International Rectifier CEO Discusses F2Q2011 Results - Earnings Call Transcript

Jan.31.11 | About: International Rectifier (IRF)

International Rectifier Corporation (NYSE:IRF)

F2Q2011 Earnings Call Transcript

January 31, 2011 4:30 pm ET

Executives

Chris Toth – IR

Ilan Daskal – CFO

Oleg Khaykin – President and CEO

Analysts

Steve Smigie – Raymond James

James Schneider – Goldman Sachs

Bill Ong – Merriman Capital

Bin Jiang [ph] – Citi

Ramesh Misra – Brigantine Advisors

Craig Berger – FBR

Stephen Chin – UBS

Brian Piccioni – BMO Capital Markets

Operator

Good afternoon. 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 second quarter fiscal year 2011 conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator instructions)

Thank you. Mr. Toth, 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 Monday, January 31, 2011 and can also 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 be available through February 7, 2011. 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.

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 second quarter of fiscal 2011, IR reported the revenue of $281.7 million, which was a slight increase from the prior quarter, and a 34% increase from the second quarter of fiscal year 2010. We continue to see a healthy demand in the appliance, industrial and automotive end markets.

Gross margin was 43%, up 430 basis points compared with the prior quarter, and significantly above the guidance. The upside in gross margin relative to our guidance was primarily from lower manufacturing cost as a result of higher cost absorption associated with increased level of inventory build in anticipation of future demand, and a strong product mix within our PMD, Enterprise Power, and ESP business units.

We reported a net income of $43.9 million or $0.62 per fully diluted share compared with $33.5 million or $0.47 per fully diluted share in the September quarter.

The September quarter results included a $3.8 million gross tax benefit that increased fully diluted earnings per share by $0.05. For the December quarter, R&D expenses were $28.5 million, which represented 10.1% of revenue. SG&A expenses were $46.6 million, which represented 16.5% of revenue. Operating income for the quarter was $44.6 million, an increase of 41% compared with the prior quarter.

Operating income represented 15.8% of sales for the quarter. Other expense net was $1.7 million in the December quarter and interest income net was $4.2 million primarily due to realized gains from sales of our level 3 securities.

Income tax for the quarter was $3.1 million due primarily to tax in our foreign jurisdictions. The total cash, cash equivalents and investments at the end of the second quarter was $602.5 million, which included $3.4 million of restricted cash. We have managed to further reduce our level 3 investments to $16.1 million the lowest level at IR in many years.

During the quarter we increased inventory by $35.6 million to $223.2 million or about 18 weeks. The largest increase was in our guidance [ph] inventory as we replenish our stock to better position IR to respond to demand.

Cash from operating activities in the quarter was $55.4 million and free cash flow was $22.4 million. Cash capital expenditures were $32.9 million, which was 11.7% of revenue. Depreciation and amortization expenses were $19.6 million and stock based compensation was $3.7 million. During the quarter, we purchased 170,000 shares of our stock at a total cost of $4.9 million. We had 69.8 million shares outstanding at the end of the December quarter.

Moving on to our outlook. Continued strength in our appliance, industrial and automotive markets should allow us to grow our revenue compared with the December quarter. We currently expect revenue for the March quarter to be between $285 million and $295 million. For this projected revenue range, we currently estimate gross margin in the March quarter to be between 39% and 39.5%. We expect the gross margin to decrease from the prior quarter due to an increase in silicon costs, lower expected cost absorption as a result of lower production volumes, and lower gross margin product mix.

We expect our R&D expenses to be between $30 million and $31 million and SG&A expenses to be about $47 million in the March quarter. Another expense net is expected to be about $1 million and interest income net is expected to be between $1 and $2 million. Tax expenses for the remainder of fiscal year 2011 are expected to be between $3 million and $4 million per quarter. We also believe we may release additional valuation allowances resulting in a benefit to the income statement during the remainder of fiscal year 2011.

For fiscal year 2012 we expect a tax rate of about 10% as we benefit from the new US tax legislation that was enacted at the end of the 2010 calendar year. And finally we expect our cash capital expenditures to be between $45 million to $50 million. Our CapEx has risen by select capacity expansion in anticipation of future revenue growth, the continuing ERP implementation and the introduction of new process technologies.

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

Oleg Khaykin

Thank you, Ilan. December marked another strong quarter for IR. We continued to execute well on our strategy with revenue slightly over the prior quarter and up 34% over the prior year quarter.

We are particularly pleased with our results as we delivered one of the most profitable quarters in IR history in many years. Despite industry cyclicality, our strong performance in the December quarter further validates the success of our strategy. The investments we made over the past several years, including new technology and product introductions and penetration of Tier 1 customers are starting to pay off.

During the quarter, the strength in appliance, industrial and automotive markets more than offset the weakness in consumer and computing. Geographically Asia was slightly down. The strong cyclical down in computing and consumer markets was nearly offset by strength in appliance, automotive and industrial. North America and Europe growth was driven by strong automotive and industrial demand.

Moving on to our business units. The Enterprise Power business unit revenue dropped 10% from the last quarter driven by cyclical downturn in the notebook market and a slight decrease in the server market. Enterprise Power, however, posted a 50.5% gross margin largely due to a greater mix of enterprise infrastructure business. Despite weakness in the consumer and computing end market, our Power Management Devices business unit declined only 3% from the prior quarter helped by strong customer demand in the industrial market. Gross margin in this business segment increased to 37.1% as a result of a greater mix of industrial products.

In our Energy-Saving Products business unit, revenue grew 5% over the last quarter to $63.1 million. Strong growth was driven by demand for our electronic motion control products that enable significant energy savings in a wide variety of applications for appliance and industrial markets.

Our Automotive Products business unit grew 7% from the prior quarter to an all-time record of $25.5 million, driven by demand in Europe and North America. Given the strong design win traction [ph] over the past couple of years, we expect our automotive business unit to perform well in the 2011 calendar year.

And lastly, our HiRel business unit grew 6% from the prior quarter to all-time record of $47.1 million, driven by strong demand from our aerospace customers. We continue to see strength and interest in our HiRel ability Power Management product in many of the segments we serve, and believe we have a strong competitive position with our customers.

Now an update on channel inventories. Software sales decreased about 4% compared with the prior quarter. Correspondingly channel inventories increased slightly from 8 to 9 weeks. We remain comfortable with our channel inventories as they are within our targeted range of 9 to 10 weeks. During the quarter, we have taken advantage of available foundry capacity to replenish our dye banks for long life, high-volume products. As such, our internal inventory grew by 19%. We feel this is a good business decision as we expect foundry and back-end capacity to become very tight by summer.

Lead times have continued to come down for the majority of products but still remain extended in some areas. Overall factory utilization remained at about 90% during the quarter. For March, we expect that Automotive and Energy-Saving Products business units to continue growing quarter-on-quarter driven by strong customer demand. We are also starting to see early signs of recovery in computing. Lastly, our HiRel business unit should also continue to see strong demand.

In conclusion, calendar 2010 has been an outstanding year for IR, and we are pleased with our strategy and execution. During the past year we have exceeded many milestones. Our revenue growth has significantly outpaced that of our peer group and competitors. We have broken the $1 billion annual revenue barrier. We have set new revenue and design win records in all five business units, and most importantly we have achieved and exceeded company’s profitability throughout the year, which in turn resulted in good returns to our shareholders.

We expect 2011 to be a good year for IR as we introduced a broad range of new technologies and products to reinforce our leadership position in power management. I feel confident that through our new technologies, products and operational excellence we can continue to exceed industry growth rates and maintain continuous profitable growth.

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

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from Steve Smigie with Raymond James.

Steve Smigie – Raymond James

Great. Thank you and congratulations on the nice numbers in the guidance. My first question is with regard to the inventories pick-up could you talk about – sounds like it is dye bank, sounds it is mostly finished good – raw materials rather than finished goods that's built up, and is that mostly in some of the motion controlled products or something like that, or you feel like it's going to be – you're not going to be able to have as much capacity to manufacture that as you get to the summer, is that sort of the way to think about that?

Oleg Khaykin

Hi Steve. This is Oleg. I will take this question. No, most of this inventory is – I mean, clearly, we can run all of our products in our fabs. A number of products, however, we also run through foundries. One of the things we've been doing in the fall is monitoring the foundry capacity, as well as the OSAT capacity, which is the backend assembly and test. What we have found out that unlike in the previous downturns where you see utilization in many of these segments drop to 80%, all of them were running about 90%, and if you've been listening to TSMC, they actually seem to be running almost at 100%.

That said, the expectations that I see based on my discussions with a lot of these foundries and OSAT is by summer they will be on allocation. Given that a lot of our proprietary products like electronic motion we can only run in-house, we felt it’s prudent for us to build a dye bank for some of our high-volume, long-life products like discrete devices so we would be able to have the room dedicated in our internal fabs to the single-source products when the demand comes. What we have done is to build dye bank on some of those other products so we would have ample capacity, ample dye bank to service customer demand without severely impacting our internal manufacturing capacity.

Steve Smigie – Raymond James

Okay, great. Could you talk a little bit about how we should think about gross margin exiting March? I guess, it seems like you built some extra stuff that helped out December gross margin and then you back off a little bit as you get into March. So do we sort of normalize somewhere in between the two as move into June? How should we think about gross margin progression throughout the rest of the year?

Ilan Daskal

So, Steve, yes. December was definitely an isolated quarter. If you look at the September quarter with a 38.7% gross margin, and then you look at the guidance for March for 39% to 39.5%, you can see the progress towards our targeted model of the low 40s. So obviously, it will take us a few more quarters to get to the targeted model, but that's definitely the trend.

Oleg Khaykin

All the dynamics with inventory and all that is baked in already in Ilan's guidance.

Steve Smigie – Raymond James

Thank you.

Ilan Daskal

You are welcome.

Operator

Your next question comes from James Schneider with Goldman Sachs.

James Schneider – Goldman Sachs

Good afternoon, and thanks for taking my question Just one more follow-up on the gross margins if you could, could you talk a little bit about how much of the improvement in gross margins was due to the fact that you built that inventory in the quarter and how much was due to mix, if you could quantify that, that'll be great.

Ilan Daskal

So, slightly above half or about half was due to the higher inventory and the lower manufacturing cost, and to a lesser extent was due to the higher gross margin product mix within the business units. These are the two components, the main components of the gross margin expansion in the December quarter.

James Schneider – Goldman Sachs

Okay, great. Thanks, and then on lead times, can you maybe quantify what you're expecting for those in the coming quarter, and when you think you'll be back – what are they today, and when they'll be back at normal levels?

Oleg Khaykin

Well, the lead time, I think, you have to look at it two parts. For the consumer and computing, our lead times are now very fast, we have a dye bank. We can in many parts, turn them around as quickly as four weeks typical assembly and test cycle. In some cases, we have our finished goods inventory. We can respond quickly and then for the Automotive and Industrial, where we have very little or no inventory that is still very much running in line with the 12-week plus lead time.

James Schneider – Goldman Sachs

Okay. Fair enough. Last one from me is can you comment on the pricing environment, particularly in the discrete part of the business. I know that pricing there has been very benign for a pretty long time now and I was wondering if you see more capacity coming online from some of your competitors that would make that return to a little bit more normal or maybe even worse than normal going forward or don’t you see that at all given the tightness?

Ilan Daskal

I'm not seeing anything out of the ordinary, I mean the pricing is still pretty robust and I think it's only going to if anything we may see the industry raising prices in the summer in the shortage of capacity in deed materializes at foundry in the backend assembly and test areas.

James Schneider – Goldman Sachs

Okay. Thanks very much.

Ilan Daskal

Sure.

Operator

Your next question comes from Bill Ong with Merriman Capital.

Bill Ong – Merriman Capital

Yes, good afternoon gentlemen. Congratulations on the solid quarter. So my question is on seasonality, just given that the March quarter 2010 and you anticipate the March quarter 2011 is going to be up sequentially, what you expect to see that is going to be the new normal in terms of quality of seasonality as you start to model future years?

Ilan Daskal

Well, you know, the way I look at seasonality Bill is we only have one business unit that has a strong seasonal up-tick in the March quarter, that’s our Energy-Savings Product. As a matter of fact that’s when most of the air-conditioning manufacturers order their products. So seasonally this has always been a very strong quarter for them. Now it's been compounded over the last two years by the fact that this is also one of the most tightest supply product lines.

So it has been obviously very strong, further reinforcement not just by demand but also the longer lead times. Typically this time first quarter is seasonally weaker quarter for consumer and computing, but I think that's already been pretty much baked-in in everybody's guidance. So, I think that said, I think industrial and automotive and appliances are once again going to be – the demand is going to be more than sufficient to offset any kind of consumer and computing weakness that you will seasonally see this quarter.

Bill Ong – Merriman Capital

Thank you, and then my last question is that we can see like 2008-2010 as a company turnaround period or you and your executive team made some very remarkable improvements. On one level it will actually be more challenging, on your next several years out so, I'd like to talk about maybe what you see are the challenges the next two-three years low hanging fruit, and how do you expect to look at International Rectifier in 2013-2014 time period, in terms of business, in terms of revenue goals?

Oleg Khaykin

Okay. Well, I think the last two years – three years probably were by far the most difficult. We've been hit with practically everything, you can imagine anywhere from the perfect storm in terms of industry cyclicality, the cleaning up our financial, dealing with the hostile takeover bid. So, all that is behind us, and in process we have reset our strategy. What we see going forward is really just accelerating our strategy to market which is further reenergizing our discrete business. We'll be rolling out a whole new family of platforms, not just products or packages, but really the whole new [ph] family of platforms, products and packages.

We are rolling out whole new families of products in our vertical business units such as Enterprise Power with VR12 platform; the Energy Saving Products, the lighting; the new generation of iMOTION; the new family of modules; the new HiRel products across and of course, automotive. So across all these things really now that, I would say, a lot of the technologies development and product development has been locked and loaded. Really what we need to be doing in the next two years is just focusing on execution and hitting the market windows, and blocking and tackling to take additional share.

Bill Ong – Merriman Capital

Great. Thank you gentlemen. Nice job again.

Oleg Khaykin

Thank you. And of course, the last thing is the gallium nitride. We're going to start actively commercializing that technology this year.

Bill Ong – Merriman Capital

Thank you.

Operator

Your next question comes from Terence Whalen with Citi.

Bin Jiang – Citi

This is Bin [ph] speaking for Terence. Thanks for taking my question, and congratulations on an excellent quarter. My first question, can you give us some more color on automotive? Apparently automotive has grown very strong for the past couple of quarters. So, what do you see the demand from Europe and Asia, especially in China, and how do you expect the growth will continue for the next couple of quarters? Thanks.

Oleg Khaykin

Thank you. I mean, most of our growth in automotive is driven by Europe and Asia. We have reasonable size of business in U.S., but it's been relatively flat. So really, it's Europe and Asia that are driving a lot of the sales, a lot of the new design wins. So, we expect that trajectory to remain very strong for us, and the key drivers will continue to be Europe and Asia with China and Korea being the strongest catalysts for growth.

Bin Jiang – Citi

Do you expect any seasonality for the auto business?

Oleg Khaykin

For automotive business?

Bin Jiang – Citi

Yes.

Oleg Khaykin

Well, at this point in time, there is not much seasonality. Automotive business is fairly predictable. I mean, your customers give you forecast beginning of the year and with the exception of the March 2009, when – the downfall [ph] of the market, it's been very reliable. You can pretty much build and ship on monthly basis. I think for us, the issue is a little bit more complicated as we are launching a lot of new technologies. So clearly, we are ramping a lot of new products and ramping a lot of new designs. We're not really running steady state. So clearly, whatever we have is enjoying a very nice steady state demand, where we are focusing most of our energies, bringing up new technology platforms and products into high volume manufacturing.

Bin Jiang – Citi

Thank you. That is helpful. I have a quick follow-up with gross margins, last quarter the gross margin was slightly down, like 300 basis points, more than 300 basis points. So what shall we think about gross margin going forward? Is that going to be the range for next four quarters or we’ll see more dynamics from the current mix?

Ilan Daskal

So, first of all, if you take again the December quarter as an isolated one and you look at the trend from the September quarter of 38.7% to March guidance to 39% to 39.5%, you see the progress there. Generally, as I mentioned earlier, we are targeting towards our target model of gross margin in the low 40s. However, we have to first get there and then you have to track it for a few quarters due to seasonality’s impact and other kind of variable components, but overall, that's our target model to get to the $1.25 billion in revenue and the low 40s in the gross margin.

Bin Jiang – Citi

A quick follow-up. Do you have a target of inventory days, internal inventory days?

Ilan Daskal

So overall we target internally to be at about 15, 16 weeks.

Bin Jiang – Citi

Got it. All right, thanks, and congratulations again.

Ilan Daskal

Thank you.

Oleg Khaykin

Thank you.

Operator

Your next question comes from Ramesh Misra with Brigantine Advisors.

Ramesh Misra – Brigantine Advisors

Hi, good afternoon gentlemen. My first question is in regards to your factory consolidation plan. So with the tight foundry capacity by summer, Oleg do you expect to push out your factory consolidation plans or qualify other foundry partners?

Oleg Khaykin

So, Ramesh so far we did postpone our next decision time frame from mid calendar '11 to the end of calendar '11. So we will definitely need to keep it open for the entire calendar of '11, and we will reassess it in the December time frame.

Ilan Daskal

We are continuing to qualify wherever possible additional capacity and we are also selectively expanding internal capacity. So to the extent we get ahead of the curve, we can then pull the trigger but to the extent our growth comes in much stronger as it has in the past than we anticipated. It's obviously also a nice problem to have.

Ramesh Misra – Brigantine Advisors

Okay. So it's a CapEx expansion that you are putting out is that allocated more to the new equipment for your Orange County fab or is that for upgrading older equipment?

Ilan Daskal

It's not Orange County, it's in the Temecula. We were actually – it's newer equipment in both Temecula and U.K. and it's also an equipment necessary for the next generation of our advanced technology platforms.

Ramesh Misra – Brigantine Advisors

Okay. In regards to the automotive business, are you doing well in excess of the growth in the automotive sector itself or do you see growth running in line with rest of the automotive sector?

Oleg Khaykin

Well, you know, the automotive sector is actually fairly flat. So we are clearly growing much faster than automotive and a lot of it was driven as A, we're growing from a fairly small base, so it always helps, right; and B, we are riding an inherent secular wave with our automotive where you're having wholesale conversion from the hydraulic, pneumatic, and mechanical power systems to the electric power system. As such IR given our strength and height, current and higher voltage processes is uniquely positioned. So, I will say in automotive, we are clearly seeing a much faster growth in the automotive sector overall.

Ramesh Misra – Brigantine Advisors

Okay, great. Final question from me, Oleg, any quantifiable details in regard to gallium nitride or do you – anything beyond that…?

Oleg Khaykin

Well, I hope you'll be able to attend the APEC Trade Show in March. We'll have some very exciting announcements there.

Ramesh Misra – Brigantine Advisors

All right. Look forward to it. Congratulations.

Oleg Khaykin

Thank you Ramesh.

Operator

Your next question comes from Craig Berger with FBR.

Craig Berger – FBR

Hi guys, nice job. I just wanted to run through the dynamics of your capital spends. First of all, did you say how much you're going to spend this year?

Oleg Khaykin

We guided for next quarter to be between $45 million and $50 million for the next quarter, for March. Overall, we guide the target model account [ph] for about 12% of revenue.

Craig Berger – FBR

What percent of revenue?

Ilan Daskal

12%

Oleg Khaykin

One-two.

Ilan Daskal

On an annual basis.

Craig Berger – FBR

I see. So, how should I model depreciation over the next, say, year?

Ilan Daskal

So, obviously for next year depreciation will be higher because the implementation of the ERP will start to be depreciated, but overall on an annual basis, about $70 million to $80 million.

Craig Berger – FBR

I see. For depreciation?

Oleg Khaykin

For the depreciation, yes. We also have some equipment rolling off…

Ilan Daskal

Older equipment that will be equally depreciated, yes.

Oleg Khaykin

There some of it is rolling off during this year as well.

Craig Berger – FBR

I see, and so what kind of capacity growth does all this capital spends give you? I know some of it's really ERP systems, so those are different spends?

Oleg Khaykin

Well, some of the – really, what we are spending is first and foremost to enable a more advanced process manufacturing on the new technology platform we’re releasing, and it's also – at the same time represents a 6 to 8-inch upgrade in our facilities.

Craig Berger – FBR

But no increase in square inches or dye capabilities?

Oleg Khaykin

It will increase obviously some manufacturing capacity as well.

Craig Berger – FBR

I see, as we look at operating expenses, how should we think about that progressing over the calendar year?

Ilan Daskal

So, Craig, again, we don't guide third quarter here. The target model is to get to the high teens. You saw the result of this quarter, and we still target to get to the high teens once we get to our targeted model.

Oleg Khaykin

We're seeing our R&D expenses going to go up slightly, but our objective is to hold our SG&A at the same level.

Ilan Daskal

So the goal is to get, Craig, the SG&A to above 15%, right? So I think from there, you can pull out the difference.

Craig Berger – FBR

Okay, last question on the model and then one quick one on the business. How do we think about taxes beyond the next couple of quarters? Is there a long-term rate we should use or what should I plug in there?

Ilan Daskal

So for fiscal year '12, we estimate it to be at about 10% rate. It's very difficult right now to estimate beyond 2012, but for fiscal year '12 we estimate it at about 10%.

Craig Berger – FBR

Great, and then one on the business, you mentioned that early signs of a recovery in PC, can you provide any additional detail there?

Oleg Khaykin

Yes, what we're seeing initial up-tick. I mean, it's noticeable, but it's obviously nothing to write home about in terms of high volume. It's mainly at the higher end, high-performance laptops, that's where we are seeing demand starting to come back after about a quarter of inventory depletion.

Craig Berger – FBR

I see. Nice job guys. Thank you.

Ilan Daskal

Thank you Craig.

Operator

(Operator instructions) Your next question comes from Stephen Chin with UBS.

Stephen Chin – UBS Securities

Thanks for taking my question, and congratulations [ph] for the strong results.

Ilan Daskal

Thank you.

Stephen Chin – UBS Securities

Most of my questions are on the PC business, Enterprise Power. First if you could looking at your comments for the March quarter, can you talk a little bit more about the server side of the business as well as in terms of what you're seeing there either from a inventory or in the channel perspective and what kind of transition you expect in the coming quarters to the new (inaudible) platform?

Oleg Khaykin

Okay. If I say correctly, you want us to say about the server business.

Stephen Chin – UBS Securities

Correct.

Oleg Khaykin

So, I think in the server business has been the, I'd say December quarter and March quarter have seen continued inventory depletion in the channel. My sense is I expect that bulk of that because we monitor the POS sales as well as POP. So clearly we have been seeing a lot of depletion of inventory in the channel. So I think by June quarter we expect the revenue growth to resume. Our view is the current generation will run at least through the end of this calendar year, and it's early to say about the next generation server platform because we haven’t heard any update from Intel.

But to the extent that Intel delays the launch of the next generation of chipsets, it will continue to be the same status quo in the industry into early next year. To the extent they come out on time we may see some initial substitution between two different platforms towards the end of the year. That said, my sense is the industry is going to be very careful about inventories for the server platforms as we are entering the last 12 months of the server life.

Stephen Chin – UBS Securities

Then switching over to the PC client [ph] notebook side of the PC business. I know late last year those product ramps that you designed into were running a little below your original target but based on your comment about high end notebooks are we starting to show some signs of life. How do you view further the mid end of other lower or both of your products performing over next year of course especially given Intel's factory recall [ph]?

Oleg Khaykin

Well, I don't think Intel's factory recall is going to – I mean it is really a storm in a tea cup. My sense is Intel is going to recover much of the situation during the Chinese New Year, so I don't think it's going to be a big deal. I think if you really look at Intel, they've been shipping roughly the same number of PCs, all the manufacturers have been shipping roughly the same number of PCs and what normally happens is the ODMs and OEMs buy a lot of all the peripheral components ahead of time to make sure that they have them in inventory.

So, when they get the order, all they have to do is get the processor because that's the most expensive piece. So the amount of shipments of laptops have more than outpaced the sales in the last one to two quarters. So, my sense is this quarter and the previous quarter has been also been burning off inventory and we're now seeing some laptops segments are, starting to come back to placing orders with new components supporting platforms. So, I don't think there is going to be any significant up-tick this quarter but I think some recovery and I think seasonally we could expect June and September quarter the laptop, PC market to grow.

Stephen Chin – UBS Securities

One last question related to PCs. Just given the share that you gained in the PC power [ph] market, and also, for Volterra have you guys seen any competitive responses from the traditional analog players have had that share in the market?

Oleg Khaykin

Sorry, could you restate your question, I didn't quite understand. You're breaking up.

Stephen Chin – UBS Securities

In terms of the share that you gained in the notebook, our regular space along with that and also same goes for Volterra. Have you seen any competitive response from the larger analog companies that have traditionally been suppliers into the notebook space prior to your tradings?

Oleg Khaykin

Well, I am not sure how big Volterra is in laptop. We don't really see them much in at least the products we are going in with. But, my sense is, laptop, as you well know, is a very competitive space, so we see everybody there. It's not that somebody just went away [ph] for lunch, and deciding to come back, every socket [ph] is a fight. A lot of our laptop design wins come through our distributors. So often we don't even know really any particular motherboard or the platform that we're getting into. The only place where we do work directly with OEMs are on the high-end laptop platforms, bulk of the mid range and lower-end service through our distribution channel.

Stephen Chin – UBS Securities

Great. Thanks for all of the color and congratulations again.

Ilan Daskal

Thank you.

Oleg Khaykin

Thank you.

Operator

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

Brian Piccioni – BMO Capital Markets

Can you hear me okay?

Oleg Khaykin

Sure. Go ahead Brian.

Brian Piccioni – BMO Capital Markets

Okay, great. As you can imagine, most of the questions I would have asked have already been asked and answered. Let me add congratulations, of course, to the strong result. You touched on gallium nitride products a couple of times already. One thing that's been going on for some time was – has been customer evaluation of early products. Can you fill us in on how those evaluations have been going?

Oleg Khaykin

They've been going pretty well. Obviously, we learned a lot and they've learned a lot, and they've provided quite a bit of good feedback on us to what we need to do to continue tweaking and evolving the technology platform. So, as you know, it's always good to work with a teaching [ph] customer, customer who has got very deep system knowledge, and they can put the product through the basis and we've been very pleased with our engagement to-date and all the improvements and innovations that we have integrated on our next generation of platform release.

Brian Piccioni – BMO Capital Markets

You said earlier in the call that you expect to be commercializing the product this year. I think that's this calendar year, correct?

Oleg Khaykin

Calendar year, yes.

Brian Piccioni – BMO Capital Markets

Okay, and would we expect to see any significant financial contribution in the current calendar year or it's still too early to tell?

Oleg Khaykin

No, I don't think so. I think if we get samples for example this year, and you put it in your platform and you evaluate them and you test them and you qualify them, my sense is you'll probably see a little bit revenue towards the end of the year and really it's more going to be in next year and given that most of the people who take it are the more advanced higher end systems, it's probably not going to be a material amount of revenue at least in the next 12 months.

Brian Piccioni – BMO Capital Markets

Okay, fantastic. Thank you.

Ilan Daskal

All right.

Oleg Khaykin

Thank you Brian.

Operator

(Operator instructions) Gentlemen, at this time there are no further questions.

Oleg Khaykin

Very good. Well, thank you everyone for joining us today. We look forward to seeing you all in the road in February and March. Thank you.

Operator

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

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