International Rectifier Corporation F1Q10 (Qtr End 9/27/2009) Earnings Call Transcript

Nov. 5.09 | About: International Rectifier (IRF)

International Rectifier Corporation (NYSE:IRF)

F1Q10 (Qtr End 9/27/2009) Earnings Call

November 5, 2009 5:15 pm ET

Executives

Oleg Khaykin - CEO

Chris Toth - IR

Ilan Daskal - CFO

Analysts

Bill Ong - Merriman Curhan Ford

Steve Smigie - Raymond James

Craig Berger - Friedman, Billings, Ramsey

Junaid Amin - Citi

Ramesh Misra - Brigantine Advisors

Mark Delaney - Goldman Sachs

Sid Parakh - McAdams Wright Ragen

Operator

Welcome everyone to the International Rectifier 2010 fiscal year first quarter conference call. (Operator Instructions)

I would now like to turn the call over to our host, Oleg Khaykin.

Oleg Khaykin

Welcome to IR's 2010 fiscal first quarter conference call. Before we begin I want to mention that after six years at IR Portia Switzer decided to leave the full time corporate world, however she will continue to consult for the company. Chris Toth has assumed the responsibility for the Investor Relations function at International Rectifier. Ilan and I would like to thank Portia for all her help and counsel over the past year and half and congratulate Chris on his new responsibilities.

Now, we'll turn it over to Chris.

Chris Toth

If you have not already read through our press release issued earlier today it can be found on our website at investor.irf.com in the Investor Relations section. The 2010 first quarter report on Form 10-Q is expected to be filed with the SEC by this Friday, November 6, 2009 and can be accessed using the same web address. A conference call replay will also be available through November 12, 2009.

Also with Oleg and me today is Ilan Daskal, Chief Financial Officer. After our prepared remarks, 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 of a number of uncertainties and actual results may differ materially. Risk factors that could affect the company's actual results are included in our press release issued today and the company's filings with the SEC, including the most recent Forms 10-K and 10-Q.

I would also like to mention that our 2009 Annual Meeting to be held at The Belamar Hotel, located at 3501 Sepulveda Boulevard in Manhattan Beach, California next Monday, November 9, at 9:00 a.m.. In addition our most recent investor presentation will be posted on IR's Investor Relations website that morning, prior to the Annual Meeting.

Also during the quarter, Ilan will be presenting at the Citi Small and Mid-Cap Conference in New York, on Friday November 20, at 10:40 a.m.

Now, Ilan will discuss our most recent financials.

Ilan Daskal

For the first quarter of fiscal 2010, IR reported revenue of $179.4 million. This is a 14.4% increase from the comparable June quarter revenue of $156.8 million, and a 12.4% increase from total June quarter revenue of $159.6 million, which included the last quarter of Transition Services segment revenue.

We saw an increase across four of our five business segments, driven by both inventory replenishment and stronger demand in all of our commercial end markets throughout the quarter, including automotive and industrial.

On a GAAP basis, growth margin was 26.4%, up 560 basis points from the prior quarter gross margin of 20.8%, due to higher revenue, as well as high factory utilization.

We reported a net loss of $16.9 million or $0.24 per share, compared with net income of $29.1 million or $0.40 per share in the June quarter. The June quarter result included a $96.1 million deferred gain on the PCS divestiture related to the settlement with Vishay, a $45 million charge related to the agreement in principle to settle the pending securities class action litigation, and $9.6 million tax benefit, and $9.5 million insurance reimbursement.

For the September quarter, R&D expenses were $22.8 million. We expect R&D to be about $25 million per quarter, plus or minus 10% in view of upcoming new product and technology introductions and a higher amount of engineering builds.

SG&A expenses were $43.6 million. We remain on track to reduce our SG&A level to about $42 million by the end of the December quarter. Other expense net was $800,000 in the September quarter, down $2.1 million from the prior quarter, primarily due to a decrease in investment impairments. Interest income net was $4 million, which is primarily from our investments.

Tax for the quarter was $200,000 benefit, primarily due to discrete items that offset the tax accruals in our foreign jurisdictions. The total cash, cash equivalents, and investments at the end of the first quarter were $591 million, which included $3.9 million of restricted cash.

Our level three investments totaled $37.2 million. Last quarter, we impaired $700,000 of investment in mortgage and asset backed securities, compared with $2 million in the prior quarter.

In October, we were notified by the IRS that it has recommended to the US Joint Committee on Taxation that our refund claim for fiscal years 2004 through 2007 should be approved. Therefore, we do believe it is reasonable to expect a cash refund within the next several months ranging from $22 million to $25 million, depending upon potential interest associated with the refund.

Also in October, and as previously reported, we have [stayed] $45 million related to the securities class action litigation settlement.

Inventory was $152.6 million. That amounts to about 15 weeks, which is down one week compared with the last quarter. We used $7.1 million in cash for operating activities in the quarter. Capital expenditures were $9.5 million. Depreciation and amortization expenses were $16.6 million and stock-based compensation was $2.5 million. We had 71.3 million shares outstanding at the end of the quarter.

Moving on to our outlook; we expect revenue for the December quarter to be between $185 million and $200 million. This is a 3% to 11% increase from the September quarter. For this projected revenue range, combined with higher factory utilization, we currently estimate gross margin in the December quarter to be in the upper 20s.

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

Oleg Khaykin

During the quarter, we continued to experience strong revenue growth in excess of our forecast, driven by the inventory replenishment, new program ramps and increased end market demand. We're especially pleased with the initial success of our growth strategy to target high volume customer programs and drive market share gains.

In the September quarter, we have made significant progress towards our goal of rebuilding operational efficiencies and economies of scale, as well as achieving profitability.

During the quarter, we continued to see a very strong demand and growth in China and Taiwan, particularly in the consumer electronics and computing. In North America, Europe and Japan, we saw encouraging signs of earlier recovery and growth momentum, particularly in automotive and industrial.

In our four commercial business units, we saw a strong 24% sequential revenue growth. Enterprise Power business unit led the growth with a 40% revenue increase from the prior quarter, driven primarily by the new Intel server platform momentum. On the computing side, we also began ramping up on some significant design wins in the notebook space with Tier 1 OEMs in US and Asia.

Our Power Management Devices segment also experienced strong growth, up 22% from the prior quarter, driven by healthy pick up in computing, power supply and consumer products in both China and Taiwan.

We are also starting to see pick up in the industrial segment in Europe and North America. We continue to see strong design wins momentum in the industrial motor drive applications and with our new (inaudible) packaging technology in commuting and power supplies.

In energy saving product, revenue grew 25% over the last quarter, driven by increased demand in appliances, industrial and consumer products. We continue to gain momentum worldwide at the top Tier air conditioner and washing machine OEMs by focusing on opportunities with our iMotion integrated design platform and accompanying IGBT Modules. We're also seeing tractions in other consumer related areas such as Class D audio and flat screen TVs.

Automotive products grew 7% from the prior quarter, driven by inventory replenishment in both North America and Europe. The growth in our commercial products was partially offset by weakness in our HiRel business unit, down 13% in revenue compared to the June quarter. The commercial aviation market remains weak and we experienced several program push outs.

That said, we continue to see strength in our bookings for our high reliability, power management products in many of the areas we serve such as space, military, medical devices and heavy duty industrial. Overall, we believe our position in the HiRel market remains strong.

In terms of outlook, we expect to see varying degrees of growth across all of our business units in the December quarter. As Ilan mentioned earlier, we expect to be in the revenue range of $185 million to $200 million.

Now, an update on inventory. Our channel sell through sales slightly outpaced our sell in sales. As a result, distribution inventory came down 9% in absolute dollars, and is now at levels below eight weeks. Our internal inventory at the end of the quarter was $152.6 million, up $1.5 million from the prior quarter. The increase was due to the larger working process inventory required to support higher level of demand.

Now, a quick update on our operational restructuring. Our plans remain unchanged. We're still on track to close the El Segundo fab, by the end of calendar 2010, saving approximately $12.7 million per year when completed. We expect to continue to operate the portion of our Newport facility that we have reopened until sufficient external capacity comes in line.

In terms of innovation, we continue to make strides in extending our technology leadership within the industry. Our GaN technology continues to gain recognition. In addition to strong interest from our customers, we learned last week that Department of Energy's Defense Research Project Agency awarded a grant pending successful contract negotiation to Delphi Automotive Systems' NIR to work with Oak Ridge National Laboratory to develop a new automotive power technology, based on GaN to work with new technology based on GaN, to improve power efficiency in hybrid and electric vehicles. We are particularly pleased that out of 3,600 proposals submitted, we were one of the 37 who were awarded a DoE grant.

Lastly, we continue to resolve our legacy issues. In addition to the settlement with Vishay in June, and the agreement in principle to settle the pending securities class litigation in the September quarter, we were recently notified by the US Attorneys office that it has concluded its investigation and decided not to bring any actions against the company or any of its former or current directors, officers and employees.

In summary, we are encouraged by the initial success of our growth strategy to capture high volume design wins and gain share. The strategic investments we have made in R&D and restructuring of our operations are starting to bear results and we continue to put our legacy legal issues behind us.

This concludes our prepared remarks. We'll now open the session to your questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first response is from the line of Bill Ong.

Bill Ong - Merriman Curhan Ford

Congratulations on nice quarter. As you get into a more normalized growth in calendar 2010, can you talk about seasonality as you get into the next four quarters? Do you expect March to be seasonal or better than seasonal based on visibility?

Oleg Khaykin

I'm not sure I can comment on all four quarters visibility going forward, but I can at least give you some color in the near term. Looking at this quarter, as we've stated, we're seeing continued growth this quarter and clearly we're waiting with anticipation after the Thanksgiving holiday to see how much the demand that's currently being projected by our customers hold up.

That said, we do expect the March quarter to be somewhat stronger than seasonal. I guess there are couple of elements that are driving it. One is kind of more systemic, industry-wide and the other one is specific to IR. Part of our business at IR is servicing appliances manufacturers, like air conditioners. The March quarter is seasonally the strongest quarter for that segment during the year, as most of the procurement in Asia is done around that time to build the products for the summer.

In terms of the broader market, given that we're seeing significant lead time extensions and increased orders from customers trying to rebuild their inventories, and meet their customers' demand, I believe that the seasonal weakness typical of March quarter, maybe offset by some of these customers taking an opportunity to further rebalance their inventories. That is all, obviously, very speculative at this time and remains to be seen what happens during the Christmas sales.

Bill Ong - Merriman Curhan Ford

Second question is, since joining the firm along with your new executive team, can you talk about which product areas have you redirected your R&D and design win efforts to focus on, which type of end market, and where do you think these types of benefit will play out in 2010 and beyond? What type of growth rates can we expect?

Oleg Khaykin

Well, I'm not going to comment on growth rates beyond what we have projected, but in terms of redirecting R&D, we have reentered the discrete marketplace and we have been successfully rebuilding that franchise for IR. One of the big areas we've done in terms of sharpening the focus is really focusing our existing business units and technologies in our development to win Tier 1 customers rather than going after a broader market.

That's actually what's paying the dividends, starting to pay the dividends right now, because of these design wins going to production; a, the probability of them becoming big is much greater than going after Tier 2 or Tier 3 players. Secondly, as they go into production the volume ramp is clearly much bigger than many of the Tier 2, Tier 3 players would have brought in, this giving us better return on investment in our R&D.

To answer your question, I guess, the one area where we have redirected is, we put more investment on the discrete part of our business and we have focused investment in other areas to win the Tier 1 customers.

Operator

Your next question is from the line of Steve Smigie.

Steve Smigie - Raymond James

For your guidance on the gross margin, you talked about upper 20s, does that, 27% to 29% or 25% to 29%, what are we thinking sort of, what do you mean by upper 20s?

Ilan Daskal

Well, Steve, last quarter we got it for the mid-20s and this time we got it for the upper 20s. I cannot direct to exactly what is the exact number there, but you have the range that's based on the guidance that we provide. That's the best I can guide right now. At the end of today, Steve, it's going to be subject to the mix of products and the level of the final revenue, and utilization rates, but that's the range.

Steve Smigie - Raymond James

In terms of seasonality for the March quarter, what would you guys argue is your typical seasonality in that quarter?

Oleg Khaykin

Well, I think traditionally in this industry March quarter is somewhat weaker, but we've had examples, I think 2005, if I recollect correctly, was example where the sharp drop in a prior year resulted in March quarter actually being up. We think that this scenario may play out this time around as well. I think just given the strong demand that we are seeing from our customers, and the lead times that are out there, I think the momentum is going to carryover into the March quarter and at least in our markets, I think it's going to be stronger than your standard March quarter, when everything is going steady state.

Steve Smigie - Raymond James

I'll sneak one more in just on operating expenses, when you get to the $41 million, $42 million type level, is that, how long do you sustain at that dollar level? What kind of leverage do you expect similarly on the R&D? Are you really going to jump back up to $25 million or sort of stay 23ish where you got through this quarter?

Ilan Daskal

So on the R&D, we did say that we will be at a $25 million range, plus or minus 10%, and that's the goal, to stay there. In the SG&A, for December, I did guide for the range at the $42 million level. So far, I plan to stay on that range, depending on various projects like if we would like to implement (inaudible) it may impact it a little bit, if we plan to reduce further the headcount, but in general, it's the range that I guided here, so that's the plan.

Oleg Khaykin

I think we believe that, that level of SG&A should enable us to scale significantly above our current revenue levels.

Steve Smigie - Raymond James

Right.

Oleg Khaykin

That's not something that we're going to grow with the revenue in the foreseeable future. Regarding the R&D, as Ilan pointed out, we kind of guided average $25 million in the June quarter. We were little bit above $25 million, because we had a lot of new products hitting manufacturing so a lot of [math and stats]. This quarter, this element of NREs was lighter, so R&D came in below the level of $25 million, but as I said, we kind of target the range of on or about $25 million going forward for the foreseeable future.

Operator

Your next response is from the line of Craig Berger.

Craig Berger - Friedman, Billings, Ramsey

I just wanted to understand, I don’t know, did you guys comment specifically on where lead times now versus where they were a quarter ago and kind of what the impact might be on bookings from that phenomenon?

Oleg Khaykin

Sure, the lead times now stand around 12 weeks, that's up. A quarter ago, we had different products for renewal, from between eight to 12. If anything, the lead times moved up a lot closer to 12 on average. So, a lot of it is driven by customers giving upside orders that well within the lead time range. I think part of it is driven by their customers demanding, giving them up sides in orders, but also, I think now that they are seeing lead times expending, they just recalculate what's the minimum inventory they need to hold. As you know, inventory levels that you carry are function of the lead time and the end market demand.

So if end market demand stays strong or continues to increase, and your lead time increases, you have to increase the level of inventories that you carry. So, I think clearly part of the orders that we are seeing in my estimation maybe the result of lead times expending. At the same time, when I look at our sell through sales versus the sell in sales, we're stilt running on sell through at a higher level. So this inventory is not sitting at least at the distribution level. I also do not believe this inventory sitting at the OEM or the [Million] level. So most likely it's very quickly getting converted into finished goods, and obviously, we're going to see how the finished goods sales fair between Thanksgiving and Christmas. That's something we don't have as much visibility on.

Craig Berger - Friedman, Billings, Ramsey

Right, thanks for the detail on that. Next question, on the power management devices segment, gross margins there are still pretty low at 5%. Can you talk about what factors are impacting that, and kind of where that business can go, because it used to be a 30% to 40% if you go back in the time?

Oleg Khaykin

We're targeting this business to get into 20s, high 20s, low 30s. Clearly, today this business is still probably carries the biggest bulk of the under absorbed capacity and also given that the mix that has been driving the growth has been coming primarily from the consumer space in China and Taiwan, it has been on the lower end of the margin business. So we expect the margins in that business unit to continue to expand as the volume grows and the capacity that is dedicated to these products gets better utilized.

Craig Berger - Friedman, Billings, Ramsey

Can you talk about some of the new products that you've launched that are actually driving revenue out performance, because IP and transitional services aside, your recovery has been pretty good. Can you talk about some of the specific new product drivers that are helping you achieve that?

Oleg Khaykin

So clearly, one of the biggest ones is the new generation of our enterprise power products targeting the new Intel platform. That platform has been scaling up, and in that platform we have a greater share on every blade, and also, we believe we have a greater share of the total market. So as a result we've seen we have been pretty much riding that wave. What we've been seeing is actually our customers are obsoleting older generation platform much faster and ramping the new generation much faster.

Typically it was a 12 months kind of transition. We're seeing many of them are driving to do it within two to three quarters. So clearly, the faster they do the substitution, the more it benefits us. So clearly that has been one of the big drivers.

On the discrete side, we have introduced a lot of new products in the last two quarters. They've been getting very good traction with customers. We have been penetrating laptop segments and a lot of the consumer spaces that we haven't been present in a long time, and that's only the beginning. We have a whole new generation based on the new packaging, part one coming out, as well as the next generation of silicon platform coming out next year.

So clearly, we expect that business to continue to gain momentum and reestablish IR as the power house in that segment. Clearly, that's been probably one of this overall and the obsolete revenue growth, it has been one of the strongest segments, going from $42 million in the March quarter to $67 million in this last, September quarter.

The other element here is our ESP product portfolio. We've had very good traction for our motion platform. It's not just the IGBT Modules, but the entire platform, including the digital controller, the power stage and IGBT Modules. As these designs are going into production, we're seeing that that is benefiting us quite a bit. The other area is really focusing on the Tier 1 players in Japan and Korea in the consumer electronics, with our Class D audio and flat panel displays, with our high voltage ICs.

As I said a year ago, the orders went out to our business units to really focus on winning with the winners, and not just do science experiments playing with Tier 2 players and clearly a lot of efforts went into it and now that these design wins are starting to go into production, it's showing the wisdom of our strategy.

Craig Berger - Friedman, Billings, Ramsey

How much content do you have in the new server platforms per blade and what are you guys doing Vcore for the Nehalem server chips?

Oleg Khaykin

We don't disclose the number, but we have up to 86 devices per blade. So I think we have 60% greater part count than in the prior generation.

Craig Berger - Friedman, Billings, Ramsey

I didn't hear how much you said you are going to save on the El Segundo fab closure and when that's going to happen?

Ilan Daskal

That's going to be $12.7 million, Craig, as of 2011 calendar.

Craig Berger - Friedman, Billings, Ramsey

Cash costs?

Ilan Daskal

Cash costs.

Operator

Your next response is from the line of Terence Whalen.

Junaid Amin - Citi

This is [Junaid Amin] calling in for Terence. Thanks for taking my question. My first question is on your revenue guidance of 3.1% to 11.5%. Your mid point is higher than most of the companies, your peer companies had reported. So I'd be interested to know what's driving the bulk of that growth?

Oleg Khaykin

Well, I don't want to (inaudible) on what the other companies have done or how they manage their channels or what they ship. I think our product mix, we are less exposed to the wireless segments, but I do believe that we've probably picked up some share, just the mere fact we entered markets when we didn't have any position before, and now we have a very nice position. We've held our own or expanded position in our existing markets. So it could be a combination of market's intrinsic [jobs] that are doing better. Could be that we've picked up share. I mean I'm not going to speculate on it, but I just know the numbers that I see.

Junaid Amin - Citi

So which of your market areas would you say would be driving that growth?

Oleg Khaykin

For example, as I mentioned earlier, if I look at our enterprise power business unit, we had a 40% quarter-over-quarter growth, and it's driven by next generation server platform going into production. So in some extent the specificity of that market is kind of raising our growth.

Also, within that segment, we have entered laptop segment and we've seen some very nice revenue materializing from our efforts. Also, we had a big exposure to industrial and automotive markets, which have been a drag on us, , particularly I'll say in last December, March and June quarter. Now these markets in North America and Europe are starting to show signs of life, either due to replenishment or some basic recovery, and we are benefiting from that sector that obviously was absent a couple quarters ago. Whereas maybe some other competitors who have segments, which have picked up sooner are now flattening out and they may not be seeing as much growth as we're seeing.

Junaid Amin - Citi

In terms of the auto segment, have you seen any drop in order flow after the end of the government stimulus like Cash for Clunkers program?

Oleg Khaykin

We have not seen the drop. I mean, remember there's always lag for it. Cash for Clunkers has exhausted inventory and what we have seen is immediate jump in the orders as people were trying to replenish it. It remains to be seen how much the drop in automotive sales after the program will manifest itself into the quarterly run rate. At least in near term, we're seeing recovery in demand. I would caution that the demand that we are seeing in automotive markets is still below the historical levels, like the summer in 2008.

Junaid Amin - Citi

On the order trend in this quarter, have you started to see any tapering now that we're entering November or how has it trended so far?

Oleg Khaykin

Well, we've guided current quarter to be up and we still feel comfortable about it. In terms of the March quarter, I gave some commentary that we are hearing from some customers that they see strength, but I'd say I'll probably be better positioned to comment on that come December, because right now, everybody is just seeing the orders. As I said, we do not see much inventory accumulating at distribution, ODMs or OEMs. It maybe a different question at the finished goods inventory which we do not see and obviously that will be a function of the final sales in this quarter, whether or not the demand will stay strong.

Operator

Your next response is from the line of Ramesh Misra..

Ramesh Misra - Brigantine Advisors

My first question is with regards to ASPs, any particular (inaudible) trend through the quarter on ASPs?

Oleg Khaykin

Are you talking about ASP trends? Well, actually this quarter we've had them. Overall, I think our ASP erosion was below 2%. In some segments we actually had ASP increase driven by mix or new product introductions, but I think partially as Europe and North America is starting to recover, we may see that ASPs are somewhat strengthening, especially since most of the growth was driven by consumer products in Asia, which are notoriously lower ASP segments.

Operator

Your next question is from the line of Jim Schneider.

Mark Delaney - Goldman Sachs

This is Mark Delaney calling in for Jim. Thanks for taking the question. I guess first with respect to the December quarter guidance, could you talk about the relative growth rates by end market that you expect to see?

Oleg Khaykin

We did not break out growth by business unit, but we did say that we expect all five of our business units to show growth in the December quarter.

Mark Delaney - Goldman Sachs

You had mentioned the sell in through versus sell through with distributors, what's your expectation for that to trend in the December quarter?

Oleg Khaykin

Well, I'm hoping that we get a lot closer to equilibrium. Frankly the channel inventories are below the levels that I find healthy in this environment.

Mark Delaney - Goldman Sachs

The gross margin improvement that you guys saw this quarter, could you give a rough breakout between how much of that was related to improved utilization as opposed to mix?

Ilan Daskal

No, we are not breaking that out. We, guided for the overall gross margin improvement to the high 20s for December.

Operator

Your next question is from the line of Craig Berger.

Craig Berger - Friedman, Billings, Ramsey

Thanks for the follow-ups, guys. Just a, a few more here. On the $25 million and $42 million OpEx numbers that you've talked about, are we going to have to give raises at some time, at some point in the future or is that steady state?

Oleg Khaykin

Well, we have not cut anybody's salaries. A number of our peers have taken salary cuts in the last several months, so clearly they are seeing a snip back and it goes back. We have not taken cuts and we do not envision salary increases until we are well in being profitable. Even then in terms of the salary increases, we got to see productivity improvements that should be able to offset any kind of salary increases.

Craig Berger - Friedman, Billings, Ramsey

So, in terms of commitment to the shareholders, you guys are talking about, 40% gross, 15% operating, so 25% on OpEx at $67 million a quarter, so kind of gets you up towards $270 million a quarter in revenues, right? That's kind of, you think you can scale up towards that level before you have to turn on the spending. Is that the right way to think about that?

Oleg Khaykin

It's combination. I mean clearly you've done your math, but that's the hope that we have. Obviously, whether or not we'll be able to maintain it remains to be seen or we may have to, always drive higher margins or the revenue goes a lot sooner, a lot faster, but clearly that is something that we are targeting for.

Craig Berger - Friedman, Billings, Ramsey

Can you talk about your sustainable level of capital expenditures? I'm just looking at depreciation that's around $65 million a year and want to understand how that compares versus CapEx?

Ilan Daskal

Craig, we target CapEx to be between $40 million and $50 million a year. That's still our target. You will see some quarters that it's going to be below average and in some quarters it's going to be above the average, but still, we target overall for the fiscal year between $40 million and $50 million.

Craig Berger - Friedman, Billings, Ramsey

Have you guys give an overall fab utilization rate for this quarter?

Ilan Daskal

The average fab utilization was in the mid-70s.

Ilan Daskal

Can you give us a quick update on the high reliability business? I know these revenues were lower than they've been in a little while.

Oleg Khaykin

So we had an as I mentioned, we've seen some push out in the commercial aviation segment, which was a meaningful chunk of revenue, but we also had some internal push out by implementing some additional test procedures, which extending the cycle time of some of our products and we did not have them completed in time to ship this quarter. So, we expect that business unit to get back to kind of the traditional run rate levels starting December quarter.

Craig Berger - Friedman, Billings, Ramsey

Then tax rate going forward, is it zero, and/or when do we think about starting to pay taxes?

Ilan Daskal

Excluding any discrete items, Craig, I would expect it to be in the range of 10% to 15%, that's not including some discrete items like the tax refund that we expect to receive.

Craig Berger - Friedman, Billings, Ramsey

Then the last one, other expenses, next your interest, what's in that and how we think about that, that came down this quarter?

Ilan Daskal

The other expense that was mainly the impairment on the MBSs and the ABSs, that's the majority of the amount. It is very difficult to predict how it's going to behave in the remaining balance. The remaining balance of the level three investments are about $37 million. Obviously, this quarter it is way lower than the last quarter impairment. It was down to about $700,000. However, it depends on how the remaining $37 million is going to be aiding the market, but I can tell you that some, some of the $37 million or some of the MBSs, ABSs balances are getting to their maturity and we even received some payment in the last quarter. I cannot predict what and if we will have any additional impairment there.

Craig Berger - Friedman, Billings, Ramsey

Last one for me and I'll go away. Sources or uses of cash, what do you guys want to do with your cash?

Ilan Daskal

In terms of a strategy? What the usage of the cash?

Craig Berger - Friedman, Billings, Ramsey

Yes. Share buyback, dividends, acquisitions et cetera?

Oleg Khaykin

Every quarter we assess the environment. We still have a share buyback program underway. We assess every quarter, whether to buy more and clearly our view on cash is, we look at opportunities, if occasionally there's a good deal to acquire a company. That said, we still feel the environment is not entirely stable and as things stabilize, clearly we'll find one way or the other to return on that cash for our shareholders.

Operator

Your next question is from the line of Ramesh Misra.

Ramesh Misra - Brigantine Advisors

Sorry my wireless connection is not as reliable as your guidance, where do you see utilization going into the December quarter?

Ilan Daskal

Ramesh, we don't guide specifically what we expect utilization rates to be, however, in light of the higher revenue that we guided, we do expect utilization rates to be higher than the September quarter which was in the mid-70s.

Ramesh Misra - Brigantine Advisors

With regards to the March quarter, are you seeing a more, a quicker backlog build-up than you would normally see contributing to your constants for the March quarter right now?

Oleg Khaykin

Well, I wouldn't say confidence, I'm just saying that, if I just look at where the customer orders are at what levels they are today versus what they where three months ago, and obviously, anything beyond kind of three months, you cannot really trust, but when I query our customers as to what's driving it, they communicate to us that they feel they have a strong demand and they will need the product in the March quarter. Clearly, this is one of these numbers that I would never bet on. We'll have to wait and see how that stays there or whether they maintain these orders, post Thanksgiving sales.

Ramesh Misra - Brigantine Advisors

Thanks Oleg. In regards to the portion of the Newport Beach fab that you have delayed the closure of, when do you, anticipate closure of that portion now?

Oleg Khaykin

Well, we're working to bring up external capacity. Once, the qualifications are complete and we're satisfied with the performance of the supply chain we will close it, but imagine it may be several quarters. It's hard to tell.

Ramesh Misra - Brigantine Advisors

It's obviously not happening next quarter?

Oleg Khaykin

No.

Operator

(Operator Instructions)

Your next response is from the line of Sid Parakh.

Sid Parakh - McAdams Wright Ragen

Just a question on the gallium nitride opportunity, can you give us an update, you talked about some funding from DARPA, but can you maybe elaborate on the commercial opportunity in the next few years?

Oleg Khaykin

So clearly, the funding from the Department of Energy, it's more of a badge of honor, because of the technical recognition and the prowess of our R&D team. Obviously, that's not something that translates into revenue in the very near term. The area where we are focusing on is on the commercial applications and we've got it that we'll be introducing our first, products in GaN. Low voltage products at the end of this year, early next year and we are still on schedule for that.

I'd say in terms of revenue, as mentioned before, given that it's a fairly disruptive technology, it takes some time before it translates into any kind of meaningful revenue, as engineers have to learn how to work with it and you typically start off with the early adopters who are typically the technology leaders in their fields.

Sid Parakh - McAdams Wright Ragen

Just another question on the revenue. Is there a way to tell, since you came on Board, the new initiatives you've kind of put in place by going refocusing on the discrete business. Is there a way to quantify what we're seeing from contribution or revenue contribution just from say some of those newer initiatives and in a way simply saying, what's coming from new products that you came in and introduced versus what was legacy business there?

Oleg Khaykin

We don't break out by generation of product, what percentage goes to what product, but clearly I think the products that were launched in the last 12 months are the ones that are driving a lot of the revenue growth that we're seeing and in particular enterprise power business unit. Since it's a fundamentally a new platform, new product portfolio, almost the entire growth in that business is driven by these new products.

Operator

Your last question is from the line of Steve Smigie.

Steve Smigie - Raymond James

You guys have had some older inventory that you were referring to, burn through that was capping gross margin a little bit, I am just curious where we are in terms of the process of burning that down?

Ilan Daskal

The bulk of it was burned Steve, so the majority was depleted.

Steve Smigie - Raymond James

Then on the gallium nitride stuff, you mentioned a number of other people got wind on similar programs, but how many of those other people were actually gallium nitride semiconductor providers versus other parts of the system?

Oleg Khaykin

I believe it's zero. I think we are the only ones on that.

Steve Smigie - Raymond James

Okay. Thank you.

Oleg Khaykin

Thank you very much for joining us today. We'll talk to you again early next year.

Operator

This does conclude today's teleconference. You may now disconnect.

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