half of this calendar year. In the high-voltage market, we continue to sample GaN power devices to Tier 1 customers and expect to launch commercial products in the second half of the calendar year.

In March, at the Applied Power Electronics Conference Tradeshow in Long Beach, California, we will demonstrate our innovative GaN technology and its superior performance, efficiency and power density. In conclusion, I am confident in our strategy and the actions we are taking to enable IR to weather the current market downturn and emerge from it with a sustainable and profitable business model.

Lastly, all of us at the International Rectifier family were deeply saddened by the passing of our Founder, Eric Lidow at the age of 100. Eric led International Rectifier as CEO and Chairman with amazing enthusiasm and energy for 60 years and established an innovative culture that defines International Rectifier today. For a great many of our employees including myself, he was a great mentor professionally, a respected pioneer in the power management industry, and a true great American success story. We will miss him dearly.

This concludes our prepared remarks. And we will now open the session to your questions. Operator?

Question-and-Answer Session

Operator

Your first question comes from the line of David Wong with Wells Fargo.

Amit Chanda - Wells Fargo

Hi, good afternoon gentlemen. This is Amit Chanda dialing in for David. Oleg, how confident are you that appliance inventories in China have normalized here?

Oleg Khaykin

Well, we are in constant contact with our customers and clearly we have known that they had quite a bit of a finished goods inventory and they have been burning off whatever a component inventory they had. And for the first time, we are now seeing actually orders for new products coming in and in our quarterly business service with them we have been tracking reduction in their inventories and gauging their outlook for the near-term. And at least from our perspective, a team is like all indicators are starting to point in the right direction.

Amit Chanda - Wells Fargo

Okay, great. And then as a follow-up, can you maybe talk about your market share opportunity in servers with the Intel Grantley launch in terms of dollar content and will that be more of a second half 2014 revenue opportunity for you?

Oleg Khaykin

Sure. As you probably know, we had a very strong share in Nehalem and we have a lower share in Romley. During the transition to Romley, there was a need for digital functionality which we didn’t have at that time. Since then with our two acquisitions we have made a very strong comeback on the Grantley platform. And currently as you may know all the reference designs are complete and many customers are currently undergoing the designing activities, and we feel we are very well-positioned with it. And all the indicators as the current plans are for sometime in 2014 maybe mid-year, but usually you start shipping products before then. It’s also our understanding that many customers want to pull in Grantley sooner rather than later given the somewhat weaker market reception of the Romley platform.

Amit Chanda - Wells Fargo

Okay, great. I appreciate it. Thank you very much gentlemen.

Operator

Your next question comes from the line of Alex Gauna with JMP Securities.

Alex Gauna - JMP Securities

Thanks for taking my question. Oleg, I was wondering if you could give us some sort of ballpark way of thinking about as revenue comes back, what the correlation might be to gross margin accretion and how you think about trying to get inventories lower still, when might we be through that process based on your 6-month or 1-year outlook where we can start thinking about more levered gross margin accretion?

Oleg Khaykin

Thanks Alex. Well, if I kind of look at where we are today at about say 22% and where we were before the whole market fell down about 39%, there is a 17% spread. We estimate about 9% maybe as much as 10% is gross margin related – is utilization related. So, clearly, the first step is start getting the utilization up. The remaining is about 50-50 split between the ASP erosion and the mix, the intra and inter-BU mix changes. So, we feel as the market recovers and as our PBU rebounds back to its previous levels and as we get into the more of this server market share that mix will bounce back to where it was before. And with our cost reduction measures I feel we are pretty confident that we have been able to mitigate the ASP erosion and be able to absorb and recover that drop. So, in that respect that’s kind of how all these three moving parts layout.

In terms of the timing, this quarter we are starting to increase our utilization slightly. The mere fact that revenue is no longer dropping, we feel we’re more at equilibrium and with the also looking at the customer orders coming in for the first six months of this year our – we are cautiously increasing our utilization in our fab. That pattern is expected to accelerate into the June quarter and a lot of these benefits will flow into the September quarter. So, in terms of the guiding how the margin will recover there is about one, one and a half quarter lag. So, this quarter will still be heavily impacted by the drop in utilization in the December quarter. The June quarter will have come up-tick in the margin but still March quarter will still weigh on it. But the recovery and flushing of the under absorption in the March and the June quarter will produce significant tailwinds on the utilization – sorry on the gross margin into the September quarter.

Ilan Daskal

So, as the way we see it right now is that for the March quarter we plan to continue to burn additional inventory. And therefore it will impact the June quarter as you know as the higher cost inventory will continue to fold through June. So, I think that if in June the gross margin will be up about roughly about 1% and then we will see or we project to see a very nice up-tick in the second half starting in the December quarter – in the September quarter in gross margin.

Alex Gauna - JMP Securities

That’s very helpful. Thank you. One more if I could, Oleg you mentioned your Class C audio (went on gain) with Samsung in your prepared remarks, I am wondering how significant could that be and coupling that with some of the other design wins that you are anticipating demonstrating at APEC, can that get to a material percentage of sales by the year at least on a run rate basis?

Oleg Khaykin

Well, I mean it’s not going to be material percentage of sales. The mere fact that goes into their flagship products means the volumes are relatively limited. But winning the flagship from Samsung shows you something because the way the consumer electronics works whatever is in your flagship products this year ends up being in upper or mid-range products next year and in the mass market within three to four years. At the same time this particular product it’s clearly very compelling to audio and consumer electronics industry. And after this tradeshow we had significant interest from all the major audio suppliers also looking at it to additionally start with this product that their – if their premier products, their flagship products and then work them down into the broader edge parts.

Alex Gauna - JMP Securities

Thank you. Congratulations on the win.

Oleg Khaykin

Thanks.

Ilan Daskal

Thank you.

Operator

Your next question comes from Terence Whalen from Citi.

Terence Whalen - Citi

Hi. Good afternoon. Thanks for taking the question. This one specifically relates to Energy Saving Products, obviously we have been in a tough inventory correction there for the past five quarters. You are looking at a bounce back in the March quarter. My question is specifically what revenue level do you anticipate ESP products to return to. Are we likely to see revenue in the $70 million range, what would be required to get back there in terms of either aggregate end demand any shifts in market share for that? Thank you.

Oleg Khaykin

Thank you. Terence, well I think when we had that one quarter by 75 there was – our sense is that during that time there was quite a bit of double ordering given the shortages of IGBTs for a year and a half, two years prior to that. So, probably we think our kind of, I would say the equilibrium point what if they probably should have been somewhere around mid to a higher-60s, okay. So, that’s kind of the levels that we are shooting for. How long will it take the market to get back to the kind of run rate that China was shipping during the time we don’t know, but I think to be prudent for this year I can see us getting for the remainder of the fiscal year by middle of this year we should be – I would feel comfortably get us up to high 40s-$50 million range. And then we’ll see how the market develops thereafter.

We have also with the launch of our micro modules we have opened up significant market for ESP into the lower power very high volume fans and pumps where IR did not play previously and with a very good traction in design wins that we’ve gotten in the last year and a half – a year, year and a half that actually should be kind of the next wave of growth for that business. So, the short answer short-term we should get by kind of middle of the share around to around high 40s-$50 million. Then as year progresses we should get up to into the 60s and then depending on how fast our new products ramp up we should take it back into the 70s and higher.

Ilan Daskal

So, Terence we definitely believe that the December quarter was the trough in our revenue for the Energy Saving Products business unit. And we see through the bookings we see – we have all indications to believe that that was the trough.

Terence Whalen - Citi

Okay, that’s terrific contexts, I appreciate that. My second question is a very quick housecleaning question did we specify or quantify utilization in both in the December quarters and your expectation for March? Thank you.

Oleg Khaykin

Could you repeat it again?

Ilan Daskal

The utilization for…

Terence Whalen - Citi

Utilization specifically just quantifying to help…?

Ilan Daskal

Sure. So, overall utilization was around the low 60s, high 50s depends on their front-end or in the back end. And bear in mind that from now on we will start to have a more kind of consolidated manufacturing footprint which overall will increase the calculation of the utilization. However, if you kind of back that aspect out, it is slightly up that we plan to be in March…

Oleg Khaykin

But it also includes 10 days of shutdown.

Ilan Daskal

Right. And also from there on and also in March, it would be coupled with an additional inventory burn. So, we believe that with the continued market recovery in June we’ll take the utilization further up.

Terence Whalen - Citi

Okay, very helpful. Thanks and best of luck.

Oleg Khaykin

Thank you.

Operator

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

Craig Berger - FBR Capital Markets

Hi guys. Thanks for taking the question. Just following on the gross margin and utilization questions, because you’re changing your mixes in-house and out-house production facilities, what kind of gross margin should we expect at say $250 million a quarter in revs or $275 million or $300 million?

Ilan Daskal

So, Craig basically it depends whether you look at the first quarter that you get with the $250 million $260 million or is an on going basis.

Craig Berger - FBR Capital Markets

Ongoing.

Ilan Daskal

So, on an on going basis, we can breakeven on the $250 million level when we gather for the first time probably we need to get to $260 million, $265 million, we can breakeven there with a gross margin in the high 20s. When you think about what I mentioned earlier for the June quarter, we believe we’ll have about 1% higher gross margin than March than what we guided in March. And then we believe that as of the September quarter we’ll see the uptick in the overall gross margin and that’s when we believe that will be timeframe that we’ll get also breakeven.

Craig Berger - FBR Capital Markets

Okay. So, breakeven is high 20s gross margins at $250 million to $265 million?

Ilan Daskal

So, about $260 million in the first time, but at an ongoing basis also at $250 million, yes…

Oleg Khaykin

Because if you let’s say you run $250 million for three quarters and you flush everything out your gross margin will kind of get to about low 30, right.

Ilan Daskal

Yeah.

Craig Berger - FBR Capital Markets

Got it. Thank you for that. And then just as a follow-up can you address how much of your manufacturing front end is in-house versus outsource and can you give us any detail on the 14th week impact for June both revenues and expenses? Thank you.

Ilan Daskal

Sure. So, Craig in the last quarter about 85% was in-house, about 15% was externally. And obviously, we are still – we still have the same plan to expand the outsource portion, and as Oleg mentioned, to get in the front end to about the 50-50 mix and on the back end about 70 external and 30 internal.

Oleg Khaykin

For us too, as you know we have announced we are resizing our UK 6-inch fab. We are well on schedule to do that, but for us to truly shutdown this building, which is really when the savings start coming in. We need to transfer a number of technologies to the foundries, and we are currently in the process of our transfer as we speak.

Ilan Daskal

And then to your second question Craig for June there would be about $4 million higher in the OpEx as a result of the 14 weeks. It’s not one-to-one to the extra week. I mean, the extra week if you extrapolate it, it’s about $5.5 million, but not everything will flow through that one week. So, we estimated an additional $4 million for the OpEx for that extra week.

Craig Berger - FBR Capital Markets

And revenues?

Ilan Daskal

So, we do not guide yet for the revenue for June, but I did indicate that we believe that gross margin will be higher by about 1% from March.

Craig Berger - FBR Capital Markets

I understand. I am just asking do we bake in an extra 7% for the extra week to the revenue line for June regardless of…

Ilan Daskal

Well, from a dollar perspective?

Craig Berger - FBR Capital Markets

Yes.

Ilan Daskal

So, generally yes, but again we don’t guide yet exactly what would be the number itself right?

Oleg Khaykin

Yeah, I mean Craig as you know, I mean, we provide guidance for three months in judging from what we see the momentum in terms of our bookings into the June quarter. June quarter does appear to shape up at this point in time as a very robust quarter. So, I mean we are not playing games with boosting revenue, with having an extra week here and there. So, if you want for your modeling, just take the linear estimate for the regular quarter end, linearize it up.

Craig Berger - FBR Capital Markets

Thank you so much.

Ilan Daskal

Thank you.

Operator

Your next question comes from the line of Stephen Chin with UBS.

Stephen Chin - UBS

Hi, thanks for taking my questions. My first one is regarding channel distributor demand, can you talk a little bit about so far quarter-to-date if the improvement in January demand, if that’s also showing up in terms of sell-through being greater than sell-in currently?

Oleg Khaykin

Yes. Steve, I mean, I was actually in Asia two weeks ago, week and a half ago, and I visited all of my major distributors across the board, they have pretty much focused on liquidating as much as possible. And right now depending on their feel for risk, they are sitting and waiting to place the orders. And with the Chinese New Year coming in though a lot of them think, hey we’ll wait until after that, but we actually had a few of them start placing orders ahead of time, because they feel the March maybe a little bit stronger than they expect. But that said, they are sitting on fairly lean levels of inventory and we tell them very openly where we do have inventory and where we don’t have inventory. And I think they are clearly realizing and it’s not only us, I mean I told them also about our competitors. Across the board, they are sitting on fairly low levels of inventories at the current volume. So, to the extent, you have any kind of reasonable demand uptick plus 5% to 8%, the weeks of inventory will dwindle very rapidly and lead times will expand. So, I think from that perspective I feel pretty comfortable about distributor inventories.

Stephen Chin - UBS

That’s helpful.

Oleg Khaykin

Okay.

Stephen Chin - UBS

The other question on your HiRel business, just getting some of the news recently with Boeing with the 787 program, I was wondering if that has, let’s say, any impact on the HiRel business through the aerospace channel?

Oleg Khaykin

Well, we don’t have direct supply relationship to Boeing. Now, we do know some of our customers maybe indirectly involved in 787, but it’s probably not material from our point of view in terms of revenue impact it would have on us.

Stephen Chin - UBS

Got it. Just last question if I could on taxes, I guess, Ilan, in terms of the restatement of the US, our new tax credit, does that have any positive benefit for the rest of this year, I didn’t hear any direct commentary on taxes for the rest of the fiscal year? Thanks.

Ilan Daskal

Steve, it’s not going to be a material amount for the fiscal year. And again as I guided as of next fiscal year and once we turn to profitability long-term, I believe it’s still in the mid-20s. In short-term, it’s $2 million to $3 million a quarter.

Stephen Chin - UBS

Okay, perfect. Thanks.

Ilan Daskal

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of James Schneider with Goldman Sachs.

James Schneider - Goldman Sachs

Good afternoon and thanks for taking my question. On the inventory levels, you talked about the inventories coming down just one more quarter, can you quantify what level you expect them to come down to in terms of absolute dollars. If I look back at 2009 on a similar revenue rate, they were a lot lower than where they are right now. So, I just want to get a sense of where you think they need to be on a weeks or dollars basis?

Ilan Daskal

So, Jim, I am not guiding right now for the exact amount, because eventually it’s going to depend obviously on the mix. I am not sure that it’s going to be in the magnitude of the December quarter, but it could be north of $10 million.

Oleg Khaykin

Yeah, and Jim keep in mind that our December quarter ended just before Christmas. So, our Christmas and New Year shutdowns fell into the third quarter, the fiscal quarter, the March quarter, so that obviously is also going to contribute to the inventory burn for this quarter.

James Schneider - Goldman Sachs

Got it. Can you just comment on what the target levels you are looking at either for your own internal inventories or for distributor inventories are?

Oleg Khaykin

So, for the internal, we do target about 16 weeks and that includes our HiRel business unit, which generally has higher inventory levels. And for the channel we target about 10 weeks.

James Schneider - Goldman Sachs

That’s helpful. Thanks. And then this is follow-on, you mentioned in the computing space, some of the issues that are impacting the revenues there declining substantially both the platform transition as well as just weak demand. Are there any other issues that are going on right now besides that or is there any excess inventory that your customers or any kind of market share issues we should be aware of, because this seems just generally a lot worse than the overall server market seems to be right now?

Oleg Khaykin

Well, I think the December quarter was heavily impacted. Most of the drop in our revenue in EPBU came with the end of the Romley platform shipments. So, clearly that platform had much longer life than we expected, but as of into December quarter, all the demands pretty much went away. And that’s what you saw is a drop most of the revenue was Romley going away. And in the March quarter, we have a very specific to that business unit. We have a major customer who just pushed out significant chunk of business into the June quarter. So, in that respect, EPBU had two quarters of very specific to it events, which will further reinforce to the generally softer busy environment. So, as we go for the March quarter, we expect that business unit to bottom out and see a nice snapback in the June quarter as the customer that pushed out orders comes back and number of new platforms based on Haswell are going to start going into production. So, there is going to be the additional within their sales. And then as the year progresses, we also have some very strong design win in the next generation gaming with our digital controller. That’s also going to benefit that business unit in the June quarter and then continued through the rest of the year. And that little by little, we have a nice new business in Brickland and Grantley starting to pickup, Brickland in the second half of this year and Grantley in the sometime next year. So, in that respect, when I look at that business unit, I think I expect March to be their kind of low point, then from there on we should see a very strong recovery.

James Schneider - Goldman Sachs

Thanks. That’s helpful color. And then last one just the housekeeping question for me, if I look at the R&D line you are guiding to $31 million, which is lower than it has been for sometime. If I exclude out all the one-time effects of the 14 weeks in the June quarter, is that $31 million roughly the R&D rate that we should assume going forward?

Ilan Daskal

So, we plan to take the R&D to a normalized $30 million level and we plan to hold the line at that level, excluding the one-week extra. So, on the 14 weeks, it may go up to $32 million instead of $30 million.

James Schneider - Goldman Sachs

Great, thanks so much.

Oleg Khaykin

Thank you.

Operator

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

Steve Smigie - Raymond James

Great, thanks a lot. I was hoping you could talk a little bit about and this is hard to tell us this, but if you go to the FETs in PMD, I think you talked about having the share leadership in the low-voltage FETs. Can you talk a little bit about how you see PMD evolving over the coming year, be continued to grow share there, and if that’s the case you are taking from. And I guess overall for the FET portfolio, you’ve sort of been absent at the high end, I know you are talked about having gallium nitride coming at the high end, but is that the only solution there or will you do something silicon as well?

Oleg Khaykin

Okay. Thanks, Steve. So, if you look at our low-voltage, most of our PMD low-voltage business was really focused on power supply, industrial applications, and computing. So, we haven’t really played that much in laptops, while we do have some business in that area. So, really those are the three principal markets that we continued to be driving with our low voltage and mid voltage products. It’s focused on the power supplies, the computing servers, desktops, laptops, and various industrial applications. So, in that respect, our strategy for PMD in terms of its target market segments remains unchanged. Now in terms of the one big market that we are not addressing today with our PMD business unit is our – is high voltage, so kind of 600 volts market segment it’s about $3 billion or more market segment today. And our objective is to answer that space with the 600 volt GaN product and that would be kind of the first product that we are going to introduce in the space. Now regarding other silicon things, that’s not something we are considering.

Steve Smigie - Raymond James

Okay, great. And then just as a follow-up on gallium nitrite and I guess if you addressed this, but any sort of thoughts on how that evolves through 2014, 2015 I think there are some third-party guys that you’ve been looking at that suggested 2015 was the big year. Have you seen that the big ramp-up pull forward at all. And any color on design wins you have at this point and I am sorry if you have touched on that already?

Oleg Khaykin

Well, with any fundamental and new technology, we are taking a very – what I would call a smart launch approach. We are being extra cautious and going into market with the leading consumer market customers, how fast to really ring out all the kinks out of the manufacturing process, the product design and so on. But also, it has a very good fact that the technology will become mainstream and by engineers the teardown or look at the Samsung use of mid-voltage devices in their audio products. We clearly expect to do quite a bit of marketing through publications and promotions through industry bodies educating engineers on using GaN in their designs. And clearly all it takes is the first customer to demonstrate success. And then in this industry, the followers and me-toos are come very quickly. And we have seen it at CES, the mere fact Samsung demonstrated it within couple of days, we are every major Tier 1 consumer electronics OEM knocking on our door, interested in engaging and putting – going to production as quickly as possible.

Steve Smigie - Raymond James

Okay, great. Thank you.

Oleg Khaykin

Thank you.

Operator

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

Craig Berger - FBR Capital Markets

Hi guys. Just wanted to ask on pricing and competition, what you guys are seeing there and can you also comment on capacity, there are some questions about whether there is too much discrete capacity out there following fab in production, instillations over the last few years?

Oleg Khaykin

Well, I think there is – I would probably say less from instillation of capacity. I think there is probably more underutilized capacity that was in place when the market was running at much higher level of consumption. So, you’re right, Craig, I mean there is today a lot of open capacity there because the level of demand is very low. But I think probably it’s less so for I would say Western or European, I mean North American or European manufacturing where we are seeing probably some of the most aggressive pricing and discrete is coming from the Japanese. And as you know there are several major companies there that are on the verge of bankruptcy. And I mean frankly right now they are just going out there and extending prices that probably barely cover their variable cost. So, I mean yeah while the market is weak they can probably get away with it but once supply tightens up I mean a lot of customers are not stupid they want the reliability of supply long-term. And I think a lot of that incentive will go away the moment market starts to recover.

Craig Berger - FBR Capital Markets

Got it. And anything unusual on pricing?

Oleg Khaykin

It’s really more of a spot pricing, its like for individual they don’t – the market is really seeing a permanent price reduction, its like okay for this particular opportunity we’ll extend you this rebate and that’s it. But there is really – the nice thing about it the moment supply tightens up you just eliminate that rebate, it’s this whole thing ship and debit. So, for particular opportunity you give one price, limited to particular timeframe and then you just re-price it when that timeframe expires.

Craig Berger - FBR Capital Markets

Thank you so much.

Ilan Daskal

Sure.

Operator

And at this time there are no more questions in the queue. Do you have any closing remarks?

Oleg Khaykin

Thank you very much everybody for joining us today. And we’ll look forward to speaking with you in personal over the next several weeks. Have a good day.

Operator

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

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