International Rectifier Corporation F2Q09 (Qtr End 12/31/08) Earnings Call Transcript

Feb.11.09 | About: International Rectifier (IRF)

International Rectifier Corporation (NYSE:IRF)

F2Q09 (Qtr End 12/31/08) Earnings Call Transcript

February 5, 2009 5:15 pm ET

Executives

Portia Switzer – VP, IR

Ilan Daskal – CFO

Oleg Khaykin – President and CEO

Analysts

Steve Smigie – Raymond James

Craig Hettenbach – Goldman Sachs

Stephen Chin – UBS

Craig Berger – FBR Capital Markets

Taunya Sell – Ragen MacKenzie

Operator

Good afternoon, ladies and gentlemen, and welcome. My name is Gabe, and I will be your conference operator today. At this time, I would like to welcome everyone to the International Rectifier Fiscal Second Quarter Results 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. It is now my pleasure to turn the conference over to our first speaker, Ms. Portia Switzer. Ma’am, you may begin your conference.

Portia Switzer

Thank you, operator. Good afternoon, everyone, and welcome to IR’s 2009 Fiscal Year Second Quarter Conference Call.

If you have not already read through our press release and SEC filing, they can be found on our website at www.irf.com in the investor relations section. This call is being broadcast over the Internet and can be accessed through IR’s web address. A conference call replay will also be available through February 12, 2009. With me today are Oleg Khaykin, Chief Executive Officer, and 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 10K and 10Q.

Now Ilan will discuss our most recent financials. Ilan?

Ilan Daskal

Thank you, Portia. Good afternoon and thank you for joining us.

For the second quarter of fiscal 2009, IR reported total revenue of $189.7 million. Excluding IP and Transition Services segments, our ongoing customer segment revenue was $175.8 million, down 17% sequentially from $212.1 million last quarter. The quarterly revenue decrease is attributed to the rapid decline in end market demand across all of our commercial market segments.

Our IP segment revenue for the quarter was $2.6 million and our Transitional Services revenue was $11.3 million. On a GAAP basis, gross margin was 33.9%. This is down 550 basis points from the prior quarter. Most of the difference is explained by the one-time IP revenue recognition of $18.7 million last quarter. Excluding our IP segment and Transition Services, our gross margin of our five ongoing customer segments was 36.3%.

In spite of our revenue decline, ongoing customer segment gross margin remained flat compared with the prior quarter. This was driven by a shift in our product mix, and proactive actions to reduce manufacturing costs to react to the changing market demand. On a GAAP basis, we reported a net loss of $186.1 million or $2.56 per share compared with a net loss of $4.5 million or $0.06 per share in the prior quarter, and a net income of $313,000 or $0.00 per share in the fiscal second quarter of 2008.

Our loss from continuing operations before income tax was $83.6 million. This was driven by a $48.9 million asset impairment charge for our Newport Wales fab consolidation, a $10.3 million investment impairment charge, and approximately $17.6 million in proxy contest costs, and external filing and financial report preparation assistance. In addition, we also booked a $102.5 million tax provision primarily due to reserves that have been recorded against the company’s tax assets.

R&D expenses were $24.9 million, or about 14% of our ongoing segment revenue, which was about flat in absolute dollars compared to the prior quarter. Selling and administrative expenses were approximately $61.6 million. Of this, approximately $17.6 million were related to proxy contest costs, and external filing and financial report preparation assistance. Excluding these costs, our selling and administrative expenses were approximately $44 million or 24.6% of our ongoing segment revenue for the second quarter, and down about $5 million compared with the prior quarter.

Other expense net decreased by $4.0 million from the prior quarter, primarily due to a decline in our investment impairments, which decreased from $15.2 million in the September quarter to $10.3 million in this quarter. Interest income net declined by about $5.8 million from the prior quarter, primarily due to a realized loss from the sale of marketable securities.

Our effective tax rate was a negative 123% during the fiscal second quarter due to a tax provision of approximately $102.5 million. This provision is due mainly to reserves that have been recorded against the company’s tax assets. GAAP guidelines requires reserves to be recorded against deferred tax assets when cumulative losses over the current and last two years impact the company’s ability to realize those assets.

Cash, cash equivalents and investments at the end of the second quarter were $700 million, of which $18 million was restricted cash. Our cash and cash equivalents was about $400 million. This is up about $97 million compared with last quarter. Our short-term and long-term investments are about $112 million and $170 million respectively. Included in investments are about $32.4 million in mortgage backed securities, of which approximately $4 million are agency issued, and $32.8 million are in asset backed securities. The remaining short and long-term investments are now mostly in US government and agency bonds.

During the quarter, we liquidated about $106 million, mainly in mortgage backed securities, asset backed securities and corporate debt. We continue to monitor our investment portfolio on a daily basis. Depending on various factors such as market conditions and timing, we will take appropriate actions to reduce our exposure to the mortgage backed and asset backed securities market.

As a result of the share repurchase authorized by our Board of Directors on October 27 of last year, we purchased approximately 668,000 shares of our stock worth about $7.4 million. Our outstanding share count at the end of the quarter was about 72.26 million. Inventory was $175.5 million, which was about flat compared to last quarter. That amounts to about 20 weeks, up from 17 weeks in the prior quarter. Net cash provided by operating activities during the quarter was about $9.4 million. Capital expenditures were about $6.3 million, compared to $4.8 million in the prior quarter. Depreciation and amortization expense during the quarter was $15.8 million.

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

Oleg Khaykin

Thank you, Ilan.

As you all know, we are facing one of the most challenging times in the semiconductor industry. However, we are proactively taking steps to manage the situation. Before this downturn began, we commenced a major restructuring effort within the company. While this does not make us immune to the effects of the downturn, it has allowed us to better prepare to deal with current challenges.

In the December quarter, our ongoing customer segment revenue fell 17%. We have seen demand fall in many of our customers as they reduced their demand and inventories across all of our market segments, except for our HiRel business. This has put significant pressure on our revenue, margins and factory loadings, and has required us to plan additional actions on top of our restructuring plan. We believe that these actions will enable us to succeed in the event of prolonged economic downturn. I will touch more on this shortly.

Moving on to our business units. In the Enterprise Power Business Unit, revenue dropped about 48% from last quarter. Excluding the drop off in the end of life orders that came last quarter from a leading game console supplier, the decline was about 25 to 30%. The long awaited launch of the new Thurley server platform has started to ramp. Orders have been coming in steadily this quarter and we have begun to ship against them. While we expect to ship initial volumes this quarter for Thurley, it will not make up for the significant drop in server demand by enterprise customers.

However, we believe that we are well positioned going forward. Our latest generation of products have been well accepted by our customer base and the market. We look forward to resuming growth in this business segment as the server market recovers.

Our ESP, PMD and Automotive market segments fell by about 15%, 13% and 23% respectively. While we cannot control the lack of market demand, we are positioning IR to beat the market growth rates in these segments when demand does return. We continue to invest aggressively in these areas, both in sales and R&D, and take a long term view by working directly with top-tier customers to secure design wins.

Lastly, we are pleased with our HiRel segment performance. We saw a 6% revenue growth compared with the September quarter. The HiRel business segment continues to see strong demand for high reliability power management products in commercial aviation, space and military. In addition, the market expansion opportunities with top tier OEMs in the medical devices and heavy duty industrial markets began to ramp and helped our performance during the quarter. Over the near term, we expect the HiRel market segment to fare better than our commercial market segments.

As you may have seen in a recent regulatory filing, Vishay notified us that it is terminating as of April 30, 2009, certain services that represented a majority – approximately 70% of the revenue reported under our Transition Services segment in the second fiscal quarter. Vishay has rights to transition the remaining business away from IR on 60 days notice, and we do not have visibility as to when this may occur.

The next topic I would like to address briefly is our inventory. We were able to keep our internal inventory flat in absolute dollars compared with the September quarter despite the 17% drop in revenue in our ongoing customer segments revenue. Our channel inventory also remained flat in absolute dollars compared to the last quarter while weeks increased to 17. We managed to keep the inventories flat by proactively taking down production levels.

As of the December quarter, in view of deteriorating market demand, we initiated a cost reduction effort to reduce headcount. We expect to reduce our worldwide workforce by about 850, or approximately 18% of the 2009 fiscal year compared to our 2008 fiscal year. These reductions in headcount are expected to save about $33 million on an annualized basis, when completed at the end of the 2009 fiscal year. We expect to incur severance related costs for the 2009 fiscal year of about $10 million associated with these reductions. To date, more than half of these reductions have already taken place with the remainder to be implemented during this and next quarter.

Additionally, in conjunction with our previously announced manufacturing cost reduction plan, we are consolidating our Newport fab, which is expected to conclude at the end of calendar 2009. The Newport consolidation is expected to save approximately $8 million per year when completed. Also, we are planning to close our El Segundo fab and consolidate its production capacity to our Temecula fab. We expect to complete this by the end of calendar 2010.

The closure of this facility is expected to save approximately $12.7 million per year when completed. We expect to incur costs of about $20 million for both facilities over the next two years. Near term visibility remains poor. In the March quarter, we expect ongoing customer segments revenue, excluding IP and Transitional Services, to be between $115 million and $150 million.

In conclusion, the industry conditions are what they are. The demand is what it is. There is not much we can do about macroeconomic forces. However, our goal remains to continue to strengthen IR’s leadership in the industry and position the company to be successful when demand does return. We continue to focus on our R&D efforts, design wins with industry leaders, and on other factors we can control while reducing costs, boosting operating efficiencies, and managing our balance sheet. Our objective is to emerge in a stronger competitive position as markets recover.

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

Question-and-Answer-Session

Operator

(Operator instructions) Our first question comes from the line of Steve Smigie with Raymond James. Sir, you have the floor.

Steve Smigie – Raymond James

Great, thank you very much. I was hoping you could go through the cash balance a little bit more. I think you took a $10 million impairment there, but I know I think the last quarter you indicated maybe there were up to $100 million at risk. So does that mean the other $90 million is safe? And I know you did buybacks. It seems like there's a lot of cash transactions. So if you could sort of walk through that a little bit.

Ilan Daskal

Yes. Hi, Steve. We still have risky investments like MBSs and ABS in our portfolio. We did sell some of those. I can tell you that we have approximately $75 million remaining on the balance sheet of the MBSs, ABSs, and corporate bonds, of which about $61 million are categorized as level 3.

Steve Smigie – Raymond James

Okay. So that's – so basically it's sort of like you had $75 million, you wrote off $10 million, so it would've been $85 million/$15 million. You're sort of in the clear. Then you've got the $61 million there still at risk. Is that sort of –?

Ilan Daskal

No. We did not liquidate $106 million overall. $10 million is an impairment for the remaining – it's already an impairment that we took for the remaining balance.

Steve Smigie – Raymond James

So – and then there's still about $61 million at risk?

Ilan Daskal

There is $61 million in level 3, and there is I would say approximately $75 million overall risk there.

Steve Smigie – Raymond James

Thank you. With regards to the $33 million in savings, is that sort of a conservative estimate? It seems like you guys are being pretty aggressive and trying to do the right thing in a tough time. Is it – are you being a little bit conservative there? It seems like you could potentially get some more savings out of that.

Oleg Khaykin

Well, the $33 million in annualized savings is related to the 850 headcount. Okay? And that's about 18% of our worldwide workforce. Remember, a lot of these positions are in the manufacturing in countries like Mexico. So in some cases, not all of them are high value salary individuals.

Steve Smigie – Raymond James

Okay. That makes sense.

Ilan Daskal

So that's the purely salary and benefits reduction per year.

Steve Smigie – Raymond James

Okay, and last one, and I will let somebody else jump in. It's just, what does R&D and SG&A look like going here into this next quarter? Could you just give us some guidance on that?

Oleg Khaykin

Well, we're not providing forward guidance on R&D and SG&A. But clearly as we outlined, we are committed to continue investing in our R&D to maintain competitive position, and I think I did mention that part of our headcount reduction includes SG&A. So we obviously continue to look for ways to reduce those costs.

Steve Smigie – Raymond James

Okay. Well I guess on the SG&A, you had like a $17.6 million charge I think you wrote off, so can I just take whatever you guys you had on your income statement, back that $17.6 million out, and that's sort of what the run rate roughly is? And then you have your reductions after that, and whatever you're going to do. Is that sort of the way to think about it?

Ilan Daskal

Some of the 17.6 will not recur. They are proxy related. And some of them will still probably – will continue to appear next quarter. That's part of our filing support, etc.

Oleg Khaykin

But I think in Ilan’s statements, he did point out that backing them out there is about $44 million a quarter remaining as G&A, and clearly we're looking for ways to improve that further.

Steve Smigie – Raymond James

Okay. Great, thank you.

Oleg Khaykin

Okay.

Operator

Okay. Our next question comes from Craig Hettenbach with Goldman Sachs. You have the floor.

Craig Hettenbach – Goldman Sachs

Thank you. Oleg, can you provide any color in terms of the customer inventory burn, just what you're shipping into channel and what you think your customers are burning off, how far you think we are along in the process here?

Oleg Khaykin

Well, you know, it's – boy, I would love to have more insight into what's going on, but clearly based on our discussions, as the demand has come down significantly last quarter, a number of customers found out that the inventory they had for the near term is actually more than enough for them to last them up to two quarters. So clearly they continue to burn what they've got. One of the areas where we have seen significant impact from that was the Enterprise Power. As I mentioned earlier in prior calls, this quarter is the beginning of the transition from the prior generation of servers to the new. So there was obviously some inventory in the channel as our customers were planning to continue shipping the older generation.

As the demand dropped, we literally saw most of these – demand for those products evaporate. And even though we're seeing demand for the new generation now starting to come in, it's still in the very early stages and not enough to offset that. And some of the other products – it's really a combination of – it's kind of chasing the dropping market. And particularly if you look at Automotive, there was clearly inventory in the channel, but our Automotive market just continues to deteriorate. So even if they burn off the inventory, the demand is dropping even further, thus extending the burn off period for maybe one or two more quarters there, I'm not really sure about.

On the industrial and kind of appliances market, typically March quarter is one of their busier quarters. So typically we see a lot of upside orders. If I look at our demand today, clearly we're not registering as much upside, so it leads me to believe that there is enough inventory there and our customers, I mean even the ones we talk to, are – just plain don't know what the ultimate market demand is going to be.

And looking at the distribution channel, their situation is even more complicated. In addition to having obviously inventory and burning it off, many of them are continuing to see inventory sell-off as the way to generate cash for operations. And we see in some cases the – they are relying on short lead times to sustain them through the business. And if a look at the order patterns, there's only one word to summarize it, it's just neurotic, which leads me to believe that people – the moment they see an order, they will run to you and they want the product and they want to run away, and you know, on other cases there is no demand. So it still remains – visibility remains very poor in that respect.

Craig Hettenbach – Goldman Sachs

Okay. Great. And then if I could just follow up, you mentioned that HiRel has performed well. Do you think at some point it will catch up and that will slow, or do you think it could continue to kind of power through the current environment?

Oleg Khaykin

Well, the nature of HiRel markets is such that it's based on the programs that have been funded well in advance, so clearly, at least in the foreseeable future, the expectations are that these programs will continue to ship, but as – my guess is as anybody else's guess. I would imagine if economy is really bad and the budgets get cut back, eventually that business segment should see challenges as well. But it probably has a much greater lag factor than the rest of the industry.

Craig Hettenbach – Goldman Sachs

Great, thanks so much.

Operator

Okay, our next question comes from Uche Orji with UBS. You have the floor.

Stephen Chin – UBS

This is Stephen Chin calling on behalf of the Uche. First question is a clarification on the new initiative to save costs. So the 850 employee reductions as well as the Newport, Wales and El Segundo fab closures, do you have a rough breakdown between where the savings will show up in terms of COGs versus OpEx?

Oleg Khaykin

Well, we're not breaking out those costs, but I mean clearly if I look at the facilities shut down, most of these savings are COGs related, right. So the projected savings in Newport and El Segundo of $8 million and $12.7 million are primarily going to impact the cost of goods. And that's going to be realized over the next two years, Newport before the end of this year, and El Segundo over the next 12 to 24 months, right.

Now, the savings from the headcount, I mentioned more than half – about a half of it was realized last quarter. Most of that was in manufacturing. The remainder is going to be a mix of both SG&A and manufacturing costs. So – but we're not providing the breakdown on that.

Stephen Chin – UBS

Okay. And the other question I had was in terms of the current revenue outlook, what is the current backlog coverage that you are assuming? And any color on the different geographies that you are currently selling into? So across the different product segments, are there certain geographies that may be performing better for certain product areas compared to others?

Oleg Khaykin

The fact is, we do not provide information on our backlog or the sub segments by geography or product segments. But I think in general I would even caution you in terms of taking any information from multiple sources given that the current situation is atypical. One thing, I'll just take the numbers that we typically see in our forecasting models and extrapolate. I think each segment and each forecast at this point in time has to be taken – has to be looked at in a different perspective.

Portia Switzer

Next question please? Next caller, operator?

Operator

Okay. Our next question comes from Craig Berger with FBR Capital Markets. You have the floor.

Craig Berger – FBR Capital Markets

Hey, guys. Thanks for taking my question, and nice job. So just a point of clarification, the 850 employees, you said those cost benefits were already realized in the quarter just ended, is that right?

Oleg Khaykin

Not all of them, Craig. We said about half of these reductions have taken place to date and the remainder will take place during this and next quarter. We started the program some time last quarter.

Craig Berger – FBR Capital Markets

And when do the cost savings actually roll in?

Ilan Daskal

When will they be? Or whether they were realized already?

Craig Berger – FBR Capital Markets

Are any cost savings from those actions already realized in the fourth quarter?

Ilan Daskal

Yes, some of those costs were realized already in the first two quarters, and the remaining will be realized in the next two quarters, Q3 and Q4 fiscal.

Craig Berger – FBR Capital Markets

I see. Thank you. How many of those 850 people are coming out of SG&A versus manufacturing, so we can make our own assumptions there?

Ilan Daskal

In the first two quarters, which account for more than half of the 850, the majority, the vast majority was from cost of sales. The remaining would be a mix, which we currently don't break.

Oleg Khaykin

Mix between SG&A and manufacturing.

Craig Berger – FBR Capital Markets

Okay. And can you tell us how much of the $17 million proxy contests and filing costs, is that all related to the attempted takeover, or is some of that ongoing recurring filing costs? How much is just for the proxy battle?

Ilan Daskal

The majority is the proxy battle, and a small portion of it is ongoing. That's the breakdown.

Craig Berger – FBR Capital Markets

Okay. So some analysts may exclude it and some analysts may include it because we have a good feel for what's recurring going forward. It sounds like a small bit is recurring. What is going on?

Ilan Daskal

A portion of it, Craig, will still be recurring, yes. But more than half is proxy related.

Craig Berger – FBR Capital Markets

What's going on with your share buyback?

Ilan Daskal

We continue – I mean we will continue once we will have an opening. It's an open plan, so we are subject to certain days and rules, but we will continue to execute the plan that the Board decided on, within the next few quarters based on our strategy and market conditions.

Craig Berger – FBR Capital Markets

Were you active in the calendar fourth quarter?

Ilan Daskal

In the calendar fourth quarter? Yes. I disclosed in my script and also in the press release. Do you need the details? We did buy back worth of $7.4 million, about 668,000 shares.

Craig Berger – FBR Capital Markets

Great. And then last one, on the HiRel I just had a question there as well. Oleg, who is the primary competition you are seeing in HiRel? And kind of what do your products address? What kind of products are you doing there?

Oleg Khaykin

Well, the – if I look at the primary competition in a lot of the products like space applications, it's either – it's mainly internal. Some companies have their internal folks that make the modules. In some areas there are also companies like Microsemi, but I think they're on a much smaller segment of that business. And then we also obviously have a kind of catalog HiRel part business, and there is a number of potential competitors, but not a very big number. But I would say in – for the vast majority of our kind of space products and module products, it's either internal or companies like Microsemi for our lower end products.

Craig Berger – FBR Capital Markets

Selling discretes or analog?

Oleg Khaykin

In discretes, yes.

Craig Berger – FBR Capital Markets

Thank you, thanks guys.

Operator

Your next question comes from the line of Taunya Sell with Ragen MacKenzie. You have the floor.

Taunya Sell – Ragen MacKenzie

Good quarter and a couple of questions here. Firstly, I wanted to get a sense for what some of these one-time items were in terms of the after-tax impact or a tax rate to maybe use to look at these individual items you have.

Ilan Daskal

So are you looking for the overall effective tax?

Taunya Sell – Ragen MacKenzie

Well, I'm looking for either the after-tax impact on some of the one-time costs that you guys talked about, or a tax rate to use and come up with a number on our own.

Ilan Daskal

We do not break down, Taunya, the components, but I can tell you overall I would assume that the overall effective tax rate for the year will still be negative. But we still maintain our three year strategy plan to have between 32 and 35 positive effective tax rate.

Taunya Sell – Ragen MacKenzie

Okay. Another question on the revenue number that you have for ongoing segments for last year’s March quarter, can you disclose what the revenue was last March quarter for your ongoing segment?

Ilan Daskal

Yes. Hold on. It's Q3 08.

Oleg Khaykin

The Q3. Yes, it's – Taunya, it will be disclosed with the Q. There will be a table that will give you all four quarters for last year.

Taunya Sell – Ragen MacKenzie

Okay. That will be tomorrow, right?

Oleg Khaykin

It will be disclosed tomorrow.

Taunya Sell – Ragen MacKenzie

Okay. One final question is on the linearity you guys saw in the quarter. It was pretty interesting to see some of the other competitors out there put out revision after revision, and you guys in November, granted you were a little later to report than some of the others, came in on your guidance, your sales guidance. And I was curious how you guys saw linearity throughout the December quarter and how you look at it going forward?

Oleg Khaykin

Maybe tomorrow it’s a question to the other guys.

Ilan Daskal

Well, exactly. I think – Well, I mean, I don't know what the other guys were thinking. I will tell you how we approached it. Remember when I joined the company, March of last year, we've taken a very painful step in June quarter to really clean out the channels and get the visibility. It is my firm view if you have stuffed channels with a lot of junk in there, you will never see what is coming at you and you have no visibility of true organic demand.

Having done that, we started seeing as early as September signs of trouble initially in our Automotive markets, because once you have a clear visibility of push/pull, you can then look at your like prior year patterns and see if something is going on. Well, we saw that happening. We took an assumption that things will probably trickle down to other segments. We kept a very close eye on it, and we've actually changed our production planning model to literally review the outlook every couple of days, and took wafer starts significantly below at least what was the apparent demand.

And as September came to the end and early October came about, it clearly became visible that we were right on. And given the uncertainty in the channel, we felt it was prudent to put a significant down outlook on the quarter. And I do remember when we reported, we got some criticism from some of the people that we were way too negative and our peer group was much more positive – and are you guys losing market share?

I think our insight, fortunately, was vindicated, and some of our competitors restated. Some restated more than once. So I think it really comes down to, how good is your transparency in the channel that you are doing, and in the end to some extent it’s taking a calculated risk of that you think things are going to be worse than the data suggests. And as I mentioned earlier, one has to be very careful about taking the traditional booking and the assumptions about turns in the quarter, because I think the last and this quarter was anything but typical, and one should be very careful about applying the proven rule of thumb that some people tend to keep mentioning in their calls.

Taunya Sell – Ragen MacKenzie

What about – you know, in terms of order net linearity throughout the quarter, did you see bookings – how did bookings look throughout the quarter? Was there a continuing decline in bookings throughout the quarter? And how does that fit with how much backlog you guys have relative to turns in any given quarter?

Ilan Daskal

Well, I think I used the word neurotic. It's probably a good definition of what the last quarter looked like, and I would say it's still pretty much in this quarter. There is no pattern. It's a completely stochastic process. One day somebody wants the product and then within two days says, never mind, I don't want the product. It just tells me that really the market has not reached the kind of equilibrium or steady state yet.

And in this quarter, it's somewhat challenging still because you do have a short month in February and the Chinese New Year. So clearly, many contract manufacturers are now coming back from the holiday, they are reassessing and their customers are reassessing their demand, and everybody is looking at the end market spending and demand. And I think it will still take some time. I'm not taking any predictions or linearity. We're taking a fairly, I would say, cautious view of the numbers that are coming in, and we are scrutinizing every order and second guessing many of our customers.

Taunya Sell – Ragen MacKenzie

I guess my question was more around kind of on a month by month basis, are there any trends? You said erratic, and that would suggest there aren't any trends. But have you seen month by month, even in maybe through the January quarter things getting worse, stabilizing, anything that we can latch onto here?

Ilan Daskal

Well, I think – I mean, as I said, the one trend I can say, it has been down. Aside from that, I probably will refrain from giving any characterization, because we do not normally disclose that.

Taunya Sell – Ragen MacKenzie

Okay, thanks.

Portia Switzer

Next caller please, operator?

Operator

All right. Next question comes from the line of Steve Smigie with Raymond James. Sir, you have the floor.

Steve Smigie – Raymond James

Great. Thanks for the chance to follow up. Just – and to follow up a little bit on the last person’s questions, a couple of your comparable companies reported last night, and they indicated that they thought post Chinese New Year they were starting to see orders come back a little bit. So my question is, this week, have you seen orders come back in a little bit, or increase a little bit, I guess is the better way to say it?

Oleg Khaykin

Well, Steve, unfortunately, I have to refrain from answering that question because we do not provide weekly or real time guidance. But as I said, I will still reiterate what I said earlier. I will be very cautious about taking any blimps up or down as a sign of a trend at this point in time.

Steve Smigie – Raymond James

Do you guys feel like Q1 is a likely trough quarter because you've been undershipping demand?

Oleg Khaykin

Well, it’s hard to tell. There's a lot of smarter people than me who can probably give you more visibility on that, but I think what we have is a very complex situation. It's not all entirely driven as in old days by just inventory corrections within our industry. I mean every morning when I open the paper and see more layoffs and difficulty, macroeconomic problems, clearly one has to consider the consumer spend and the disposable income as a factor as to when the bottom quarter is going to be. So at this point in time, I don't know. I mean clearly, once I start looking at my bookings and billings charts, and I see a crossover, then we will know that things have bottomed out. Until we do that, I don't want to make any projections.

Steve Smigie – Raymond James

Okay, thanks. At the midpoint of your revenue guidance range, what would – could you give like a gross margin range where you might be there? Or a gross margin target where you might be at the midpoint of your revenue range?

Oleg Khaykin

Well, as I said earlier, we don't provide the gross margin guidance. And the reason for that is not just because we don't know. But there’s many factors in here such as mix. Clearly, last quarter HiRel was a bigger component of our revenue. It has obviously inherently higher margins. So depending on the mix and – but also on our ability to continue to take out variable costs in manufacturing, there's too many moving parts to nail the gross margin forecasts.

Steve Smigie – Raymond James

Okay. Could you give an update on sort of your thoughts about how much you are doing in-house on the front end and back end now, and sort of what the – if your targets remain the same say two, three years out, whenever the ultimate targets are?

Oleg Khaykin

Yes. On the front end, I mean most of our wafers are done internally. I mean that’s – I mean that’s pretty much almost all of it, with some exceptions. On the back ends, we traditionally run 50/50, the split between in-house and outsource. Clearly as the business dropped, our percentage of outsource has come down somewhat, but we still try to provide some loading to our subcontracting partners, because we all recognize those are tough times and one needs to maintain those partners in business.

So clearly we maintain bigger share in-house at this point in time. However, our long-term model as business returns and capacity gets equated – equalized, our long-term goal is to be about 70% in-house and 30% outsourced on wafers. And the back end, 50/50, or could be – could even go down more. It all depends whether or not the pricing in the market justifies investment in internal capacity, or if pricing remains very low, it makes no sense to expand internal capacity. So it's really becomes a make verses buy decision.

Steve Smigie – Raymond James

Okay. And final question, I apologize. Assuming you can talk a little bit about the change in the tax asset, it seemed pretty significant. And what does that mean going forward?

Ilan Daskal

Yes. Basically, based on GAAP or FAS 109, we are required to, or we were required to place a reserve against all our deferred tax assets this quarter. And that is based on the cumulative loss for the current year and the prior two years. Obviously, in case the profit levels will come back, we may be able to reverse this reserve in the future.

Steve Smigie – Raymond James

Okay, thank you.

Operator

And our last question comes from Craig Berger from FBR Capital Markets. You have the floor.

Craig Berger – FBR Capital Markets

Thanks for taking the follow-up question. Guys, I just wanted to know, once you close the factories and consolidate Newport and El Segundo and whatever else you're doing, what is your sort of annual revenue capability out of your existing fab infrastructure?

Oleg Khaykin

That was good question, Craig. Unfortunately, I haven’t done the math yet on that. I mean I know how many wafers we're going to be able to do, but it's really going to become a function of what the mix will be, because there's a big spread between – in the revenue per wafer that we get. The way I would probably – a better way of thinking about it is we will probably load the highest-margin, most proprietary processes in-house first and tend to outsource older, lower revenue per wafer processes to subcontractors.

So, and that's actually how we're planning our strategy that we will have, we know which products will be the first ones to push out and which ones will remain. So probably, it will be better just to talk in terms of number of wafer capacity that we will maintain in-house rather than revenue. But I think it's probably a good exercise for us to look at, but there’s too much variance.

Craig Berger – FBR Capital Markets

Thank you.

Oleg Khaykin

Sure.

Portia Switzer

Operator, I think those are all the questions at this point in time.

Operator

Okay. This now concludes today's International Rectifier fiscal second quarter results conference call. You may now disconnect your lines.

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