International Rectifier's CEO Discusses F4Q13 Results - Earnings Call Transcript

Aug.19.13 | About: International Rectifier (IRF)

International Rectifier Corporation (NYSE:IRF)

F4Q13 Earnings Conference Call

August 19, 2013 5:00 pm ET

Executives

Oleg Khaykin - President and Chief Executive Officer

Ilan Daskal - Executive Vice President and Chief Financial Officer

Chris Toth - Executive Director, Investor Relations

Analysts

Alex Gauna - JMP Securities

Steve Smigie - Raymond James

Terence Whalen - Citi

Christopher Rolland - FBR

Gabriela Borges - Goldman Sachs

Kevin Cassidy - Stifel Nicolaus

Amit Chanda - Wells Fargo

Operator

Good afternoon. My name is Steve, and I will be your conference operator today. At this time, I would like to welcome everyone to the International Rectifier Fourth Quarter and Year-End Fiscal 2013 Results. 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 of Investor Relations, you may begin your conference.

Chris Toth

Thank you, Steven. 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 have 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 received and shipped during the quarter, level of bookings, the timing and introduction of new technologies and products, general semiconductor industry conditions and the overall economy in financial markets. In addition to these risks, we refer you to the risk factors included in our press release and in our most recent SEC filings.

I would also like to mention that in addition to reporting our GAAP financial results, we present supplemental non-GAAP financial data. A reconciliation of the non-GAAP to GAAP measures set out in our press release and discussion today can be found in the press release and on our website. We believe providing our 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, August 28, we will be attending the Jefferies 2013 Semiconductor & Hardware Summit in Chicago; and on Wednesday, September 4, we will be attending the 2013 Citi Global Technology Conference in New York City.

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 fourth quarter of fiscal 2013, which was 14 weeks rather than the customary 13 weeks, IR reported revenue of $276.5 million, which was a 23% increase from the prior quarter and a 3% increase from the fourth quarter of fiscal year 2012. Revenue in the June quarter were normalized to a 13-week basis, was equivalent to approximately $257 million or a 15% increase sequentially.

GAAP gross margin increased to 30% in the quarter, at the high end of our guidance. The gross margin increase was primarily due to higher utilization and better mix. Non-GAAP gross margin was 30.2% and excluded $417,000 of accelerated depreciation associated with the resizing of our Newport, Wales fab. Overall, GAAP net loss was $6.1 million or $0.09 per share for the quarter. This compares with GAAP net loss of $21.2 million or $0.31 per share in the prior quarter and GAAP net loss of $68.2 million or $0.99 per share in the prior year quarter.

Non-GAAP net loss was $1.2 million or $0.02 per share for the quarter. Non-GAAP net loss excluded accelerated depreciation of $417,000, asset impairment, restructuring, and other charges of $2.2 million, amortization of intangibles of $1.6 million, and a net tax charge of $664,000. This compares with a non-GAAP net loss of $19.8 million or $0.29 per share in the March quarter and a non-GAAP net loss of $10.5 million or $0.15 per share in the June quarter of last year.

Moving on to operating expenses; non-GAAP operating expenses, which include R&D and SG&A, were $79 million. This amount had an extra week of expenses including salary, wages and benefits. R&D expense was $32.6 million and represented 11.8% of revenue. SG&A expenses were $46.3 million and represented 16.8% of revenue. Amortization of acquisition related intangibles was $1.6 million.

During the quarter, we recorded $2.2 million in asset impairment, restructuring and other charges. Excluding the accelerated depreciation, asset impairment, restructuring and other charges, and amortization of intangibles, operating income was $4.5 million. GAAP tax for the quarter was a $5.9 million expense. Non-GAAP tax expense for the quarter was $5.2 million and excluded discrete tax items and net tax effect on one-time items. Total cash, cash equivalents and investments increased by $52.5 million to $455.9 million at the end of the fourth quarter, which included $1.3 million of restricted cash.

During the quarter, inventory decreased by one week to 16.8 weeks and remained about flat in dollars at $232.3 million. In the June quarter, we generated $57.8 million in cash from operating activities, mainly due to improved working capital. Cash capital expenditure for the quarter was $11.7 million or 4.2% of revenue. Free cash flow was $46.1 million. Depreciation and amortization expense was $22.6 million and stock-based compensation was $5.1 million. Total shares outstanding increased 1.4% in the quarter to 70.4 million shares, primarily due to the exercise of expiring employee stock options and the issuance of restricted stock units to employees.

Now, moving on to our outlook. We currently expect revenue for the September quarter, which is a standard 13 week period, to be between $260 million and $268 million. This represents a 2.5% sequential increase, at the guidance midpoint, when compared to a normalized 13-week June quarter. For this projected revenue range, we currently estimate non-GAAP gross margin to be between 33.2% and 34.2%. GAAP gross margin in the September quarter is estimated to be between 33% and 34%. We expect our combined R&D and SG&A to be about $75 million. Amortization of acquisition related intangibles is expected to be about $1.6 million.

For the September quarter, we expect approximately $1 million to $2 million in restructuring and other charges resulting from the resizing of our manufacturing facilities. Other expense net is expected to be about $1 million. Non-GAAP tax expense for the quarter is expected to be between $3 million and $4 million, mainly due to foreign tax accruals which excludes about $3.5 million of discrete items. And finally for the September quarter, we expect our cash capital expenditure to be about $17 million.

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

Oleg Khaykin

Thank you, Ilan. We had a strong June quarter as revenue exceeded our expectations, growing 15% sequentially on a normalized 13 week basis. Improvement in revenue was broad-based as all five of our business units posted solid growth. Gross margin also rebounded nicely as a result of improving business demand, higher utilization and mix.

We generated $57.8 million in cash through operating activities and increased our cash balance by over $50 million. Both our bookings and backlog remain stable at this time and we expect all our business units to be up slightly in the September quarter on a normalized 13-week basis. While it is too early to comment on the December quarter, current visibility indicates that the second half of this calendar year is shaping up to be better than last year.

Geographically for the June quarter, Asia increased significantly as we saw broad-based strength across all end markets. Japan exhibited strong revenue growth in both industrial and automotive end markets and both North America and Europe increased nicely as we saw continued stabilization and inventory replenishment in both automotive and industrial.

Moving on to our business units. As expected, Enterprise Power business unit revenue rebounded significantly to $29.4 million. The increase was mainly due to Haswell share gains and program ramps in the computing market and a nice pickup in the server market due to several Romley program launches. We also saw strong demand from the communications infrastructure market. And lastly, we began shipping into the new Tier 1 gaming platform.

For September, we expect continued growth. Our share in high-end computing platforms is expected to increase as Haswell continues to ramp. In addition, design wins in gaming and on the Brickland server platform are also expected to contribute. For calendar 2014, we remain well-positioned on the Grantley server platform, as Tier 1 customers adapt our digital power management solutions. Design win activity has been strong as we continue to remain confident in significant share gains relative to Romley.

I would also like to note that we have received our first reference design win based on our digital power management platform for Broadwell in high-performance computing that is scheduled to ramp in 2014. We continue to see our available market increasing in computing and we expect additional share gains next calendar year.

Our Power Management Devices business unit revenue increased significantly to $108.5 million in June quarter. The increase was broad-based in both the industrial and power supply end markets across all geographies. Overall, we see lead times slowly trending upwards, pricing pressure remaining minimal, and overall business demand remaining stable.

Our Energy-Saving Products business unit revenue rebounded to $52.1 million. We continue to see a recovery in orders in both industrial and appliance end markets, including China. The ramp of our new micro-modules that target lower power motors is progressing nicely and is ahead of our early expectations. This is a new market for us and the addition of these products significantly expands our addressable market.

Our Automotive Products business unit revenue increased to a record $36.3 million. Growth was driven by broad market strength and continued new product ramps. The automotive end market continues to remain strong for us and your design win activity is robust.

Lastly, our HiRel business unit revenue rebounded to $49.8 million. Gross margins in this business also recovered nicely during the quarter. We expect September revenue to be about flat on the absolute basis, and up on normalized basis with gross margins recovering to historical levels over the next several quarters. Bookings and backlog remained stable in all of our HiRel markets and we continue to see steady long-term growth in our business.

Now, an update on channel inventory. During the June quarter, sell through increased 19% compared to the March quarter, channel inventory remained about flat, and overall weeks were reduced to below 11 weeks. Although lead times continue to remain normal, we see a slight upward trend. Factory utilization increased into the 80% range and inventory levels are close to our target of 16 weeks. Overall, we feel comfortable that our production level is roughly in line with product demand.

Now, I'd like to provide a few updates on some of our ongoing activities. The June quarter marked a milestone for our GaN Technology as we transition into the commercialization phase. In May, we began shipping our mid-voltage GaN products to a Tier 1 customer for a high-end home theater system. Interest in our mid-voltage products for home theater systems is strong and we expect increasing penetration into this market. In high-voltage, we continue to sell our GaN power devices to Tier 1 customers and expect to launch commercial products towards the end of the calendar year. Also, during the quarter, we entered into a settlement agreement in a long-running dispute with Efficient Power Conversion Corporation that provides for future royalty payments to IR.

In operations, over the past several quarters, we took a number of strategic actions to reduce our manufacturing footprint, optimize our supply chain, and qualify more external capacity. Our El Segundo facility was shut down in March and we continue to – completed the first phase of Newport fab resizing. With these restructuring actions, fixed cost and internal capacity have decreased helping to drive utilization higher for the remaining manufacturing operations. This has been one of the drivers behind our gross margin rebound.

In addition, as part of shifting our long-term front-end manufacturing capacity to 50% [indiscernible], we are consolidating some of our proprietary processes, such as ultra thin wafer fabrication, into a small facility in Singapore. Once operational, wafers from both foundry and internal fabs will go to our Singapore facility for final processing. We expect to start production in this facility during the June quarter of 2014. The investment in the Singapore facility is part of our total CapEx for the Company which is expected to be below 7% of revenue in our 2014 fiscal year. Over this next three quarters, we expect start-up cost to be about $2 million to $3 million per quarter.

In closing, by finishing the majority of our operational restructuring and maintaining discipline in our operating expenses, we are seeing strong leverage in our margins and are expecting to return to profitability in the September quarter. We remain well-positioned for growth in all of our business segments driven by our core technology platforms and our new operational footprint. We are establishing an attractive operating model that will provide future growth and strong financial leverage.

This concludes our prepared remarks and I would now like to open it to Q&A. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Alex Gauna from JMP Securities. Your line is open.

Alex Gauna - JMP Securities

Congratulations on the progress getting back to profitability. Oleg, I know you mentioned you expected better seasonal results in the second half of the year, can you kind of characterize, I know you're not guiding, but characterize what you would consider a normal December quarter and maybe some color behind what you think might be better than normal seasonality in that quarter?

Oleg Khaykin

There's a couple of things. When I look at all of this information, it's a bit like reading [indiscernible], you look at multiple data points and derive what the output might be. The first one I would say is if we look at our POS sales today, they are moving very briskly into the channel. Also looking at some of our direct customers who are already planning for December, we do not detect any type of major slowdown activities as we saw last year at this time during the year. And also, we are not seeing a major de-booking that we absorbed at the same time of last year as the December quarter is being shaping up.

So taking into account that brisk POS sales, fairly lean channel inventories, no significant notice of decline in production plan for December, at least as far as we are seeing at this point in time, it leads us to believe that December quarter will be a lot healthier than we observed in the last two years. But also on that point I would add, is because we are seeing so much caution in restocking inventory and we expect even inventories in the channels to decrease further by the end of the quarter, just a fundamental healthier December quarter may result in a lot of expediting and last minute order placement in the September quarter.

Alex Gauna - JMP Securities

So, Oleg, if I understand you correctly, the further inventory leanness in the channel that you would expect would get you to the point where you could benefit from expedite, and where are you with your own internal inventory levels, are they where you want them now or do those need to, will you expect them to come down a little further?

Oleg Khaykin

We are getting very close to the levels where we would want them to be. I mean given that, depending on the product, the replacement cycle is anywhere between 8 to 12 weeks. And what we're seeing now is some of the products are already – we are noticing some of the products are already seeing their lead times expanding as demand picks up. And one of the things we are noticing is there is hesitancy on the part of the channel to place the orders, and then once they get the order from their customers, it's a scramble which leads us to believe – and also we're looking into the channel inventories, there is just not much slack available there.

Alex Gauna - JMP Securities

One more if I could, you mentioned some design wins for Broadwell now and also your optimism around Grantley, do you get the sense that timetables are pulling in for Intel and essentially leading to some better share gain opportunities for you sooner rather than later?

Oleg Khaykin

I do not know but clearly I would imagine what my peers at Intel are thinking. I mean clearly the sooner they can get those products to market, the better it is for them. So to the extent they can pull it in, it's going to be obviously good news for us. And even though there has been a lot of talk, and we all know that PC market as overall has been shrinking, clearly getting new products to the market, any company [indiscernible] is clearly trying to do their best to accelerate new products to market. But also if you start with a fairly small base, and you win the business, maybe in the market that is shrinking but still a very big market, it's still a very attractive place to be depending on your pasture.

Alex Gauna - JMP Securities

Thanks very much, that's helpful.

Operator

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

Steve Smigie - Raymond James

Congratulations on the good numbers here and the really nice gross margin guidance. On that gross margin topic, I was hoping if you could talk a little bit about how we might think about that progression going forward, I mean you have obviously utilization picked up, I think it was 80 or so you said, will that go into 90s suggesting sort of 100 basis points more over the next few quarters, how should we think about that?

Ilan Daskal

Steve, for September, obviously we enjoyed the benefit of the higher utilization and the higher revenue. You need to take also into account the mix that we had in the expanded model of the outsourced manufacturing footprint, which will continue to benefit us as revenue continues to grow. And if you look at the target model, after the September quarter, we get about another 5, 6 points to get to our target model which will continue to be part of the mix and utilization and revenue growth. I mean these will continue to be the same factors that will get us to the target model.

Steve Smigie - Raymond James

Okay. And can you update us what revenue level you'll be at, sort of you consider to be your target gross margin, I think it was $1.25 billion or something like that?

Ilan Daskal

So it depends at the end of the day, not only on the revenue, it depends on the mix and it also depends on what would be the mix between the internal and external manufacturing. So we don't want here to guide on specific revenue that will get us to that level since it's going to be – it can be a wider range of revenue.

Steve Smigie - Raymond James

Okay, thanks. On the operating expense, $70 million to $75 million you have guided in September, I think you said committed to seeing somewhere close to that level for a while, can you just update on what revenue level you get before you have to start pushing that OpEx up above $75 million?

Oleg Khaykin

I think we said between $300 million and $315 million is kind of the level for which we are excited up and we think we can keep our OpEx at about $75 million up until that level, and really what pushes it beyond that is mainly the commissions will get bigger, so the number will go up slightly, but we feel we can keep that model up to about $1.2 billion, $1.25 billion run rate.

Ilan Daskal

Alright, so we plan to hold the line at $75 million, and we will include in that $75 million all the variable components that do change, as bonus, as rep commissions, et cetera.

Oleg Khaykin

Stock compensation.

Steve Smigie - Raymond James

Great. If I could just sneak one last one in, with regard to the Singapore cost, you mentioned some additional cost, does that meaningfully impact whatever gross margin ramp we have seen to have started here or is that kind of part of normal CapEx or maintenance CapEx?

Oleg Khaykin

Steve, this is all part of our guidance, it is already baked in there, and it's also baked into our CapEx. What we are doing, as you know, we announced we are in the process of scaling down on our 6-inch fab in UKs, our back of the line operations in [indiscernible] and things like that, are in that location for us to fully complete it, we need to move it somewhere, but placing it in Singapore we put it essentially logistically located, so all the wafers from our both internal and external fabs can go there for final processing, and then it's also in very close proximity to our assembly and testing of wafers. So that's pretty much part of our ongoing plan of operations and all the costs and CapEx are baked in our gross margin and CapEx guidance for 2014.

Ilan Daskal

But generally I can add to that Steve that for the next three quarters, we will have some start-up costs in the range of $2 million to $3 million per quarter and then we project that it's going to be fully operational.

Steve Smigie - Raymond James

Okay, thank you

Operator

Next question comes from the line of Terence Whalen from Citi.

Terence Whalen - Citi

This is Terence Whalen from Citigroup. Thanks for taking the question and congratulations on the results. The first question that I have is regarding the lag effect of higher utilization on gross margin, specifically if we would assume roughly flat December quarter, I was wondering what sort of carry-through effect we would see on gross margin given the improving utilization from June to September? So again, if we were to see a flat December quarter in terms of revenue sequentially, what would the gross margin do sequentially in December?

Ilan Daskal

Terence, first, there is another kind of factor here to the mix of products, there's another kind of factor that you have to take into account, but assuming a similar mix and a similar revenue, there will be an additions of positive fall through from the September quarter increased utilization through December. It's not going to be at the same magnitude as we enjoyed from June to September, but it's at least 1 percentage point.

Terence Whalen - Citi

Okay, thank you, Ilan. The second question I have is just wanted to sort of take a step back fundamentally and understand how – conceptually interpret what's going on here, because on one hand we're seeing distributors not take on additional inventory yet we are seeing their point of sales grow considerably at a level which implies that their end customers are taking on inventory. Just within the context of how do you interact with the channel, how would you characterize sort of the behavior given that it's very large number in terms of the point of sales that we are seeing even adjusting for the weeks?

Oleg Khaykin

This is Oleg, let me take this question. I'll share with you my perspective, how I characterize the behavior. As you remember in last two years, December quarter has been down significantly from September quarter across all segments. So some people are assessing here we had start-up cyclicality even though we know it was driven by very much two separate discrete macroeconomic events. But as I said, twice burnt, third time shy, a lot of distributors are being very weary of what will happen this December and while we are seeing a significant gap between the POS and what they are currently reordering in terms of POP, none of them are seeing any degradation in business or any kind of pushback from customers or push out by customers. So in fact in a way I kind of see it as a herd mentality that says, hey, nobody else is restocking, I'm not going to restock until I get a clear signal from my customers that they are placing the orders.

Also, what that means that once the orders do come in, it will be a mad rush to fulfil these orders because if you don't have the inventories, you're not going to get the orders given to you by contract manufacturers. So it's building our predicament and actually most recently we've been seeing some orders now coming in as we're getting close to the end of August and I expect in the December quarter, market may turn down, in the next four, five weeks, we are going to see people breaking the [indiscernible] and placing replacement others, otherwise I don't see how they're going to meet their deliveries in the December quarter.

Terence Whalen - Citi

Okay, that's very helpful. Thank you, Oleg. So it sounds like if demand to even be flat in December, the prospects of seeing some restocking then are relatively high, is that the correct interpretation?

Oleg Khaykin

If actually demand is flat in December, I think there will be a lot of pain in the channel trying to meet it, because I mean I don't think anybody today is sitting on a lot of finished goods inventory ready to just unload it, because just myself looking at our peers, and nobody is sitting on massive pile of inventory as we had a year ago for example.

Terence Whalen - Citi

Okay, that's very helpful. And just one last one if I could for Ilan, obviously Ilan we have seen you guys do a great job on the front-end consolidation and sort of make progress a little bit sooner than expected on that front, could you just remind us what your target gross margin is in terms of the long-term model, perhaps in light of the recent progress you have made?

Ilan Daskal

Sure, Terence. So the gross margin target long-term remains in the low 40s. If you look at the September quarter, we will be closer to the mid-30s, I mean towards the second half of the calendar year, and from there as I mentioned earlier, a combination of improved revenue, higher utilization, better absorption, and mix, that will get us there, and if you think also about the manufacturing efficiencies that we have implemented will contribute as well. And then when we get to our new target model of the fab activity to expand it to 50%-50%, internal versus external, will get us to the low 40%.

Terence Whalen - Citi

Wonderful, thanks, and best of luck.

Operator

Your next question comes from the line of Christopher Rolland from FBR. Your line is open.

Christopher Rolland - FBR

I think there was some chatter about flat booking trends from June to September. So, obviously this was some outperformance here in June and then we have a small tick down on an absolute basis. Was there any sort of a disruption in linearity there or were there orders that were pulled into this quarter or am I understanding that correctly?

Oleg Khaykin

The bookings, remember there is a lot of vacations right now in Europe and Asia, so on any given week you may have a little lower but overall the bookings are trending, if I would look at it, they are trending fine but given the POS, they should be higher if you just tend to replace it. So the mere fact to me is that there is a growing gap between what I see is POS and the POP, it leads me to believe that the bookings are being understated or being under-booked, the product of being under-booked there rather than how they should be.

Christopher Rolland - FBR

Okay. Also cash flow generation fantastic in the quarter, CapEx fantastic here, should we think about that 7% of sales as a sort of cap here, can we do better than that, and what are your plans for either to return or redeploy cash?

Ilan Daskal

Chris, we have our buybacks and we still have about $35 million left on the authorized plan by the Board, and if you look kind of at all four we have done so far, we were very opportunistic in the marketplace and we did manage to reduce very nicely the share count overall with a very nice average buying price. Looking forward, obviously we will continue the buyback and we will continue to be opportunistic. If needed, once we deplete the $35 million remaining, or about $35 million, we may go back to the Board and seek for an additional amount for the buyback.

Oleg Khaykin

And in general, we periodically revisit our capital allocation model with the Board, and clearly things are going well and we continue to generate cash in excess of our needs. There are a number of vehicles that we can consider but buyback so far has been our preferred instrument. Regarding your other question on CapEx, I think 7% is what we guided. Clearly much will depend on how the year shapes out but we believe 7% is very reasonable for the year.

Ilan Daskal

And Chris, 7% was the overall for the year. There would be some quarters that are a bit below, some quarters may be at 7% or so, or above 7%, but for the year, we target to be below the 7%.

Christopher Rolland - FBR

Okay, and one more if I could, remind us what normal lead times were, and since you guys have some expediting rush orders, do you think we might see some pricing expansion for you guys?

Oleg Khaykin

So, I mean lead times vary, so for ICs it's about 12 weeks, for discrete it's about 8 weeks, and generally if you start from scratch, to the extent we have die bank inventory, lead times could be shorter, to the extent we have finished goods, lead times could be shorter yet. At this point in time pretty much the finished goods inventory has been all about depleted and the die banks are rapidly declining as well. So more and more orders now have to go through the complete lead time cycle. And I think we're seeing the same pattern across our competitors as well. So, I'll say lead time is a blended average depending on what product it is, but it is shifting more and more towards complete new wafer start.

Christopher Rolland - FBR

And on pricing?

Oleg Khaykin

On pricing, clearly as inventories get depleted and lead times get expanded and to the extent there is a shortage of product in the channel, the pricing gets stronger, and in fact as we said in our statements, we have seen minimal pricing pressure last quarter and clearly as economy continues to recover, we may see opportunities for selective price increases.

Operator

Your next question comes from the line of James Schneider with Goldman Sachs. Your line is open.

Gabriela Borges - Goldman Sachs

This is Gabriela Borges on behalf James. Congratulations on the strong results. I want to follow-up on the commentary on [indiscernible] Enterprise Power space, could you provide us with some more details on the competitor environment in this circle, and how should we be thinking about the potential magnitude of [indiscernible] over the next several quarters?

Oleg Khaykin

You're talking about servers, sorry?

Gabriela Borges - Goldman Sachs

Yes, servers, Enterprise Power and servers.

Oleg Khaykin

Enterprise Power, okay. I think as we talked about it, currently the server generation that is shipping is Romley and we have had lower share in Romley, as we had in the previous generation, but really what's going down this summer is the award of the Grantley generation of servers which will start shipping middle of next year, and in that particular generation we have taken back significant share and we are very well-positioned as that product starts shipping.

In addition, we do have share in Brickland and some of the Romley platforms there are starting to ramp second half of this year and clearly that continues to contribute to our revenue ramp in the second half of this year. So I would say, if I kind of look at the next 12 months for that business unit, we feel very positive about not only the revenue growth but also the mix as we get significantly greater share of the enterprise segment like servers and routers, higher-margin business in general versus the computing segment.

Gabriela Borges - Goldman Sachs

That's helpful, thank you. And then just as a housekeeping question as a follow-up if I may, how should we be thinking about modeling interest income and other expense going forward?

Ilan Daskal

So it will continue to be about $1 million per quarter, that's what we see so far.

Operator

[Tim Allen with WHD investments] (ph). Your line is open.

Unidentified Analyst

Just a longer-term question, if you look five years ago when you guys took over and it's been a lot of expansion you've seen in the Company since then, so if you look forward to the point at which you see the Company evolving at a normal rate versus the accelerated pace of change over the last five years, and then you look back to when you took over, how far along are you on the transformation, and I have asked this question before but there's obviously been lots of changes in your trajectory, taking assets you didn't think you were going to use that much and then using them for a while then realizing and moving to the asset mix strategy, et cetera, so just in terms of the actual percent transformation that the Company has actually undergone and the manifestation of that change, where are we along that line?

Oleg Khaykin

Sure. Now as you can imagine, last five years were anything but normal, right. I mean I don't remember the last time in the semiconductor industry you had this near economic collapse and then a massive recession and in betw4een there is a crazy growth spark, right. So I mean when we started our transformation in 2008, 2009, we did plan all along to exit some of our older fabs but the downturn was so short and the upturn was so severe, we didn't have enough time to plan and execute on technology transfers and developments of the foundry capacity. However, over the last three, four years, even during the good times, we were developing the foundry strategy and developing foundry partnerships and transferring technology and that's why at this point in time we're in much better shape to execute on this manufacturing transformation.

In terms of where we are, I would say we are probably within 12 to 18 months of completing it and that's really what it takes to complete the technology transfer for our products that run in our U.K. 6-inch fab, and once that's done I think we will probably get to the point where I feel very comfortable for the next several years in terms of pursuing further growth, both in terms of the mix in internal manufacturing and external manufacturing, and in terms of where we are in our respective business unit strategy and product growth.

Unidentified Analyst

Oleg, would the timeline of that be commensurate with the actual sort of percentage of completion, if you will, i.e. 12 to 18 months would mean you are 75% or 80% along towards being the company you expect to be, is that a good numerical or ratio description of where you are, where you are going to be verses where you were?

Oleg Khaykin

I mean versus – what I'm saying 12 to 18 months, that's the absolute figure in terms of how long it takes Company to transfer remaining products and qualify them, right. Now clearly if you ask me in a scope of five years, I would say probably about 80% we are there on a big picture basis. On a more tactical basis, it's 12 months to 18 months to complete the manufacturing, because as a business unit level, we have already implemented the strategy we wanted to implement, at the product development level, we already implemented the product development strategy we wanted to implement, at the customer positioning level, we are already there. The only piece remaining is really the operational transformation, and once that's completed, that will be kind of one of the last pieces to fall in place, and of course the next last piece for us would be commercialization and ramp-up in our gallium nitride technology.

Unidentified Analyst

Just a last take on that, so 80% of the way there in terms of the Company's transformation, in terms of how that manifests say on the income statement, given that there is probably a lag between internal changes and the accrual financials, what would you say that the current financials show in terms of how far you are along that transformation?

Oleg Khaykin

I would separate between the strategic transformation and the financial, right, because current financials are more a function of the last 12 months macroeconomic environment, right.

Unidentified Analyst

Yes, but if you adjusted those to the macroeconomic fluctuations?

Oleg Khaykin

So, if I get back to where we were before the downturn, I mean we actually hit the operating model that was very attractive, and actually with the transformation that operating model actually gets even better. But I think for us to truly realize full benefit, we need to get the revenue up to $300 million a quarter and above, and volume obviously has significant leverage on our financial results. So we have all the right planning, we have all the right structures in place, and now it's just we would do great, we had another one to two years of steady financial, steady economic growth, without any major government incentives or fed incentives or anything like that that can skew the recovery one way or the other.

Ilan Daskal

And Tim, another financial indicator is CapEx. I mean it used to be in the last five years about 10% to 15%, and we are now guiding below 7% which means that we are at the tail-end of the investment that is required to get to that model, and that will have a nice leverage on the free cash flow at the end of the day.

Oleg Khaykin

So Tim, I feel very comfortable where we are in terms of getting the structure and infrastructure, the kind of the plumbing of the Company, the strategy, customer, market strategy in order, so now all that remains is if we have just even steady economic recovery, I think we will be very well.

Operator

Kevin Cassidy from Stifel Nicolaus, your line is open.

Kevin Cassidy - Stifel Nicolaus

Congratulations on the results. Sorry to pull the conversation back into some tactical things about the quarter, but on the Enterprise Power, your gross margins came down quite a bit quarter over quarter, can you say what the moving parts were for that?

Oleg Khaykin

They came down at the Enterprise Power, one of the things that you've got to look at is the mix. So we had a number of our – in the previous quarter we had smaller revenue but really the revenue remaining was mainly servers and communication infrastructure, so generally higher-margin. This quarter we had much more computing demand in that. So that's part of the snapback in growth. However, one thing to keep in mind for Enterprise Power, we are still working off the under-utilization on that business unit, so as work out that higher cost inventory and its cost, there is going to be some inherent pickup in the margin, and as our server revenues start to come back, that's going to meaningfully swing the margin to the historical levels.

Kevin Cassidy - Stifel Nicolaus

Okay, great, that explains it. So as we are looking out to the September quarter, you think this is one of the reasons why gross margins are going up?

Oleg Khaykin

I think the biggest reason for gross margin is [indiscernible] utilization of our assets, but we still have quite a bit of the higher cost inventories that we've been burning up and with every quarter less and less of that remains, the margins continues to expand. But in case of Enterprise Power, there was also a drop-off in the server business which lowered the margin for that business unit closer to the computing space rather than the server and router space. As we regain the share in some of Romley and Brickland and really by next summer in Grantley, we expect the margins in that business to get back to that historical level.

Ilan Daskal

Okay, and specifically for June for the Enterprise Power business unit, mix was the major impact in terms of the gross margin quarter over quarter, from March to June.

Kevin Cassidy - Stifel Nicolaus

Okay, and then as we use up that inventory, even the computing power products, even that portion of the business would be higher gross margin?

Ilan Daskal

So mix is, the more the servers revenue will increase, it will benefit the gross margin for that business unit.

Kevin Cassidy - Stifel Nicolaus

Okay, great. Thank you.

Operator

Your next question comes from the line of Amit Chanda from Wells Fargo. Your line is open.

Amit Chanda - Wells Fargo

This is Amit Chanda dialling in for David Wong. Oleg, can you comment on what is the difference in International Rectifier's business unit trends this year at this time compared to last year that leads you to believe the second half of calendar year 2013 will be different relative to last year and more sustainable in terms of growth?

Oleg Khaykin

Sure. I think it's very basic, the September quarter, the level of demand and the bookings that we are seeing are significantly better than a year ago. A year ago, early June, we saw significant de-booking and cancellations and push-outs starting for September quarter and it really accelerated in the September quarter for December quarter. We have not seen any of this, this year. There is a lot of caution in the channel about getting ahead but we are not seeing negative business trajectory.

Also just purely looking at our end markets, Europe is doing much better this year than last your and actually Europe has been a shining star in our business portfolio thus far in both automotive and industrial. Demand is very robust and we actually, even though September quarter is generally seen as a seasonally weak quarter for automotive, we are not seeing much of it this time around. So in that respect, there is fundamentally stronger business demand across all sectors and geographies this year versus the prior year and also we are not seeing the level of de-bookings, cancellations and push-outs that we saw this time of year last year versus today.

Amit Chanda - Wells Fargo

Okay, great. That's very helpful. And then one final question for Ilan, what GAAP tax rate assumptions should we use once International Rectifier becomes profitable again in the September quarter?

Ilan Daskal

So generally for this fiscal year, the non-GAAP tax guidance would be between $3 million and $4 million. There will be discrete events that will – it will be reflected in the GAAP numbers but for the non-GAAP one, $3 million to $4 million which is in the long-term beyond that, it's still between the low and mid 20s rate.

Amit Chanda - Wells Fargo

Okay, great, thank you and congrats on the great results.

Operator

(Operator Instructions) Your next question comes from the line of Steve Smigie with Raymond James. Your line is open.

Steve Smigie - Raymond James

I do want to just follow up on the last tax question, how should we be thinking about any NOLs that you have, at what point would be sort of get back to the point where we would see GAAP and non-GAAP get pretty close again?

Ilan Daskal

So Steve for this fiscal year, there will be some discrete events and therefore we do guide for the non-GAAP tax projection which remains at the $3 million to $4 million level per quarter. Long-term, the new tax strategy will take us up to the mid-20s percentage and that is below the federal rate of 35% and that's based on our new tax strategy.

Steve Smigie - Raymond James

Okay, great. I was wondering if you can make a quick comment on your SAP implementation, where are you now that it's been up for a while in terms of getting information on your supply chain, getting information internally, what benefits can we expect to see out of that?

Oleg Khaykin

SAP has been quite an adventure as every company that implements it, not only SAP but any ERP system, you go from initial euphoria to a very visceral hatred and eventually you get to the loss, so we're now back in the last phase with our enterprise system. I think over the past four months, we have a stabilized SAP and now really we are in process where it is truly becoming a great productivity tool for us. The system is running smoothly and we are in process of developing various material reports to help us better manage the Company. So at this point in time, we are in very good place with SAP.

Steve Smigie - Raymond James

Okay. And just if you could talk a little bit about gallium nitride as we look into 2015, seems like you are getting some commercial stuff on the mid-voltage side and some high-voltage commercial towards the end of the year, could we see 10% of revenue in 2015 be in gallium nitride or is that further out than that?

Oleg Khaykin

Steve, one of the things we are doing, we are very cautious the way we are rolling out this technology. If you go back and think back like eight, nine years ago, when silicon carbide came out, because there was so much industry euphoria, it turned out to be a complete bust because the technology had so many problems. It took another five, six years before these problems were fixed and the industry could get back to it.

What we are doing is we are by all measures trying to do a phased launch for the technology. We start off with well defined customers, well-defined applications, we are looking how the technology performs in the field, what is the relative failure mechanisms in this technology, how do you ensure the long-term reliability and things like that, and we are methodically going step-by-step starting with mid-voltage and launching high-voltage later this year, engaging with key Tier 1 customers who are both learning as well as the launch customers, and little by little increasing our reactor capacity to keep up with the demand.

So in terms of, to address your question, 10% of revenue, I don't think it will be next year but it's not out of the question that over the next five years, we'll get to that point. And of course depending on some market, it could be sooner, but one of the key time constant in that space is the order in reactors. I mean currently we see six to nine months lead times for some of these reactors. So it's not that trivial to just flip the switch and be able to double, triple your capacity.

Steve Smigie - Raymond James

Okay. And the last question was just with regard to order patterns, you guys have gone through this somewhat already so I apologize if this is repetitive, but can you talk a little bit about the linearity of orders throughout the quarter, I mean it is the most recent month the strongest month or is it slow down a little bit?

Oleg Khaykin

I think in July, it starts stronger, then as we see various regions go on vacation, you may have like a week big drop, especially during the peak vacations, and then now we're seeing some countries [indiscernible] they are coming back, we're seeing big spikes. So I think if I adjust for that, I would say August was somewhat weaker versus the July but now as we are entering kind of later half in August, we are seeing some signs of the pickup. And clearly when we are at our various investor conferences in early September, we will have a much better visibility how the September is shaping up. My hypothesis right now is that we are going to see a pickup in orders as September progresses because we have not seen the deterioration in demand for the December quarter.

Operator

Your last question comes from the line of Christopher Rolland from FBR. Your line is open.

Christopher Rolland - FBR

So I know you guys said all segments would be up in the September quarter but are there any outliers, any segments that are stronger or weaker than the others?

Oleg Khaykin

There is really no outliers, I think they are all nicely up I mean on a 13-week normalized basis if I look at it here. The only thing that – there is really nothing that stands out as the big outlier but we are seeing a little bit stronger recovery in the [indiscernible] ESP and even though we are – our ESP business unit, we are seeing some slowdown in the air-conditioning but some of the other factors are favorable and we actually see – even though it was seasonal weakness, we are seeing better than what expected growth wise. EPBU I think is going to be up nicely, just continued recovery in the computing and some of the server revenues starting, on Romley starting to pick up. I think Auto is roughly flat because of big upside, because usually in September quarter Auto is down meaningfully but here it is going to be slightly up, it's just unusual for that segment during this time of the year. And I think HiRel obviously continues its recovery, it will be nice to up slightly. So I mean overall there is nothing that goes up like 20% or anything like that but we do have some nice pickup in various markets.

Ilan Daskal

And Chris, again this is all based on a normalized June 13 weeks.

Oleg Khaykin

Yes.

Christopher Rolland - FBR

Okay, great, thank you guys, and once again, great quarter.

Operator

There are no further questions at this time. International Rectifier, for closing remarks, I turn the call back to you.

Oleg Khaykin

Thank you for joining us today and we look forward to speaking with you in person over the next several weeks. Have a good day.

Operator

That concludes today's conference call. You may now disconnect.

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