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International Rectifier Corp. (NYSE:IRF)

F2Q10 (Qtr End 12/27/09) Earnings Call

February 2, 2010 5:15 pm ET

Executives

Chris Toth - IR

Ilan Daskal - CFO

Oleg Khaykin - CEO

Analysts

Ramesh Misra - Brigantine Advisors

Steve Smigie - Raymond James

James Schneider - Goldman Sachs

Bill Ong - Merriman Curhan Ford

Craig Berger - FBR Capital Markets

Terrence Leeland - Citi

Stephen Chin - UBS

Brian Piccioni - BMO Capital Markets

Operator

Good afternoon ladies and gentleman and welcome. My name is Christian and I’ll be your conference operator today. At this time I would like to welcome everyone to the International Rectifier fiscal second quarter 2010 results conference call. (Operator Instructions). It is now my pleasure to turn the conference over to our first speaker, Mr. Chris Toth, Executive Director of Investor Relations. Sir, you may begin your conference.

Chris Toth

Thank you, operator, and good afternoon. 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 second quarter report on Form 10-Q is expected to be filed with the SEC on Wednesday, February 3rd, 2010 and can be accessed using the same web address. This call is being broadcast over the internet and can be accessed thorough IRF’s web address. The conference call replay will also be available through February 9th, 2010.

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-Q and 10-K.

I would also like to mention that International Rectifier will be presenting at the Goldman Sacs Technology Conference in San Francisco on Thursday February 25.

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

Ilan Daskal

Thank you, Chris. Good afternoon and thank you all for joining us. For the second quarter of fiscal 2010, IR reported revenue of $210.2 million, which was above our targeted range of $185 to $200 million. This was a 17.2% increase from the prior quarter. Across all five of the business segments we saw a healthy increase in revenue driven by strong and market demand for our products resulting from new program ramps strong distribution sales through and the inventory replenishment

Gross margin was 29.9%, up 350 basis points from the prior quarter gross margin of 26.4%, due to higher factory utilization and product mix. We reported net income of $28.3 million or $0.39 per fully diluted share, compared with net loss of $16.9 million or $0.24 per share in the prior quarter. The results for the second quarter also included a $27.8 million tax benefits due to the release of tax reserves.

For the December quarter, R&D expenses were $24.2 million. We expect R&D to be around $25 million per quarter, plus or minus 10% in view of upcoming new product and technology introductions and a higher number of engineering builds. SG&A expenses were $37.3 million. This was lower than our original expectations as a result of our efforts to reduce cost in $3.2 million of cost benefit, which are not expected to recur in the third quarter.

Going forward, we expect SG&A expenses to be approximately $42 million plus or minus 5%. This includes project expenses associated with a new ERP system implementation. Other expense net was $1 million in the December quarter and interest income net was $2.5 million, which is primarily from the investments. Income tax for the quarter was a $26.6 million benefit primarily due to a $27.8 million release of tax reserves that offsets about $1.2 million in tax accruals in our foreign jurisdictions.

The total cash, cash equivalents, and investments at the end of the second quarter was $549.9 million, which included $3.4 million of restricted cash. We have managed to further reduce our level three investment from $37.2 million to $32.8 million in the December quarter. In the March quarter we expect to receive the cash tax refund approved by the U.S. joint committee of approximately $23.6 million.

Inventory was $158 million, which is up $5.4 million from the prior quarter. These inventory increase in support of the expected sales growth. Inventory weeks have come down by one week to 14 compared with the last quarter. We use $27.4 million in cash for operating activities in the quarter. This includes the previously reported $45 million related to the litigation settlement that we paid out during the December quarter. Excluding this payment we generated $17.6 million in cash from operating activities in the quarter.

Capital expenditures were $10.6 million, in the coming quarter we expect to see our CapEx at $15 million to $20 million per quarter reflecting incremental investments in our ERP system implementation and facilitation of the GaN manufacturing. Depreciation and amortization expenses were $17.4 million and stock based compensation was $2.6 million.

During the quarter we purchased about 261,000 shares of our stock at a total cost of $5 million. We had 71.1 million shares outstanding at the end of the quarter. We have positively adjusted opening retained earnings by $13.3 million. During the December quarter we determined that in prior years, specifically fiscal years 1998 through 2006 net foreign currency gains of $13.3 million related to intercompany loans with the company’s foreign subsidiaries should have been recorded in income. These gains were recorded in other comprehensive income. For the effect of these adjustments, you can refer to the tables on stockholders equity included in today’s earnings press release.

Moving on to our outlook. We expect revenue for the March quarter to be between $225 million and $235 million. This is about 7% to 12% increase from the December quarter. For this projected revenue range, we currently estimate gross margin in the March quarter to be about 34% to 35%. IR continues to maintain a strong balance sheet with no debt. With the return to profitability and generation of cash from operations, we will continue to evaluate the best uses for our cash to deliver shareholder value. We planned to provide greater visibility into our capital allocation model in the coming months.

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

Oleg Khaykin

Thank you, Ilan. Over the course of 2009, IR regained most of its quarterly revenues since the downturn began. We achieved very strong sales in the December quarter with positive operating income and we generated about $17.6 million of operating cash flow excluding the previously reported $45 million litigation settlement payment.

We have seen a sharp recovery from the downturn with the revenue of $210 million in December nearly matching our September 2008 peak ongoing revenue of $212 million. We believe that our strong revenue growth is more than just a reflection of recovery in market demands and inventory replenishment. We believe that part of our revenue recovery is attributable to market share gains.

And with the improvements in overall business conditions over the past couple of quarters, we are starting to see strong positive impact from our go-to-market strategy focusing on winning Tier 1 customer designs. Provided economic recovery continues, we believe our strategy will drive strong top line growth, margin expansion and positive earnings leverage in calendar 2010.

During the quarter, we continued to see very strong demand from China, Korea and Taiwan particularly in consumer electronics and computing. We also saw a beginning of a recovery in North America, Europe and Japan with solid growth momentum particularly in automotive and industrial.

Moving on to our business units. The Enterprise Power revenue increased 23% from the prior quarter to $33.7 million driven by continued growth in our server products, share gain and netbook computing products with Tier 1 OEMs and seasonal strengths from our enterprise communication products.

Our Power Management Device business also experienced strong growth up 14% from the prior quarter $76 million driven by healthy demand in the computing and power supply markets in China and Taiwan. The industrial market segment in North America and Europe is also showing positive momentum. We continue to see a strong design win activity during this quarter with Tier 1 netbook suppliers and with industrial motor and applications.

I am please with the success of our PMD business unit growth strategy to date. The success of PMD growth is critical to rebuilding operational efficiencies in economies of scale in our manufacturing operations. In our energy saving product business unit revenue grew 7% over the last quarter to $40.4 million driven by increased demand in appliances, industrial and consumer products. Company’s appliance business is gaining momentum with the start over the new model year and government stimulus programs particularly in China.

These programs incorporate our advance motion control architecture. The iMotion integrated design platform and accompanying IGBT Modules. We're also continuing to see strong traction in consumer applications particularly flat panel TVs Class D audio. Our automotive products business unit grew 28% from the prior quarter to $16.9 million driven by the inventory replenishment in both North America and Europe. We expect ATBU to be one of the strongest long-term growth areas for the company as the need for power management efficiency requirements in the automotive industry continues to grow.

And lastly, our HiRel business unit grew 22% compared to the prior quarter to $39.8 million on return strength of our orders in commercial aviation, space, military, medical devices and heavy duty industrial. In terms of the outlook we expect to see continued growth for IR in the March quarter. Our ESP business units, which includes both industrial and appliance market should see particularly strong seasonal growth. As Ilan mentioned earlier, we expect our revenue to be in the $225 to $235 million range.

Now, an update on channel inventories. Channel inventory remains lean at below 8% eight weeks. Channel selling sales were roughly in equilibrium with the channel sell through sales during the second fiscal quarter. On the technology front, we’ve remained focused on being a leader in power management technology. Over the next couple of weeks will go to releasing our first commercial gallium nitride products at the Applied Power Electronics Conference in Palms Springs.

We see gallium nitride base technology being infused into every business unit and product line with in IR. GaN offers five superior value proposition versus the best silicon dramatically increasing performance and cutting energy consumption in enterprise,

Industrial and consumer applications. We’re excited about GaN and see it as one of the major drivers for our long-term revenue growth and market share expansion.

Now I would like to share a few thoughts in our strategy for the calendar year 2010. First, we’ll continue with our go-to-market strategy focusing on Tier 1 OEMs, ODMs, distributors and contract manufacturers. Second, we’ll continue to expand external capacity to increase our manufacturing scaling flexibility. Third, we’re developing new products to expand our addressable markets. Lastly, as Ilan mentioned, we are committed to enhancing shareholder value by reviewing our capital allocation model in view of business growth opportunities and industry cyclicality. We plan to provide greater visibility to our shareholders into our capital allocation model in the coming months.

In conclusion, we have made significant progress on a number of fronts over the past 18 months and to better position IR for future growth. The recent decision by the SEC not to seek any enforcement action against the company largely concludes the legacy regulatory issues associated with the prior restatement and investigation of the company. We’ll begin the New Year confidant in our strategy of growing our business and improving profitability.

That concludes our prepared remarks. We will now open the lines for your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Ramesh Misra with Brigantine Advisors.

Ramesh Misra - Brigantine Advisors

Oleg, some of your peers have talked about supply constraints especially on the back-end of the manufacturing line. I wanted to ask you if you’re experiencing that and I see your CapEx is going up, where is that being allocated to?

Oleg Khaykin

Obviously, we are no different from our peer group; I mean we are seeing tightness of supply in both front-ends more driven by internal capacity. There are issues in back-end as well as about, but so far we’ve been able to manage it (inaudible). I wouldn't say we're able to fulfill every demand, but generally we’re managed to get enough capacity to meet our minimal customer requirements. So in that respect, we expect the capacity tightness to remain constraint over the next one or two quarters. We are clearly working as I mentioned earlier to bring on some additional external capacity to elevate the front-end constraints and we are working with our suppliers to plan for greater back-end capacity as well.

In terms of capital, Ilan mentioned that most of our increase for this quarter is driven by our start at on implementing the new ERP system. We have signed an agreement, we’re one of the leading providers of the ERP solutions and that charge will hit our capital budget this quarter. Also at the same time, we are as I mentioned we are announcing the commercial introduction of our first product GaN and we are going to be placing some orders this quarter due procure some tools for GaN capacity expansion.

Ilan Daskal

If we just to elaborate on the CapEx, the original CapEx run rate that we have communicated is the same. The incremental CapEx spending that we just now communicated is basically attributed to some of to the GaN equipment that Oleg just mentioned, but mainly it would be the capitalized of the implementation of the new ERP system.

Ramesh Misra - Brigantine Advisors

Okay. If I may just have a quick follow up, I wanted to get your outlook on the auto market overall and also for IR specifically, there has been some commentary at the age of automobiles in the U.S. in particular has lengthen too much to historically a longer levels and I wanted to see what’s your position in that market is and how do you see that evolving for you through the course of the year? Thank you so much.

Oleg Khaykin

Well, I think the kind to use the Mark Twain’s phrase the demise of automotive industry in U.S. I think has been greatly exaggerated. I mean, clearly the market is now down, but U.S. is a huge installed base of cars and eventually a lot of them will need to be replaced. So I think it’s a matter of timing for the automotive recovery in the U.S. market and clearly today a lot of the growth is taking place in China. Given that we are not really particularly fixed into anyone geography, I mean most of our customer supply, the global automotive industry, so from our perspective we look at the overall market growth rather than any particular region. And while there is still softness in some parts of the world, if you combine the kind of rebounding demand from the loss of last year together with the inventory replenishment, we actually expect our automotive business unit segment to continue to see growth in the near future.

Operator

Our next question comes from Steve Smigie with Raymond James.

Steve Smigie - Raymond James

I was hoping you could comment a little bit on the operating expenses. You talked about the $25 million in R&D you believe, how many quarters further does that go, I think year and half and then on the OpEx even if I add back the numbers it’s still pretty low so, is that $42 million level that you guys looking at or is that something that you’ll keep going forward I think where does that go forward as well?

Ilan Daskal

So, Steve first I’ll start maybe with our balance sheet as you know we have no debt and we started to generate cash from operations. And we don’t need to invest the cash from operation that we generate to recover any debt or to retire debt. So we took a strategic to invest that cash in the growth of the company and one of the, I expect is obviously the R&D spend. At the same as we communicated in prior quarters that strategy there has no change. So we took our strategic decision to spend about $25 million per quarter plus or minus 10% as we said and so far that’s our strategy. In terms of the SG&A, we guided for so far what we see as the normalized quarterly spend of about $42 million, plus or minus 5%.

Steve Smigie - Raymond James

Okay. And then just if I could look out a little bit you obviously have pretty big quarter here, pretty big guidance on the revenue side, based on that surge in revenue should I expect the rest of the year to continue to sort of be seasonal or have you set the bar higher here so that I shouldn’t apply a typical seasonal patterns going forward?

Oleg Khaykin

I think as I mentioned in my previous calls, I really do not like to pine beyond the three months visibility, so I’ll just leave it at that, I mean who knows what the rest of the year holds. What I see is what’s currently our customers are communicating to us with their expectations and really I think if anything a better proxy to how to think about this industry throughout the rest of the year is what the expectations are for the broader economy, because clearly we and our peers are very much dependant on how good is the economy recovery going to be in North America and Europe and how strong the consumer markets remain for reminder of the year.

Ilan Daskal

And Steve just with on what Oleg said, though we guide just for the March quarter and not beyond the March quarter. Obviously, if you know the economy will continue to recover, we don’t precede the March revenues guidance as a onetime spike. I mean, we believe that if the economy will continue to recover, we will stay along with it.

Operator

Our next question comes from the line of James Schneider with Goldman Sachs.

James Schneider - Goldman Sachs

I guess, Oleg I think last time on last you talked about lead time being stated, I think that’s very common for most people in the industry. Can you talk about where lead times are today and what you expect will do over the next quarter?

Oleg Khaykin

Well, I think the lead times as you correctly pointed out are extending across the industry and for IR lead time is range anywhere between 12 to 16 weeks exiting last quarter and it’s a little bit shorter for some product lines where we have more ample capacity and it’s bit longer for other product lines particularly if we launch more complex products which require longer cycle times to go through the fab. I expect the lead times for the industry to remain, that’s kind of the extended levels for at least next three months. But I think overtime, we should see lead times start coming down as demand is getting for sales and additional capacity comes on March.

James Schneider - Goldman Sachs

Thanks for that and then as a related question, what do you see in terms of pricing in a market, I mean clearly with lead times extended in sometimes that allows you the opportunity to kind of keep prices flat or better than normal or even in some cases increase them. Where do you see with ASPs going in December and then what do you expect from March?

Oleg Khaykin

Well, I think the broader market I think the pricing remains stable and there are I think price increases going on at the kind of lower end segments of the market, because those are usually the first ones that CODM pricing pressure. So more commoditize, lower end parts of the market is fairly what you are seeing some ASP increases. I don’t think there is any price increases happening for kind of direct design in where you have one or two sources and you have a multi quarter contracts with the customers.

James Schneider - Goldman Sachs

If I could speak one last one in, on the high road business that’s recoverable pretty nicely. Do you think you are pretty much on normalized run rate or do you still have more recover to get back to kind of where you were before?

Oleg Khaykin

Well, I think it’s more or less the run rate as we see it, but also we’re starting to see part of that recovery is driven by some of our newer product segments in medical and heavy duty industrial applications, as well as the return of the commercialization spending. So I think I certainly hope that this continues to get better. There is however, probably a risk in there although for IR it's not a very big depending what the Congress decides to with military spending. We have fairly small exposure to the military segments, but clearly if Congress decides to scale back military spending that may impact longer term some of the revenue.

Operator

Our next question comes from the line of Bill Ong with Merriman.

Bill Ong - Merriman Curhan Ford

Congratulations on the solid quarter. On the emerging gallium-nitride technology, can you just talk about who was some of your early customers or customer types and how this adoption will permeate into the different end markets? And what type of growth rates can we expect from this segment, let's say three to five years from now?

Oleg Khaykin

Three questions in one, but let me try to calculate as well thanks for that, it's a good question. On GaN, we won’t the customer names, but as you can imagine given that it’s a very unique kind of revolutionary new technology, they adopt a customers who are the first one to take notes that were are usually the market leaders in the field, so if your Tier 1 customers and particularly on the lower voltage segment, if the customers in the computing kind of enterprise computing storage and communication space and on the mid voltage usually in the industrial type customers.

So that's kind of the first set of customers with whom we have NDAs in place and with whom we share the samples and who are currently, obviously qualifying and experimenting with these products and their designs. In terms of the growth, as with every new technology the first thing happens as people need to learn how to design and work with it. So as the result, just because you have the samples you have the product, you take some time for a lot of these customers to get comfortable with it.

So as a result we don't have any illusions about the hockey stick growth in this business, but we do expect to start showing some revenue within the next 12 months and really I think the growth in that segment should start picking up within kind of 18 to 30 months horizon. And what the particular growth will be, it really will be driven by how strong is the market adoption, it's kind of hard to predict at this point in time. Since it’s taking off from zero, you can argue that growth is infinite. I mean you probably will be in better position to estimate market penetration and growth once we have at least one year of revenue under our belt.

Operator

Our next question comes from Craig Berger with FBR Capital Markets.

Craig Berger - FBR Capital Markets

I guess the first one is your continuing to grow revenues here in the first quarter, it seems like there are some replenishment going on in the first quarter your customers. How comfortable are you or what kind of visibility do you have into your non distributor customers your OEMs that they’re not stock piling excessive amounts of inventory. Can you just explain what type of visibility you have there?

Oleg Khaykin

Sure thanks Craig, is good question here. Clearly we are monitoring all our customers as well as distributors, given the number of the expedite request we’ve been getting from our Q1 customers, we do not believe there is any SEC filing of inventory because they are telling us in many cases they use contract manufacture and they get to the point where they actually manage on daily basis the allocation how many units should be shipped to which manufacturer depending where they see the tightest need, latterly the moment these products hit the doc for the most of the them they go immediately into the finish product.

I cannot talk to the we’re those product and up, how fast they are sold or did they going to finish good inventory, but from our understanding at this point in time very little product is actually being put into inventory, for the most part it go straight from the doc into the finish goods. And in case of distributors we are monitoring is very clear, as I mentioned in my script the sell in sell through were roughly in equilibrium. So we are monitoring the sales that going to the channel and given that they are not historically lowest point for us at below 8 weeks, I’m actually not very comfortable with the level of inventory as we have in the channel, I think it's probably too low.

Craig Berger - FBR Capital Markets

And then thank you for that. Then is a follow up, I think you guys have talked about potentially getting the power management device business up towards $100 million quarter market. You’ve obviously close the gaps somewhat here in December and probably what we done in March. What’s your confidence in hitting that number this year can you remind us what the major programs are maybe who you are taking share from any color over there? And as it relates those revenues continue to rise, how do you think about your gross margin profile?

Oleg Khaykin

Okay, I don’t want to comment on who we are taking share from, you guys are probably much better at analyzing that. However, we do feel very confidence in our power management devices business in fact given the capacity constraint, actually this is one business units where some of the capacity is in shortages been (inaudible) more acutely. But I do feel that we have a very good shot at closing $100 million mark in this business unit this year and the margins will continue to expand.

As you’ve probably seen over the last few quarters, our margins have grown up quite significantly and one of the elements driving our margins growth projections for next quarter is a significant rebound in this business unit segment. So we do feel that long terms it’s going to be a rough $100 million for quarter business for us with the margins in the historical range of between 25 to 35% in that business unit.

Craig Berger - FBR Capital market

Last question, can you just remind us about the timing and related cost savings of anything fab consolidation actions? Thank you.

Oleg Khaykin

Sure. As you know we have two fabs that we have planned for consolidation, one in El Segundo, and one in UK. And our initial plans were to shut them down sometimes during this calendar year. We continue to evaluate this decision on quarterly basis by watching how much of the external capacity comes on line and what the demand is doing and where the shortage of sub capacity we have. It’s still our plan, but we continue to evaluate on quarterly basis whether to proceed with a shutdown. So once we feel we have sufficient external capacity in place and products have qualified in running we will proceed with a consolidation better. This point in time, our capacity remains very tight and actually both of these factories are necessary just to meet the customer demand.

Ilan Daskal

Oleg, just with on that, on the manufacturing on the closure, we have not changed any decision that we’ve communicated earlier. So far in terms of the consolidation and the timing and the savings, it’s still part of our ongoing plan, however as Oleg you mentioned we’re revisiting those decisions every quarter. And if the capacity constraints that grows market share gain will continue. We will may need in the future to change the decisions.

Craig Berger - FBR Capital market

What was the cost savings you guys had said?

Ilan Daskal

We headed for the El Segundo as of calendar year 2011 at about $12.7 million a year savings. And the remaining savings for the new product it’s about another $3 to $4 million savings per year. We already realized another four.

Oleg Khaykin

Just to clarify, it’s not that we’re going to change the decision to close the fabs the decision will not change. It’s the timing around that this what we are continuously revisiting.

Operator

Our next question comes from Terrence Leeland with Citi.

Terrence Leeland - Citi

The first one relates to I think several times you’ve said that some of the revenue growth is attributable to market share gains. Can you perhaps order for us the top three areas I think you’re gaining share and then I have a follow-up? Thanks.

Oleg Khaykin

I think from our perspective if I look at them where we were how long different business units during the last cycle and where we are today. So clearly our enterprise power has gained significant share in the server space from the prior cycle and from the prior architecture, also have they now expand into other parts of the enterprise space such as the communication and storage we’re going there from 0% to obviously some revenue and as they extend further into the laptop computing space that's also a new market for us.

So net, net the enterprise power is one segment what we have picked up quite a bit of share. The second segment is our discrete business, when I joined the company it little under two years ago one of the big focus areas for us to engage was said on Power Management Devices and we have done significant rejuvenation over the product portfolio in that business and we’re launching in our new book silicon and packaging platforms, for that business units and if I going to track our broader peer group and growth in that area over the last four, five quarters our revenue as that grown the larger industry and also if I compare where we were at the same point during the last cycle we are positioned better this time around as well in terms of both design win pipeline and the revenue shipments.

And the third area is the industrial and appliances we are seeing IR has always been a leader in technology in the variable speed motors this technology is finally now coming in to its own after kind of a being technology for the next year for the past six, seven, eight years given the government regulation and incentives being put in price we are seeing very sharp inflection in the transition in the appliances as well as the industrial space towards the variable speed motors technology and IR is very well positioned in the segment and if I look at our pipeline we're clearly positioned very well to grow in that area.

Terrence Leeland - Citi

Then as a follow up I think I actually have two ones. The first one is on the intellectual property revenue, it seems like that’s stepped up a little more than as I expected, I perhaps missed that explanation of that and what your expectations are going forward?

Ilan Daskal

Yes, this quarter it was higher than we projected, it was a recognition a one-time recognition of license fees. And we do not expect that to recur in the next quarters. As we communicated in the prior quarters, we believe that it will be at the around line median or less per quarter.

Oleg Khaykin

Yes, just see this incremental amount was triggered by the one of the license fees qualifying the technology and passing the mouse from which enabled us to recognize the royalties.

Terrence Leeland - Citi

Understood and then the last one from me is on inventory, I think you have suggested that you do have some front-end tightness there obviously have guided for sequential growth, are your expectations for end inventory that you will take them up, is that correct?

Ilan Daskal

As I side on the front-end tightness, every quarter we have been provisioning more capacity and just to that before we had enough the demand has gone up even higher so we continue every quarter to add capacity and in the interest of the improving customer support and reducing lead times you do have to prevail some die banks and something is good inventory for certain customers. So in that respect we do plan once the capacity shortage to get you alleviated to provision some additional inventory for our customers. And given that at this time our channel inventories are very low, I'm sure of many of our distributor partners so would like to see more products in the channel.

Operator

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

Stephen Chin - UBS

My questions are evolving mainly on our gross margins. You could first clarify in terms of the automotive power business. I think why the gross margins were down sequentially despites the strong growth in the quarter?

Oleg Khaykin

In automotive business unit we launched a new technology platform last quarter and as we can imagine during the startup phase unusually higher amount of yield losses in the fab, so that problem has been fixed during the last quarter, but the material yield losses that we have incurred last quarter have depressed these margins we should see the recovery in these margins during this quarter as part of the driver that’s will push our margins to 34% to 35% range as Ilan outlined earlier.

Stephen Chin - UBS

Great, can you let's talk about what is your capacity utilization rates were in the semi quarter?

Oleg Khaykin

All of our capacity utilization was in the low 80% range.

Stephen Chin - UBS

And lastly as we look forward at some point in future when you’re equal to prepare external front and back-end capacity to migrate some of your production with the gross margins, roughly comfortable or potentially above/below (inaudible) given that utilization or getting higher the manage high return on what replying time is future going you can alter as production would you expect margins to remain comfortable to where they are today?

Oleg Khaykin

We don’t breakout the difference in cost internal and external; clearly the margin impact when we are other will depend on the pricing we are receiving and also the fabric products that we outsource.

Ilan Daskal

And we’ll add to that also, the mix also will play here, it depends on the mix of the revenue that we generate each quarter, but definitely the higher utilization that we have internally, and it does help with the gross margin by reducing the overhead cost.

Operator

(Operator Instructions) Our next question comes from Brian Piccioni with BMO Capital Markets.

Brian Piccioni - BMO Capital Markets

Thank you for taking my questions and congratulations again on the great performance into even better outlook. Of course most of the questions one wouldn’t want to ask, were already been asked and answered, you mention the variable speed drive opportunity earlier, I was wondering if you have looking through to your customers significant exposure to things like solar, wind power and that sort of thing?

Oleg Khaykin

As you know the solar wind power that use essentially the exactly thing products of all their industrial segments. So, we do have when we have quite a few design winds and we are in production and shipping revenue in to this market. However, at this point in time given the current architecture in the solar market it really the only place where products like IR’s devices season discrete is the inverter box, so you may have very large solar panel generating plan, but it only has few inverter box. So interesting as this opportunities for the solar panel providers for the semiconductor it’s largely not a very big market.

However we do see some interest in the migrating solar panel architecture were you have an inverter on each panel so clearly from the silicon provider point of view that will become a more interesting market for us. We do expect to the wind power there is a much more interesting market because each one as you know has the generator motor and there are the traditional industrial products that I ask provides work very nicely and we do see interest in there in organically were we see also some interested in our high level margins modules for these wind powers especially the once that going to the open sea because the condition salt moisture and so on are very adverse to the traditional kind of commercial and industrial modules and there our know-how in the HighRel modules which can with stand very harsh conditions that appears to be very appealing to many of our customers.

Brian Piccioni - BMO Capital Markets

Okay if I can compare much of the current situation in the solar business where there is large number of panels small number in inverse in the VSD business we are going from the situation were the semiconductor content of most electric motors are zero and if I understand the specifications in the future there is going to substantial semiconductor content with each of these motors is that correct.

Oleg Khaykin

That’s absolutely correct, which you are going to placing, you are placing a lot of the mechanical like pulley transmissions and all these other things with the electronic sensing and controllers and the drivers so in that feel overall bill of material goes down, but there is a significant substitution of the mechanical parts with the electronic parts.

Brian Piccioni - BMO Capital Markets

And their improved efficiency.

Oleg Khaykin

That’s 30 to 40%.

Operator

(Operator Instructions). We do have a follow up from the line of Craig Berger with FBR Capital Markets.

Craig Berger - FBR Capital Markets

Hey guys just wanted to operating expenses I think Steve trying to ask some questions here, but can you just remind us what you are committed to spending or not spending based on certain revenue levels?

Ilan Daskal

So Craig, what we have communicated in the R&D we plan on $25 million per quarter plus minus 10% and on the SG&A 42 million plus minus 5%.

Craig Berger - FBR Capital Markets

I guess my question is at what revenue level per quarter does at need to go up?

Oleg Khaykin

I mean, I see us at least keeping that level and share about $250 million a quarter run rate and then we’ll have to revisit our assumptions and see what if any we would need to increase, but also as we implement our ERP system, over time I expect our SG&A actually to start coming down. So, to the extent to maybe the two may offset each other, I think we should be able to scale our revenue without meaningfully increasing our OpEx. That’s where part of the operating leverage comes in into play.

Craig Berger - FBR

And then as a follow-up, do you guys have any plans to reassess your target operating model or gross margin targets and I guess how do you see gross margins ramping as revenues continue to ramp?

Oleg Khaykin

Well, I mean I think kind of taking one step at a time, we had a 1.5 year economic set back and we have now successfully recovered our top line and bottom line to where it was pre downturn. We will continue to focus on growing both our top line and expanding our margins towards our stated goals and I mean, as the economic recovery continues and remain sustainable we will get to our target model sooner I would imagine and we will continue to update you guys as our revenue both top line and bottom line grow.

Operator

Our next question comes from Steve Smigie with Raymond James.

Steve Smigie - Raymond James

Just some housekeeping items, can you give your thoughts on tax rate end of the quarter and as far as you are willing to and similarly share count, is a little bit of buyback how more would you do in the buyback and wonder what’s your prices start to feel that our partner share effects?

Ilan Daskal

So, Steve on your first question for the next couple of quarters we will just have tax on our foreign entities jurisdictions of approximately two or less than $3 million per quarter. And to you second question, what was that?

Steve Smigie - Raymond James

Buyback.

Ilan Daskal

On the buyback so, we did announce the 100 million buyback we’ve done so far about a third of it. And it is part of our overall strategy and we don’t try to time to market it is just part of our overall strategy and we are continuing to execute on these plan, but again we are not communicating at what volume for each quarter or timing or pricing?

Steve Smigie - Raymond James

Okay and is there particular stock price where (inaudible) after this come back in money for you?

Ilan Daskal

We don’t communicate, I mean needed the stock price or the volume or the timing as I said Steve.

Steve Smigie - Raymond James

And then just the final question. Can you just talk about order patterns look like throughout the quarter into the new quarter up a month? Thanks?

Oleg Khaykin

I think we only prepared to give the guidance for this quarter and so far to be customer demand that remains robust and I think depending on what happens after Chinese New Year as people may be reasserting goals a situation may change, but from given from where I look at today, showed just have capacity and amount of unmet demand on there I imagine at least to next three months are going to be strong and some of it may carry out into the next quarter. But it’s too early to tell at this point in time.

Steve Smigie - Raymond James

I guess sequentially was each month better than previous month.

Oleg Khaykin

I don’t break out typically what we’re seeing and within the quarter I just kind like to strict to the quarterly guidance.

Operator

There are no further questions at this time. I’d now like to turn the call over to Oleg Khaykin for any closing remarks

Oleg Khaykin

Thank you, operator. Well thank you very much for joining us today. As I mentioned earlier we feel very confidence in our strategy and we are very pleased to recover most of our lost revenue during these 18 months economic downturn and recovering and turning back to profitability and we look forward to building a strong business with an expanding our profitability. Thank you for joining us and we’ll see you next time.

Operator

Ladies and gentleman, this does conclude today's International Rectifier 2010 fiscal year’s second year quarter financial results conference call. You may now disconnect.

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Source: International Rectifier F2Q10 (Qtr End 12/27/09) Earnings Call Transcript
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