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International Rectifier Corp. (NYSE:IRF)

F1Q2010 Earnings Call

November 04, 2010 04:30 pm ET

Executives

Chris Toth - IR

Ilan Daskal - CFO

Oleg Khaykin - President and CEO

Analysts

James Schneider - Goldman Sachs

Terence Whalen - Citi

Steve Smigie - Raymond James

Craig Berger - FBR Capital Markets

Brian Piccioni - BMO Capital Markets

Ramesh Misra - Brigantine Advisors

Stephen Chin - UBS

Steve Smigie - Raymond James

Operator

Good afternoon ladies and gentlemen and welcome. My name is Carrie and I will be your conference operator today. At this time I would like to welcome everyone to the International Rectifier fiscal first quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions). To ensure that everyone has a chance to ask their question, we ask that you please limit yourselves to one question and one follow-up.

Thank you. It is now my pleasure to turn the conference over to our first speaker, Mr. Chris Toth with Investor Relations. Sir you may begin your conference.

Chris Toth

Thank you, Carrie 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. Our quarterly report on Form 10-Q is expected to be filed with the SEC tomorrow Friday, November 5, 2010 and can be accessed using the same web address. This call is being broadcast over the internet and can also be accessed through IR's web address. A conference call replay will also be available through November 11, 2010. After our prepared comments, we will open the line for questions.

Our discussion today will include some forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. We caution that such statements are subject to a number of uncertainties and actual results may differ materially. Risk factors that could affect the company's actual results are included in our press release issued today, and the company's filings with the SEC including the most recent Forms 10-K and 10-Q.

Before we begin, I would also like to mention that following events of note. From November 8, through November 11, we will be at the Electronica Trade conference in Munich, Germany and I would also like to mention that International Rectifier will commemorate its 50th Anniversary on the New York Stock Exchange by ringing the opening bell on Tuesday morning December 7.

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 first quarter of Fiscal 2011, IR reported revenue of 280.9 million which was a 6.5% increase from the prior quarter and a 56.6% increase from the first quarter of fiscal year 2010. We continue to see a healthy increase in revenue driven by a strong end market demand driven primarily by our OEM customers.

Gross margin increased to 38.7% up 260 basis points compared with a prior quarter. The increase resulted primarily from a retail product mix as we continue to see strengths in the higher margin industrial and enterprise infrastructure end markets. Overall, we continue to see good progression on our gross margin and remain confident of our target range in the low 40s. We reported a net income of 33.5 million or $0.47 per full diluted share compared with $29 million or $0.41 per fully diluted share in the June quarter.

The September quarter results included a $3.8 million gross tax benefit that increased the diluted earning per share by $0.05. The June quarter results included an $8.5 million gross tax benefit that increased the diluted earning per share by $0.12. For the September quarter, R&D expenses were $27.6 million which represented 9.8% of revenue. SG&A expenses were $48.3 million which represented 17.2% of revenue. The increase from the June quarter is primarily from employee incentive compensation and commissions associated with higher revenue. Operating income for the quarter was $31.6 million, an increase of 43% compared to the prior quarter.

Operating income represented 11.3% of sales for the quarter. Other expense net was $1.3 million in the September quarter and interest income net was $1.4 million primarily from our existing investments. Income tax for the quarter was $1.8 million benefit due primarily to a release of tax reserves and other discrete items totaling $3.8 million which was partially offset by about $2 million in tax accrual in our foreign jurisdiction. The total cash, cash equivalents and investments at the end of the first quarter was $575.5 million which included $3.4 million of restricted cash. Inventory was $187.6 million which is up $17.4 million or about 10% from the prior quarter. Inventory weeks were 14 up one week compared to the last quarter. Cash from operating activities in the quarter was $37.6 million and free cash flow was $14.9 million.

Cash, capital expenditures were $22.7 million which was about 8.1% of revenue. Depreciation and amortization expenses were $18.9 million and stock based compensation was $4.4 million. During the quarter, we purchased just over 1 million shares of our stock at total cost of $20 million. We had 69.4 million shares outstanding at the end of the September quarter.

Moving on to our outlook. Despite weakness in consumer and notebook market, continued strength in our industrial appliance and automotive markets should enable roughly flat revenue compared with the September quarter. We currently expect revenue for the December quarter to be between 275 and $285 million. For this projected revenue range, we currently estimate gross margin in the December quarter to range between 39.5% and 40%. We expect the gross margin to increase due to a retail product mix and operational efficiencies.

We expect our R&D expenses to be about $28.5 million. SG&A expenses are expected to decrease about 5% to $46 million in the December quarter. The decrease is primarily due to a decline in audit fees and lower stock base compensation expense. Interest to income is expected to be about $1 to $2 million. Tax expense in the December quarter is expected to be between 2 and $3 million. And finally we expect our cash capital expenditures to be about 28 to $30 million. This is driven by our investments in internal manufacturing companies, our ERP implementation and new technology introductions.

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

Oleg Khaykin

Thank you, Ilan. Overall we are pleased with our performance in the September quarter of strong customer demand and market share gains drove our revenue growth up 6.5% over the prior quarter and 56.6% over the prior year quarter.

Favorable product mix and continued improvement in our operations drove our customer gross margin and net income without any discrete tax items to the highest point since I joined IR in March of 2008. We are making significant progress towards our target model and we have discussed at our Analyst Day in June and I am confident that our strategy to deliver sustainable growth and solid results. During the first quarter, we continue to experience strong business growth across all geographies. That said the we did see weakness in consumer and notebook markets. However, the new program ramps in strength and appliance, industrial and automotive markets resulted in the growth for the quarter. Asia remains particularly robust as we continue to see strong growth driven by appliance, automotive and industrial customers and North America and Europe also continue to pour solid growth momentum in automotive and industrial.

Moving on to our business units. The Enterprise Power business unit revenue was up slightly to $35.2 million despite weakness in the notebook market. This was due to strong revenue in bookings in our server products and continued growth in our communications business with tier 1 OEMs. The increase in Enterprise Power gross margin to 47.3% is largely due to a change in customer mix with higher gross margins in enterprise infrastructure business. Our Power Management Devices business unit experienced 6% growth from the prior quarter to $116.5 million driven by robust demand across the industrial and power supply markets. Gross margin in this business segment increased to 29.5% for the quarter. The gross margin increased as a result of a more favorable mix towards industrial products and greater economies of scale.

Indeed energy saving products business unit revenue grew 9% over the last quarter to $60 million. The rapid conversion to more energy efficient appliances and industrial products is fueling the growth. IR motion control and IGBT technology is seeing very strong customer demand and we continue to see new opportunities unfolding. We have a established leadership position in architectures and products for Medtronic motion control that enables significant energy savings in a wide variety applications.

We expect to see this trend to continue driven by regulatory measures and consumer demand for more energy efficient products. Our automotive product business unit grew 11% from the prior quarter in an all time record 23.9 million driven by demand in Europe, Asia and North America. We continue to see a rapid adoption of our high efficiency power products into new car models and demand remains strong. On the near term, we expect to see strong growth in this segment as new design wins ramp it to production. We expect the automotive segment to benefit from strong growth over the long-term. And lastly, our HiRel business unit revenue was $44.2 million which was a 9% increase compared to the prior quarter. We continue to see strength and interest in our HiRel ability Power Management product in many of the segments we served. Overall, we believe we have strong competitive position in HiRel markets.

Now an update on channel inventories. During the quarter, software sales compared with the prior quarter were up 10% sequentially. Channel inventory was up slightly in absolute dollars but remained flat at about eight weeks. Leap cons have come down with some profits but remain extended for others. Overall factory utilization remained at about 90% during the quarter. For December, we expect to see cyclical weakness in the consumer and computing markets to be offset by continued strength in automotive, industrial and appliance and markets.

Our Automotive business unit continues to remain robust as design wins continue to go into production. In addition, our ESP business unit which includes motion control products for appliances in industrial applications should cease strength. As Ilan indicated earlier, we expect our revenue to be roughly flat in 275 to $285 million range. The increase in gross margin to 39.5 to 40% is largely due to a shift in customer mix towards higher gross margin industrial and enterprise infrastructure business and operational efficiencies.

In conclusion, we are pleased with the execution of our strategy. We continue to build a strong operating model and continue to see strong demand for our products as reflected in our design win pipeline. As we close our calendar 2010, we remain focused on aggressively investing in R&D expending our presence with the industry leaders, increasing operating and manufacturing efficiencies and prudently managing our capital. We are confident in continuing to grow our business and improving our profitability. Our operating business model provides opportunity for further leverage as we grow our revenue expense, our margins and gain market share.

This concludes our prepared remarks. We'll now open the lines for your questions, operator?

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from James Schneider with Goldman Sachs.

James Schneider - Goldman Sachs

I was wondering if you could talk a little bit about order trends in the quarter. What your book to bill is currently at this point, what your terms requirement is to meet your guidance. And then if you could quantify the lead times is on a blended basis, you said some remain extended as some came down. If you could quantify that, that would be great.

Oleg Khaykin

Thank you. We do not report our book to bill guidance. I view that especially at this part of the cycle the volatility of end market push and pull kind of skews and generally we are both talking about this thing. However we give a guidance, it includes already our level of confidence, what we think our current expectations for the quarter and generally given where we are we are comfortable with the numbers.

James Schneider - Goldman Sachs

And then maybe on, what you're seeing from distributors it sounds like sell through increased more than your sell in. Do you expect distributors in the December quarter to build a little bit more inventory? Are you trying to do that or are they a little bit more cautious and want to keep in for your levels where they are?

Oleg Khaykin

No, I mean clearly this part of the cycle some distributors are taking cautious approach and they are obviously trying to sell more, but on the other hand we also have distributors who want more and it's not in our interest to put more products in the channel without seeing an actual end market demand. So if we see any kind of normal orders from distributors, we ask them why they are ordering and generally I avoid or I discourage speculation on the future demand and I would rather hold this inventory in house and release it to the market when the time is right.

James Schneider - Goldman Sachs

On the discrete market and just pricing in general, are you seeing any return to normal pricing pressure in a discrete market or is that as robust as it has been for the last several quarters. Thank you.

Oleg Khaykin

We are not seeing any return to irrational behavior of price cutting, in fact I think pricing is remaining very solid and one of the things you got to look at it with a lot of standard kind of product, especially in discrete. It's really a function of supply and demand and how the people feel the demand is going to be in the future. From where I am sitting and based in our intelligence on the availability of foundry capacity and internal capacity at our competitors, we see that pretty much everybody is running nearly the full fabs and it would be foolish for anybody to drop the prices at this point in time because in a matter of quarters as our cycle starts to pick up again, they will stuck with lower priced products and I think what we are seeing is quite a bit of discipline in the industry about maintaining the prices.

Operator

Your next question comes from Terence Whalen with Citi.

Terence Whalen - Citi

Hi good afternoon and congratulations on the results. This question relates to the target profitability model. Longer terms to the low 40s and high teens operating margin model, if I look at that versus the December quarter guidance, it would imply a slight move up in gross margin, but more importantly it would imply that OpEx levels on an absolute dollar basis would be almost flat as you increase revenue to the $312 million range. Is that a fair assessment on the OpEx side that on an absolute dollar basis you can keep the OpEx levels flat over the next several quarters as you drift towards $312 million revenue level?

Ilan Daskal

Generally on the OpEx we try to target to the model that we laid out back in June, the SG&A was about 42 plus, minus 5%, its more on the high end of that range. And on the SG&A again, we target the 25 million plus, minus 10% and we are there are also on the high end. On an absolute dollar basis, we try to keep at that level. Bear in mind that on the OpEx we have a slightly elevated amount due to the ERP implementation. But overall that's correct as we scale the revenue; we try to maintain the same dollar value for the OpEx.

Oleg Khaykin

And from our perspective maybe in the future we'll see some increases in R&D but as Ilan said, as we finish up our SAP implementation it will be more than offset by a decrease in SG&A and generally my view is that growth in revenue should not necessarily result in increased OpEx. My sense is OpEx should be growing significantly slower than the top line.

Terence Whalen - Citi

Next question would be more related to the March quarter. As we look into the March quarter, its sounds like you've only seen some selective reductions in lead times. Maybe Oleg if you can give your perspective on where we are in the supply demand cycle, heading into March I think that's a seasonally down quarter. Would your expectation be that it be normal seasonality where we've been moving around lead times and supply demand balance affect that warrant as well? Thank you.

Oleg Khaykin

At this point in time it's kind of early to talk about the March quarter. I mean we're still two months away from the end of the December quarter but as I've been talking for a long time, its kind of the (inaudible) some and this industry has been kind of six quarters up and then two quarters closed and depending on a level of inventory to our economic conditions, it could be down or flat or it can be driven by the specifics of the company. So you could kind of count as December as the first quarter or kind of the two quarter above, whether it's going to be up or down or flat I think it's more a function of individual company and their position in the market. But generally for the semiconductor industry, as we've seen from a lot of our peers and other companies in the industry, they are seeing December quarter flat to down mainly driven by consumer and computing segments.

Furthermore typically March quarter is seasonally weaker for the consumer segments. But then it all depends on the segment. I mean for us for example, the appliances segment at the March quarter is seasonably the strongest quarter in our market segment. It comes down to what extent the computing and consumer market is going to start coming back sometime the next quarter or to what extent the automotive and industrial markets continue to be strong. That said, I think the industry is headed for a very soft landing in this particular downturn and probably by June quarter or end of the March quarter we should start seeing growth. That said, I probably would refrain talking about our visibility for the March quarter as its too early, but I would say that for us as I mentioned on the call, the channel inventories remain fairly lean at about eight weeks and our lead times for many of our products are still much bigger than I would like them to be.

Operator

Your next question comes from Steve Smigie with Raymond James.

Steve Smigie - Raymond James

Can you talk a little bit about some puts and takes here in gross margin, some of your comparables or competitors have had a hit of 100 basis points or so as goals has increased. So your margins went up that despite that or you are not as affected. And you've had some really nice improvement there in discretes and how much further can that go. Is your low 40s margin going to prove to be too low or maybe as capacity comes online some pricing would drop off a little bit and you might lose some juice there. So can you just talk about puts and takes here for the gross margin percentage going forward?

Oleg Khaykin

Sure, sure. I think it is absolutely true that the commodity practice have gone up. I mean fortunately for us, we don't use much coal. Power in coals is almost together and we use copper, but copper has also gone up but its much smaller percentage of our cost structure. But that said, we've seen significant increases in raw silicon wafers and there has been even talk of a lot of increases in remote compound and other kind of things. So the material did go up. However, two years ago we put an aggressive plan to drive operational efficiency and our operations have done a very good job more than offsetting these material increases on the costs or at least keeping up with the productivity with the material increases. Also just running a higher volume always brings you a percentage to further improve the operational efficiencies and economies of scale. So that's obviously been a contributor. You can always find that your factories can do more than a 100% of their stated capacity when push comes to shove and obviously that benefits you quite a bit.

When factories are running full, they find ways to improve things beyond what they thought was normal. So, my general philosophy is the high volume grade efficiency and that is something that we are seeing. In terms of looking further, I mean clearly we expect to continue to see improvements in profitability on our industrial automotive business just as volume goes up and we gain additional efficiencies and some of the more lower margin business comes back in consumer. Its really going to depend on the mixture of factors, one is what's the mix of IC's versus Discrete because ICs are generally at more than 40% margin, so its going to be accretive to the overall margin. Discrete are generally below 40% so they are even more dilutive. But as we look at the overall business growth and the mix as we are projecting forward, we are comfortable that we can get to the low 40s long term sustainable gross margin and once we get there, we'll take a look and see if it fits to revise this further.

So at this point, our goal is to comfortably get to the low 40's and by continuing to still focusing on growing the volume and optimizing and maximizing the bottom line of the company.

Ilan Daskal

Steve regard to Oleg just to make sure that, just understand that the guidance incorporates and all the commodity price increase are all baked into the guidance. And honestly its part of all the productivity gain and the manufacturing efficiencies that Oleg mentioned.

Steve Smigie - Raymond James

Then do you seen have outperformed here little bit on the quarter and the guidance relative to some of the comps. I think if you look at some of the products you revitalized, they have been having some fairly good growth there. Can you talk about how that opportunity looks over the next couple of years? What kind of growth you think can you continue with that performance and others like stuff we can look at design wins, etcetera that gives us some clue that that's actually going to take place?

Oleg Khaykin

Well I think you are being a little immediate. I think we have more than outperformed. If I look at the prior cycle tea cups September, 2008 and today we are over 30% on our best quarter then and most of my competitors are still below that jigsaw. I think we have more than just outperformed the industry and clearly reenergizing some of our older products has had a significant impact on the regaining market share but also without being talking for about two years our strategy focusing on the winners, winning that business, delivering new products, hitting the production windows and going into production is really have been the factors that contributed to what I believe is a significant gain in the share for you relative to our market space. In terms of going forward I think the way I look at this business whatever, we are doing today is really kind of planting the growth seeds for the 2012-2014. Whatever we're going to expect to see 2011-2012, all these growth seeds have been planted since last two years and we'll start going into production and will drive our growth over the next two years. Personally what I am spending all my time on today and what my management team and R&D team are doing today is really to focus on laying the foundation for 2012 to 2014.

Operator

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

Craig Berger - FBR Capital Markets

Thanks for taking my question, can you talk a little bit about where you are in the discrete market share gain story. Do you still have more gains left to come, which applications and how are you gaining confidence, sort of how we think about the magnitude for 2011?

Oleg Khaykin

Thank you Craig I think we are gaining share not only in discrete but also in the other products across other business units, but in the discrete, it's a very broad market. Right you don't just target particular applications. What its really more is you go by technology of a low voltage, mid voltage, high voltage. We are not playing in a high voltage market as the result of divestiture of business to be shaped out four years ago and year years ago or so. By the way we do place the mid voltage and low voltage and there, there is a broad range of applications running from computing to power supplies to industrial to practically every application imaginable. And in that business you win on three factors, right. If you have the lowest resistance which means the highest efficiency when that on the markets where you require not only lowest resistance but also the lowest gate charge. You got to have a benchmark solution and there are markets where all they want to see the highest frequency switching. So it's not a complete commodity as a lot of people assume, there is actually a lot of sub-segments and technological differentiators which dictate whether you win or lose.

And what we strive for is to be the benchmark performance for every particular application and that means having the best operating silicon and in packaging technologies. And the first step that we have undertaken to gain share was to rollout a whole new portfolio of packaging technologies which have enhanced performance of our older silicon and in past six months and in the upcoming year well be rolling out a whole new generation of silicon technologies which further push the under lope and expand both the cost effectiveness as well as the performance of our products.

Craig Berger - FBR Capital Markets

Can you just remind us what your quarterly revenue target is for the PMD segment?

Oleg Khaykin

Well the higher the better, but generally I think in the near term we targeted to get to about 125 and that's what we discussed in the summer. And I think we are kind of past that, so I am not working on setting new targets for them because it seems that they have gotten…

Ilan Daskal

(Inaudible) 16 in the last quarter.

Oleg Khaykin

No, no. He's talking about targets. The last quarter we did 116 and our target was 125, so obviously, we are getting pretty close to our target, so its time to up the target.

Craig Berger - FBR Capital Markets

That was fast. Okay, sort of tied into this. We've been hearing for a couple of quarters now it seems like Q3 and Q4 about weakness in PC and consumer and continuing strength in auto and industrial. Question A, is all those auto and industrial ship demand real or are we going to have a base reset to come in the first quarter or first half and B, when is computing in consumer going to stop stinking so bad. Thank you.

Oleg Khaykin

I hate to be the oracle for the industry but I consult more about our company. When it comes to mode of industrial at least from what I am seeing it as a real demand, the mere fact a lot of it is literally (inaudible) in supply and to avoid any line downs especially automotive. I know that these products are not sitting on the OEMs shelf. They go immediately into finished or semi-finished goods. Now the question what I would have left visibility on a finished industrial goods what's the inventory doing for them and from what I am hearing from lot of our customers in industrial drives, pumps, motors and so on in power supply is whatever they build, they immediately also shipped. So they don't have any roll inventory or finished goods inventory.

Now as we look further like one two steps or moved and have we looked in major industrial manufacturers, the likes of [GDB] and the others. That's something what I cannot really comment in terms of what's happening to their finished goods inventory but given that my customers are saying that in very strong continuous demand back in there is at least several quarters or why the demand is going to continue to be strong.

On consumer and computing I think the demand for a current generation of product is over. What we are seeing now is some of the consumer demand that is starting to come back is focused more of the next generation products that are going to be hitting the market in summer of next year and that's why the customers are starting to place orders. So I think really what's happening today on the existing generation of products is I think that by and large still they have enough inventory to finish building the Christmas and the Chinese New Year and whatever early builds for next year and really I don't think that demand is going to come back and really to the extent you are in the next generation products is what its going to probably start putting demand for you in the first quarter of next year.

Craig Berger - FBR Capital Markets

A couple more and then I'll go away. Do you have any foreign exchange or materials cost pressures, A. B can you just highlight how we should model OpEx for the year for fiscal '11 and see just remind us about your uses of cash? Thank you so much.

Ilan Daskal

On the foreign exchange we are kind of not really hedged the portion that we have in manufacturing or cost of controls is roughly at the same level of foreign currencies of the revenue and then on the commodities generally yes. We do see the price increases but it is all baked into our guidance and again we have other gains of sufficiency etcetera that Oleg mentioned earlier that offset the price increase of the commodities.

On the use of cash, we mentioned several times that our strategy is I'll refer you now back to the capital location model that we presented back in June and partially its for that strategy. You can see the buyback and we always considering an inorganic growth depending on the opportunities that are out there. In terms of overall 2011 guidance for the OpEx I don't want to guide specifically for the entire year. But again we'll mention that back in June our target model for the OpEx that we guided at that time and we said that the SG&A we target for about 15% of revenue and the R&D between 10 and 11% of the revenue.

Craig Berger - FBR Capital Markets

So no growth until you hit those targets?

Ilan Daskal

So in the mean time if you look at this quarter, SG&A was about 17%, R&D was about 10%. So just slightly above that.

Craig Berger - FBR Capital Markets

Thank you.

Oleg Khaykin

And I said earlier, earlier I think my view is the OpEx does not need to grow at the same rate as top lines. So but in general up about to obviously continue to drive operating leverage by managing the OpEx growth and driving efficiencies in our OpEx to improve the leverage in the bottom lines.

Operator

Your next question comes from Brian Piccioni with BMO Capital Markets.

Brian Piccioni - BMO Capital Markets

Yes, congratulations again for the performance and the turn around and the great outlook. I'd like to go back to the gross margin issue. Obviously you had mention targets in the June. I made notes even in the June investor day of in the low 40% range over a three year plan. Would you consider the company to be ahead of plan perhaps in 2012 that sort of a range could be achievable?

Oleg Khaykin

Well, I will tell you when we are ahead of plan, when we hit our model. And being close, it's like the only time it matters closely when you play horse shoes and hand grenade. So yes we are close but we are not there yet, so that point is I wouldn't say we are already there. I think we still have work to do. To the extent we hit it earlier, that's great and we will just have to reset and up the targets. At this point in time, I probably do not want to comment beyond our guidance in June. Thanks for your observation.

Brian Piccioni - BMO Capital Markets

I am only supposed to ask a second question, that's all I am going to do. The auto sector has worked there really well for you and this is probably another question. It's a little bit difficult to answer on account of the fact that there is a lot of things going on like electric vehicles and that sort of thing. But do you have some sort of insight as to what size of an opportunity the automotive sector could become for IR given five years let's say?

Oleg Khaykin

During the June meeting, we're laid out the target for automotive to get into the range of about 30 million a quarter and clearly we're making very nice progress to it. I think we're going to go beyond that. Obviously I mean expect automotives to become kind of equally weighted the major segment for IR. So, we are uniquely positioned in automotive with our power products because it's not only electric or hybrid. Everything in the car is going electric. There is a wholesale of replacement of all the hydraulics with the electrical drive and many of you don't realize but all your breaking systems and your steering systems are by and large today are electronic and that means everything has to be powered by motors and not chatters and pumps and that demands significant amount of what I call smart power electronics which is what kind of the sweet spot for IR and to extent you are introducing hybrid electrical functionality that significantly expands (inaudible) in every single car and that's what really gets us excited about automotive and automotive is not an easy market to be in. A lot of companies pay a lift service to it but really if you want to do it right you got to invest and two years ago we have undertaken such and investment we thoroughly redesigned the way we designed the products, the way we manufactured the dye, the way we packaged them, the way we test them and the way we track all the changes and all of that is now starting to manifest itself in the design wins and ramp in demand.

Operator

Your next question comes from Ramesh Misra with Brigantine Advisors.

Ramesh Misra - Brigantine Advisors

Hi good afternoon gentlemen looking good for 50. My first question is in regards to some noise about part shortages in different pockets of the industry. What are you seeing from your perspective and when does that go away.

Oleg Khaykin

Well I think as I mentioned earlier, in automotive and industrial there are still expended lead times, there are some periodic (inaudible) but they are driven more by the upside of the orders rather than with customers forecasted even 3-4 months ago. That said I think in computing and consumer that is really no longer a problem if you want some parts and we can deliver them to you tomorrow. But I think in industrial automotive and even also in appliances; I think there is still the areas that remain to be supply constraint.

Ramesh Misra - Brigantine Advisors

Okay fair enough Oleg. In regards to…

Oleg Khaykin

Sorry, its not only silicon, you are also getting into things like PC boards and plastic components and things like that. Often that's actually by far a bigger problem.

Ramesh Misra - Brigantine Advisors

I see okay, in regards to your enterprise computing segment, when do the design wins for the next generation Intel processors from your perspective start ramping, is it kind of Q1 event or is it going to be more stretched out through 2011.

Oleg Khaykin

Well it is going to vary, on the consumer side and computing a lot of the early production kind of starts in the first half and then goes in earnest by middle of the year for the next cycle. For the industrial, I mean that's kind of rolling number; there is no particular date for appliances. Generally each new model the year starts around February or so.

So it kind of varies obviously automotive is summer time. So I think we don't have any one segment that is dominates the cyclicality of new design wins. They kind of happen throughout the year. But generally what you do, especially if you play in the consumer or automotive, you have to pre-built some inventories before the product launch, because they want already to see by contractual requirements that you have that inventory already on hand.

Ramesh Misra - Brigantine Advisors

Okay thanks for that Oleg. One quick final one, any updates on your gallium nitrate product portfolio and the market evolution over there. Thanks.

Oleg Khaykin

Well I think you should buy a ticket and go to Munich next week and I guarantee you a good visit.

Ramesh Misra - Brigantine Advisors

Sounds good, talk to you later.

Operator

Your next question comes from Stephen Chin with UBS.

Stephen Chin - UBS

Guys thanks for taking my questions. First one was one the top line, could you pile up a color in terms of some of the areas where you're still seeing a little bit of growth in the current quarter specifically on the automotive and planning sides. Are those driven by new product ramps or is that just existing or is that existing demand for whatever products and there is a seasonality that's kicking there?

Oleg Khaykin

Okay, well think let us say that due to our segment and time the automotive there is a lot of new product ramps, so all the design wins we've kind of scored in the last two years are kind of starting to go into production and what you're seeing there is a lot more power electronic focused products kind of replacement of hydraulics with electronics the replacement of the traditional way the products were designed with the components that are more heavily relied on power electronics like the injection. It gives them orders, the steering, braking, electrical distribution and the kind of things like that.

In case then there is also secular trends such as in appliances or in industrial, if you've been tracking all the energy efficiency guidelines by European, Asian, and American governments going into effect, you see that by 2015 a significant share of the appliances in industrial product has to meet significant stricter environmental and energy efficiency standards and that means you have a 100 plus million big electric motors that are prior to the date did not require any electronic components, although require variable speed motor control and once that's driving the growth because this is my favorite type of growth. It's purely substitution driven. We had zero content before in a huge market. Now you are having a very nice amount of content for motor and it has to (inaudible) a little bit in the next three to four, five years. So those are the kind of secular trends that are driving it and for consumer obviously that's all driven by design wins and product cycles.

Stephen Chin - UBS

And also relates to the top line, I know that you guys traditionally have not had enough much closure in the handset and mobile handheld device segment but given your comments earlier about low voltage discrete products then, how is your progress on that part and market today?

Oleg Khaykin

We don't comment, at this point we don't have any wireless business and we don't really comment on our strategy for the future products at this point in time.

Stephen Chin - UBS

And if could just one last question on margin, just given the healthy improvements in the first quarter and also your guidance for the second quarter, is the assumption that a lot of the improvements for the current quarter is being driven by operational efficiencies, is that pre-calendar, is there a bigger element of mix shift in Q2?

Oleg Khaykin

Well I think as I said its combination of two things. Clearly a higher volume and number of operational measures that we undertaken have come to effect and has resulted in lower cost and higher level of productivity so that lowers your cost somewhat but also the mix as you take out some of the consumer and computing products and replace them with a more industrial products clearly there is a benefit to your margins.

Stephen Chin - UBS

I guess in terms of these efficiencies that you are realizing even though your utilization rates are quite high. Are these just sort of (inaudible) events or is there some classification that you might have in terms of initiatives that are going on that help move margins above your model that you currently have out there?

Oleg Khaykin

I don't think we are going anywhere above with the (inaudible) I think we all along when we set our guidance to be in the low 40's vis-à-vis type of measures that we have put into our assumptions. So there is really no Blue Birds of any type of (inaudible) beyond, above and beyond over we are pointing out.

Operator

(Operator Instructions). Your next question comes from Steve Smigie with Raymond James.

Steve Smigie - Raymond James

Great thanks for the opportunity on the follow-up. I did want to actually follow up on a question that Craig had asked earlier, with regards to the industrial. We're still hearing very strong data points out of yourselves and competitors and some of these markets. You mentioned for example GE is a customer.

So those guys are a little short on the revenue and their internal inventory was about I think 5% from the rough top of my head. Lockheed Martin missed their numbers a little bit as well. And GE was sort of a bunch of different things. They missed one which was all similar to aircraft.

So you guys are exposed at least in the military stuff and some of those industrial stuff to pounce there and dreams and stuff that those guys make. How long does it take for that kind of stuff to flow back to you? Does the miss necessarily mean that that you're going to see some disruption? So how close do you look forward to those guys and I guess how long would take to fall back to you?

Oleg Khaykin

Sorry I didn't mean to make GE, we don't really work with them as a direct customer with exception of few things. As they are generally our customer. The more customers we deal with on an industrial side, as the likes Emerson, (inaudible) on appliance side and others. So that's really what I meant when I said the appliances and industrial.

In terms of the kind of you mentioned Lockheed and others, while we intersect these kind of customers is mainly more in our HiRel side and most of our business there is problem driven. So, I mean perhaps the revenue there is highly reliable, once the program is approved then it' going to go into production. There is a certain number of units we're building ship and so during mobile schedule rather than any particular quarter.

Steve Smigie - Raymond James

And then while you talked about, I think with some discussion around SG&A you talked about some audit fees coming off and I know you guys had a bunch of consultants and have been working through fixing up your books. You guys I think are in full compliance now or at least a quarter ago. So will we see that number or at least that thing come out? Are we still yet to see a lot of the benefit of some of that cost rolling off?

Oleg Khaykin

So Steve, the consultants that we used to have are no longer with us for few quarters already. The increased audit fees were both in the June quarter and in the September quarter. So there is yes in the guidance there is a lower audit fees that is baked into the guidance.

Operator

At this time there are no further questions. Gentlemen are there any closing remarks?

Oleg Khaykin

Thank you very much for joining us today. We look forward to you again in the road in November and December and if we don't see you then, until February. Thanks.

Operator

This concludes today's conference. You may now disconnect.

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