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Executives

Christopher Toth – Executive Director, Investor Relations

Oleg Khaykin – President, Chief Executive Officer

Ilan Daskal – EVP, Chief Financial Officer

Analysts

Gabriela Borges – Goldman Sachs

Ramesh Misra – National Security

Stephen Chin – UBS

Craig Berger – FBR Capital Markets

Terence Whalen – Citi

Steven Smigie – Raymond James

International Rectifier Corporation (IRF) Q3 2012 Earnings Call May 3, 2012 5:00 PM ET

Operator

Good afternoon. My name is Ally and I will be your conference operator today. At this time, I would like to welcome everyone to the International Rectifier Third Quarter Fiscal Year 2012 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to your host for today Mr. Chris Toth, Investor Relations at International Rectifier. Sir, you may begin your conference.

Christopher Toth

Thank you, operator, hello, and good afternoon. We all welcome you to the International Rectifier conference call. On the call today is Chief Executive Officer, Oleg Khaykin, and Chief Financial Officer, Ilan Daskal.

I trust you all seen copies of our press release, which was published about an hour ago. If not, the press release can be found on our website at investor.irf.com in the Investor Relations section.

Before we begin, I would like to remind you that except for historical information the matters that we will be describing this afternoon will be forward-looking statements that are dependent upon certain risks and uncertainties including factors among others as orders received, and shift during the quarter, the timing and introduction of new technologies and products, general semiconductor industry conditions, and the overall economy and financial markets.

In addition to these risks, we refer you to the risk factors included in our press release issued today, and the company’s filings with the SEC. Including the most recent Form 10-K and 10-Q.

Before I hand the call off Ilan, I would like to mention the following upcoming events. On Monday, May 14, we will be attending the JMP Securities Research Conference in San Francisco, and on Tuesday, June 5, we will be attending the Raymond James Spring Investors Conference in Boston.

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 third quarter of fiscal 2012 IR reported revenue of $248.1 million, which was a 7.8% increase from the prior quarter, and a 16.4% decrease from the third quarter of fiscal year 2011.

Revenue over the last quarter increased as the market started to show initial signs that demand is recovering. Automotive was strong and we saw solid traction in the consumer and computing end markets.

Gross margin for the March quarter was 29.8%, about 1.5 percentage points lower than our guidance, mainly due to mix as a higher margin industrial and appliance end markets were weaker than expected, and lower margin consumer and computing products rebounded stronger than expected.

We reported a net loss of $2.5 million, or $0.04 per fully diluted share for the quarter. Excluding the discrete tax benefit of $6.2 million, a gain on the property sale of $5.4 million in amortization of intangibles of $2.1 million, net loss would’ve been $12 million, or $0.17 per share.

R&D expenses were $34.8 million, compared with $32.2 million in the prior quarter. The higher R&D was the result of increased engineering bills to accelerate new product introductions, during the quarter, as we took advantage of a lower fab utilization. R&D expenses represented 14% of revenue for the quarter.

SG&A expenses were $49.6 million, down from $50.6 million in the prior quarter as we work to reduce our fixed cost structure. SG&A expenses represented 20% of revenue for the quarter. Amortization of acquisition related intangibles was $2.1 million.

During the March quarter, we had a $5.4 million gain on disposition of property from the sale of a vacant site of an old R&D facility located in Oxford, England. Operating loss was $7.1 million for the quarter.

Income tax was a $4.5 million benefit due primarily to discrete tax benefit of $6.2 million, which was partially offset by $1.7 million in tax accrual in our foreign jurisdictions. The discrete tax benefit was mainly due to our release of tax reserve. The total cash, cash equivalents and investments at the end of the quarter were $366.2 million, which included $1.4 million of restricted cash.

During the quarter, inventory remained about flat at $307 million. Weeks of inventory decreased four weeks to 23, as a result of increasing revenue. We used $14.5 million in cash from operating activities in the quarter, mainly due to changes in working capital.

Cash capital expenditures for the quarter were $24.7 million and represented 9.9% of revenue. Depreciation and amortization expense was $21.9 million and stock-based compensation was $4.1 million. During the quarter, we did not purchase any shares of our stock. We have about 69 million shares outstanding at the end of the March quarter.

Moving onto our outlook. We currently expect revenue for the June quarter to be between $265 million and $270 million. For this projected revenue range, we currently estimate gross margin in the June quarter to be about 30%, primarily due to under absorption and lower margin in consumer and computing product mix.

Going forward, as we work to balance utilization and inventory reduction, we expect that our gross margin will continue to increase as revenue increases through the cycle. We expect R&D expenses to be about $35 million. SG& A expenses are expected be between $51 million and $52 million, which includes approximately $1.5 million in severance payments associated with the reduction of our fixed cost structure.

For the June quarter, amortization of acquisition related intangibles is expected to be about $1.7 million. Other expense net is expected to be about $1 million, and interest income net is expected to be negligible.

For tax, in the June quarter, we expect a $4 million tax expense due to a foreign jurisdiction tax accrual. We also anticipate the net tax benefit as we expect to release additional tax reserves. And finally, for the June quarter, we expect our cash capital expenditures to be at about $28 million.

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

Oleg Khaykin

Thanks, Ilan. During the second half of the March quarter, we saw an acceleration in customer orders that drove revenue towards the higher end of our forecast. Revenue was driven by improved end market demand and inventory replenishment mainly in automotive, consumer and computing end markets. However, that strength was offset by continued weakness in industrial and appliance demand in Asia.

Geographically for the quarter, we saw increased demand in Asia in consumer and computing. However, that strength was partially offset by continued weakness in the industrial and appliance end markets as customers reduced finished good inventory particularly in China. Both the Americas and Europe increased and as we saw encouraging signs of stabilization and inventory replenishment. And finally, Japan was about flat as increases in automotive and HiRel shipments were offset by decreases in the appliance and industrial end markets.

Moving on to our business units. The enterprise business unit revenue increased 6% from the prior quarter mainly due to strength in the computing market. Servers were slightly up and the communications market was seasonally down. Our digital power design wins continue to gain momentum, our latest generation of DC to DC converters that incorporate digital technology and power stage products, deliver industry-leading performance in efficiency, power density and cost.

Digital power platforms are rapidly gaining traction with Tier-1 OEMs and we have started to see adoption and share gain in high-performance desktops and graphics cards. In servers, while we are already seeing early adoption of digital power on Romley, we believe the follow-on platform Breckland is scheduled to launch in early 2013 will broadly adopt digital power. To date, we have had strong design win traction in Breckland and expect to increase our share.

Our digital power solutions are starting to gain wide acceptance in the ultrabook market, which requires a high level of power performance and density. Intel ultrabook design activity based on a Haswell processor has started and we expect design decisions to be concluded by the end of this year and the anticipated production launch in 2013. The industry adoption of digital power, our addressable – with industry adoption of industrial power, our addressable market and potential content have expanded and we remain optimistic in our outlook for growth. For the June quarter, we expect enterprise power revenue to continue to grow modestly.

Our power management devices business unit revenue rebounded strongly at 11% from the prior quarter. The increase was mainly driven by customer inventory replenishment and a stronger than expected snapback in the consumer and computing end markets. The increase in consumer and computing was offset by softness in the industrial end market, which typically lags in the recovery by about one to two quarters. For June, we expect our PMD business unit to continue growing.

Our energy savings products business unit revenue decreased 3% compared to the December quarter. Overall, demand was weak in Asia particularly China, as customers continued to reduce finished goods inventories in industrial and appliance end markets. The weakness in China was partially offset by stabilization in North America and Europe. For the June quarter, early indicators showed revenue trending about flat as North America and Europe continue to stabilize and China burns through inventory.

We expect the reduction of growth in the second half of the year as industrial and appliance demand starts to recover. Our automotive product business unit revenue snapback 17% from the prior quarter mainly due to broad market strength in inventory replenishment in Europe. The automotive end market continues to remain strong and our design win activity continues to exceed historic levels.

We continue to see automotive as one of our strongest long-term growth drivers they are. Over the past three year, we built a comprehensive automotive grade product portfolio, including our recently introduced Automotive IGBT platform of products and modules that deliver industry benchmark performance. We have already begun to see design wins for these products in hybrids and electric vehicles for our technologies used in electric power train components. For the June quarter, we expect Automotive to grow modestly.

Lastly, our HiRel business unit increased 10% compared to December quarter. The increase was mainly due to timing of shipments between the December and March quarter. For June, we expect revenue to range between $48 million to $50 million. Bookings in our overall backlog continue to be strong in our HiRel markets.

Now, an update on channel inventories, during the March quarter, POS was flat compared with the December quarter selling versus sell-through during the March quarter was in equilibrium, and our channel inventory remains slightly below 11 weeks. Our target range for channel inventory is about 9 t 10 weeks.

During the March quarter, our internal inventory decreased to 23 weeks. Our revenue – as revenue recovers, we remain comfortable that we will be able to continue down – taking our inventory balance to the inventory levels of 2011. Lead times remained normal for the majority of our products, and overall factory utilization decreased to about 70% in the March quarter. We expect utilization to start recovering in the June quarter.

Now, I will provide an update on some of our ongoing activities. During the March quarter, we initiated a number of measures to scale down on our SG&A expenses to the $50 million level. We are on track and expect to achieve this goal by the end of the June quarter, or early in the September quarter.

In R&D, we continue to take advantage of lower fab utilization to accelerate the development and introduction of new products. Including our new IGBT platform, the expanded digital power portfolio, and gallium nitride on silicon technology. These innovative platforms and products are critical to our future growth and technology leadership. As we continue to grow, we expect our quarterly R&D expenses to remain in the $33 million or $35 million range over the upcoming cycle.

Finally, we continued to make good progress in our GaN products. In the last two quarters we have been sampling high-voltage GaN power supply devices to Tier 1 customers. We have met initial performance targets, and continue to improve their robustness and reliability. We are taking aggressive steps to protect our intellectual property in GaN, I am curious they have over 160 patents issued and over 230 patents pending on our GaN technology.

Next week at the PCIM tradeshow in Nuremberg Germany, we are planning to present our latest GaN demonstrations that show superior performance, efficiency and power density. Before we move on to the question-and-answer session. I would like to take a few moments and make a few remarks about our gross margin.

Our March gross margin came in below our guidance, and our projected June gross margin is expected to be flat to slightly up. Factory utilization is the primary driver of the decrease in gross margin as we continue to balance our overall utilization rate, and inventory reduction. In addition, a shift in product mix toward lower margin consumer and computing products, and lower than seasonal demand in the industrial and appliance end markets have resulted in additional gross margin headwinds.

That said, as revenue rebounds, we expect our gross margin to recover to the high 30s level over the course of four quarters. We expect about 6 to 7 percentage points of the recovery to come from increased utilization, as we fill our factories, and 2 to 3 percentage points of the recovery to come from improved product mix as the industrial and appliance demand returns.

In conclusion, we are encouraged that the recent downturn is behind us and we look forward to resuming growth and increasing our margins. The strategic investment we have made in our R&D continues to bear fruit. We continue to remain well-positioned in high growth end markets that the right technology.

This concludes our prepared remarks, and we will now open the session to your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Goldman Sachs, James Schneider.

Gabriela Borges – Goldman Sachs

Thank you for taking my question. This is Gabriela Borges on behalf of Jim. I want to ask specifically about gross margins in the power management segment, is there an impact in product mix within this segment it’s off, or is that primarily from utilization?

Ilan Daskal

You’re talking about power management devices business unit? I think, I presume you’re talking about PMG business unit. Well, in that business unit, the margin you saw dropped to about 19%, it’s really a manifestation of under absorption of our factories, that is being allocated to the respective business units.

To the extent both of our fabs and our facilities are underutilized. That product line get’s a – its greater share of allocation against its revenue. So the drop that you see in the gross margin is primarily driven by the absorption of the under – of variances in those factory.

Gabriela Borges – Goldman Sachs

That’s very helpful, thank you. And as a follow-up if I may. You talked about pricing pressure or rather competitive taking strategic pricing actions in the last quarter, does that continue to be the case, or is the situation prevented as demand picks up? Thanks.

Ilan Daskal

I think, the situation has been improving. I mean, there is clearly been some price pressure we’ve seen ASP erosion in maybe 2% to 3% as a result of this whole downturn. However, I think most of that I’ll say panic behavior is behind us and I think many, many factors have kind of relying themselves and as the market returns, I think will probably see a price firming up, and maybe a rebounding somewhat.

But also, I think it’s kind of hard to tell because if I look at this business, the mix have been shifting. I mean, the industrial market has been a lot softer and the same component is often going to industrial markets as they go into consumer. So clearly, at the share, mix of the consumer business becomes bigger, your recipes come down somewhat. So I’ll say it is between 2% and 3% ASP erosion is probably a mixture of both the changing mix as well as the ASP pressures.

Oleg Khaykin

Thanks, Gabriella.

Operator

Your next question comes from National Security, Ramesh Misra.

Ramesh Misra – National Security

Afternoon, guys. Can you quantify the digital power management business either in the current quarter, or when you expect it to grow to say it next year or over the next few quarters?

Oleg Khaykin

Well, Ramesh, we do not breakout particular products as in the business unit. And in the enterprise power business units for us is already probably as pure play as you can report it. It is basically servers, high performance desktops and some graphics cards, so as well as obviously routers and storage area networks. So, I think in that what you are seeing there is a lot of substitution going from the analog power management onto the digital power management, both digital communication as well as the digital control. And as new platforms come out, overwhelmingly OEMs are choosing to adopt digital power management, both as far as indications and as well as digital control.

Ramesh Misra – National Security

Okay.

Oleg Khaykin

You’ll probably see a faster adoption in terms of the next six months will come from the kind of high performance desktops and graphics, because those things have much quicker design and product line cycles. The next wave will come in the form of servers. Probably really ramping with Bricklent platform early next year and I’d say kind of longer lead time would be on routers and storage area networks because those have longer design cycles.

Ramesh Misra – National Security

Okay. That helpful, Oleg. In regards to industrial business, can you help reconcile some of the issues over there? So clearly, the ISM data seems very promising at least here in North America. So is the weakness predominantly driven by excess inventory in the channel? Or is it weakness in Asia/Europe? Why is industrial so weak right now, in a seasonally strong quarter?

Oleg Khaykin

Well, I think I will give you my perspective, just from what I have been seeing and talking to a number of our customers, I think North America is – the consumption is fairly steady, but then again North America is not a big industrial market anymore. So, it is kind of – North America is doing well and it study, but it is not a big chunk of the demand or the revenues.

The issue you’ve got to look at is much more to do with China. They had a significant slowdown in industrial production, and also in case of appliances, there has been too much finished goods inventory builds up. But I don’t – I’m not sure if it is buildup inventory, but rather when the finance get tightened up last year, a lot of construction and a lot of the new housing came to an abrupt stop and as a result, the pipeline that was cranking out, the air conditioners, refrigerators, washers, dryers, ended up overbuilding finished goods inventory. Our customers are unwinding their finished good inventory position. And I think probably, through the next three, four months into the summer they will unwind a big chunk of it and we should start seeing demand returning in the second half.

The other thing is also the industrial orders in China have obviously been impacted by tightening of the monetary policy last – second half of last year. And if you look at who sells a lot of the industrial equipment into China, Europe is one of the major export market for capital goods. So, as such, we receive many of our customers in Europe have been impacted plus on top of it, the overlay European physical problems, that’s kind of been the downer on the European demand.

But that said, I think we’ve seen the European market at least has been pretty much kind of work its inventory out and it’s more equilibrium and we’re starting to see signs of recovery there as well. And that said, I think China is also starting to show some signs of recovery obviously, it is still well below where it was summer of last year.

Ramesh Misra – National Security

Okay. Thanks very much Oleg.

Oleg Khaykin

Sure.

Operator

And your next question is from with UBS, Stephen Chin.

Stephen Chin – UBS

Hi, thanks for taking the questions. Oleg, first one – in terms of the automotive market, I know that still a very positive market for you guys currently, I guess, just looking at other automotive OEMs, also parts OEMs any progress or thought on your footprint in some of the Asian automotive manufacturing? I guess one, the question some of the talk went out of your coordinator capacity reduction by the European automakers been in a much excess capacity they have?

Oleg Khaykin

Okay so those are very good questions Stephen. I mean IR, just in general are automotive, we have a very strong position in Europe. We have a weaker position in the U.S., mainly because there is less automotive kind of Tier-1 manufacturing, supply going in the U.S.

I mean, you’ve got even U.S. companies like Delphi and TRW, a lot of their design activities in Europe and in the Far East, so really, it is Europe and Asia are the two big kind of components, manufacturing markets.

Europe, for us I think there may be some reduction in capacity, but I think in the last three years a lot of our design focus was in Europe and even with lower maybe capacity demand for those new designs going to production, we expected to be flat to maybe slightly up or continue to grow in Europe. Some of our biggest successes in the last two years have been really getting design into the Korean and Chinese manufacturers and we actually probably look at region by region our highest growth will be in Asia, although it is coming from a lower base, but clearly that is the market that is still growing very strong in particular, Korea.

Stephen Chin – UBS

Okay. That’s very helpful. And then one quick one for Ilan on the SG&A side. I think earlier maybe last year you were talking about how your database your M system cost was possibility the SG&A line, so I understood that it would be that we’ve seen over the past couple quarters. I thought that the SG&A would kind of trend back down below the 60 million mark. Is that no longer the case anymore? And you guys are just trying to just get it to 50 million at the very least that the new bar that’s being next year?

Ilan Daskal

So Stephen, for the last few quarters, we reiterated it. Our goal is to get to the SG&A to the 50 million level which does include 2 million depreciation for the new system. So, if you kind of beg those 2 million, its kind of comparable 48 million prior to the European implementation and we do target and that’s what we said also in the last several quarters, that we targeted either in the second half of the calendar year, so during the June quarter or in the September quarter. And that’s still the same target. So, no, it does not change.

Stephen Chin – UBS

Okay. So 50 million is sort of a border for the rest of the year, the calendar year at least?

Oleg Khaykin

Yes.

Stephen Chin – UBS

Okay, great. Thank you.

Oleg Khaykin

Sure.

Operator

And your next question comes from FBR Capital Markets, Craig Berger.

Craig Berger – FBR Capital Markets

Hey, guys. Thanks for taking my question. It looks like you’re going to lose money for three quarters in row and for the fiscal year, which frankly, I don’t think it that good. So, I guess my first question on the gross margins, what are the specific utilizations we’re at? What are the specific utilizations you need to get to in order to get into the high 30s gross margins? Assuming no meaningful channel fill or channel burn? What are the revenues you need to get back there? That’s my first question. Thank you.

Ilan Daskal

Well, I think, Craig, our internal capacity, if you get the right mix, is sitting around $250 million, right? So, any revenue will run above $250 million will go meaningfully to lower op internal factories. And 250 is 100% utilization, perfect mix. If you say, well, the mix is not always going to be perfect and you’re really going to be running about 90%, I think if you sustain – as you burn off the inventory, even running at $260 million, $270 million, it’s really a matter of, do I want to burn off my inventories or do I want to maximize my utilization.

So, we’re trying to manage both, burn the inventory and reduce utilization. That’s why we said, it will take us several quarters to work it out. Now, a lot of the margin, as you know, is – there’s a quarterly absorption that lowers your margin, but also there is some of it that goes into the inventory. So as you sell off inventories, there’s about maybe a quarter lag for you to work out the higher cost inventory. That’s why we said we expect, if you assume a modest straight-line recovery to the prior revenue levels over the next several quarters, that’s what we think three to four quarters to truly flush all the effects out, get you back to the last summer’s model.

Craig Berger – FBR Capital Markets

My second question is, on operating expenses. I believe your targeted operating model is for expenses in the low 20% of revenue range which, at $85 million a quarter and price revenues of $285 million or roughly 50% growth from what you’re doing right now. And, so, my question is you said you were going to hold R&D roughly flat. Is that in a vacuum? And what are the signs that you are looking for in order to adjust your spending levels up or down, what are the second half revenue levels that you think you need to be doing in order to justify this type spending level?

Oleg Khaykin

So, clearly, all these numbers are not in a vacuum, right, it’s always a balance between do I start doing cuts over the next two quarters or I just basically stay – maintain steady space and observe revenue growth. So clearly as we get into high $200 million revenue range, that’s something I would like to see in the second half, for me to keep my current OpEx what it is and then go from there.

Clearly, if revenue growth stalls and we are not going to get into higher $200 million, $300 million range, then, I have to review further my R&D and SG&A spend..

Ilan Daskal

And Greg, I would add to that, on the R&D, we guided for $35 million, but overall long-term the range would be between $33 million and $35 million we just take advantage of the lower utilization currently to build an additional engineering field, so we took advantage of the situation.

Operator

And your next question comes from Citi, Terence Whalen.

Terence Whalen – Citi

Hi, good afternoon. Thanks for taking the question. Just one maybe another way of asking question that was asked earlier. I think Oleg, when you said that you expected gross margin to bounce up to high 30s in about four quarters, what type of revenue level does that impound? And also, what type of utilization would you expect in order to generate the high 30s gross margins? Thank you.

Oleg Khaykin

Well, I think it’s a matter of two things. If you get to around $290 million, you’re pretty much getting there. But the truth there is you got to have maybe two quarters of 290 million to flesh out the higher cost inventory that was build in the lower utilization quarters. So, if you have two quarters running around 290, and the industrial recovers back to its last year’s share of revenue, that’s what we’re looking at.

Terence Whalen – Citi

Okay. And then as my follow-up question, this one relates to the enterprise power business. If you could just give us an update on where you think your market share right now is and things like server power management, perhaps also notebook and then what it could go to in the quarter weather be the server area, notebook and ultrabook. And just sorry to tag this on, but also what is the dollar content changes ultrabook versus notebook for you guys? Thanks.

Oleg Khaykin

Well, I mean we don’t really break out market shares on servers. I think I will tell you that much that on the Romley platform our share is lower than it was in the previous platform. As we did not do as well with our previous portfolio and as Romley kind of at least adopted the digital communication bus. But on the follow-up to Romley, I think our share will be back to at least where it was before. And we believe on the previous version of the platform, we were about probably 35% to 40% share and we think we are going to get back to the same level on the Britland platform.

On the laptops, we are starting from – especially in Ultrabooks, we are starting from zero to any revenue there is going to be incremental and the same thing goes for the graphics as well as the high-performance desktop. So actually all of that is going up so as a result even with the loss of some share in the servers, revenue, topline should actually be the same or higher than it was at the peak of last year. But as we recover our share in the server that is when you are going to see even further revenue growth as well as the margin expansion.

Operator

And our next question is from Raymond James, Steve Smigie.

Steven Smigie – Raymond James

Great, thanks a lot. I was hoping we could talk a little bit about on power management devices, give us some color on what you think growth will be in that business, say, looking out 12 months and 24 months? You guys, I think, have been investing a lot there, you have some good growth for a while, we had the downturn, just curious at this point, what sort of growth opportunity do you think you have given your investment?

Ilan Daskal

Well, I think, you know, PMD, I mean, we continue to be bullish on that segment. I wouldn’t be surprised if by the end of the summer, if demand continues to recover. We’ll be back over $100 million and growing, so I think we expect the business unit to continue performing very well for us. And, I think really, I mean, I actually think us not engaging in irrational discounting last quarter, did not – I do not believe that impacted any of our market share.

Steven Smigie – Raymond James

Right. And I’m just talking more a question of you made the investments when you went through the decision about bringing the R&D dollars there. Did you have a particular growth target in mind and sort of…?

Oleg Khaykin

Yeah, actually on PMD, the amount of R&D dollars is not that great. It’s really low voltage platform and is by the way the same platform that is used for enterprise power and automotive. So once you develop the MOSFET platform then you sell it as discrete to the PMG which gives you scale and volume. And then you optimize the products for the platform for enterprise and automotive for the higher margin. So in that respect, PMG is one of our leanest R&D spend business units.

Steven Smigie – Raymond James

Right.

Oleg Khaykin

When you see a lot of our investment in the ESPP, EBV and ABB.

Steven Smigie – Raymond James

I understood, I was just trying to get a growth number. But in any event just looking at the power module business, obviously that market slowed down, Chinese subsidies fell off. Can you talk – do you have to still go out and retool your parts for newer generation stuff as that’s recovering? Or is the same modules essentially designed six month ago still going to be viable for-sale over the next coming year or so?

Oleg Khaykin

Well, this is to viable, I mean, these modules are generally designed for like compressor or motor, so to the extent that the same motor goes into other application using they are all rated by current and frequency. So I think clearly they are more optimize for appliances so the appliance module business really needs to come back for lot of these modules to sell. But exactly same modules, often go for industrial fans and other types of applications. So its clearly the volume wise appliance market is order of magnitude bigger than a lot of these industrial applications.

Steven Smigie – Raymond James

Okay. Last question was just, back to on that market again, any signs of Chinese government is going to put up further subsidies to spread that market?

Oleg Khaykin

They are. I mean, actually, I think it was slowdown is less of a subsidy, it – they’ve had a big hold on construction or new housing and obviously, that drives a lot of sales. And my understanding, they are – we are seeing signs of demand returning and I don’t know to what extent they are going to provide incentives, but incentives are relatively speaking were not that big, it were like anywhere between $20 to 50, depending on how high end the product was.

Steven Smigie – Raymond James

Okay, great. Thank you.

Oleg Khaykin

I think bigger driver was the new construction.

Operator

(Operator Instructions) And you do have a follow up from FBR Capital Markets, Craig Berger.

Craig Berger – FBR Capital Markets

Hey guys. Thanks for taking the follow-up, just wanted to ask on the cash balance it continues to bleed down, when is the bottom and what is the study stay cash that you guys need to run your business? What are your sources and uses of cash? Can you just talk about that? And in particular, the almost $150 million bleed over the last year? Thanks.

Oleg Khaykin

Well, I think, Greg, you’ve got to dissect the bleed. I mean, some of it went out to do a stock repurchase; we also made significant capital expenditure to upgrade our manufacturing assets to be able to produce a newer product. We expect the upgrade cycle for us to be done more or less by the end of this calendar year. And, from there we expect our CapEx spend to drop off dramatically. But you know even if you look at this quarter, let’s say you had around 40 million operating loss, you add back our depreciation, we were operation cash flow positive and then of course the region is reduced to cash as we continued to implement the capital upgrades to our manufacturing infrastructure.

On the looking forward, as I think we’re going to keep running probably for the next three quarters, somewhat higher level of CapEx as we complete the retrofit and upgrade of our infrastructure, and from there we are going to drop our CapEx quite significantly. Also, because of the slowdown, we had an increase in inventory so, as we unwind our inventory, it will release cash and also as we do the collections on our receivables, we will further release cash.

So I think, I am not worried so much about where we are in cash today, I think we have plenty of cash and generally we need about $200 million to operate. And, really, the matter here is you got to look at this in view of capital upgrades, and I think, we already got all that factored in for the next four quarters and we feel comfortable with our cash position and we believe will start growing the cash position over the next three quarters.

Ilan Daskal

So Greg, it feeds to our cash needs and also the to the customer location model that we already communicated.

Oleg Khaykin

Yeah.

Operator

Our next follow-up comes from Citi, Terence Whalen.

Terence Whalen – Citi

Hi, thanks for taking the follow-up, guys. There are two of them. The first one is regarding channel inventory. I think you mentioned regionally, your expectations around channel inventory, can you just summarize this again? It sounded like to me that you expected channel inventory perhaps in China to go down before bouncing back in June? What is your net expectation for June and by region? And then, when you think we are at a point where you start benefiting from restocking on the revenue line? Thanks.

Oleg Khaykin

Well, I think we already seeing restocking coming back. In many ways, if I and look at the June quarter of 2009 its almost like exactly same way we’re playing out. You had very strong comeback in Asia with the computing and consumer first which kind of put a lot of pressure on the margins, on the mix and about 1 to 2 quarters the industry rebounded and we’re seeing almost exactly pattern emerging. I mean if I look at the March quarter, January was pretty much dead. In February we started seeing some signs of POS sales increasing and in March, we start seeing initial restocking orders coming in on short-term notice from Asian distributors.

Both North America and Europe were fairly quiet I would say during the March quarter, fairly flat and we are actually seeing a quarter later North America and Europe starting to show signs of restocking and the orders coming back. And, in the June quarter we actually see Asia continues to accelerate. So in many ways, I mean, if I were to venture and kind of make a prediction, I’d say just to replay the 2009 movie.

Ilan Daskal

And Terence, I believe that’s what we said in the remarks was that channel inventory was about flat and generally speaking, we targeted to be at about nine to 10 weeks.

Terence Whalen – Citi

All right. Okay. That’s terrific. And then, I think Oleg, you sort of did a good job talking month-by-month in terms of what you saw in improvement, can you talk a little bit about going forward? I know you can’t just out really predict, but maybe if you also remind us what your order seasonality is like month-by-month? And, whether you’re concerned at all that sort of growing re-concern over European austerity might create a softer European environment in the third quarter? Thank you.

Oleg Khaykin

Well, I think, let me just say month-by-month, I think I would probably say that May is looking better than April. I mean that’s about all I have at this point in time. So we’ll see how the June comes in, in terms of demand particularly in Asia.

In terms of the European austerity, I mean, clearly it’s a concerning thing, but European demand for us is usually twofold. There is a true European consumption, and then there is the European production that is sold into China and Asia. So to the extent, I mean I actually see Europe to me is more important than the China to recover, for China to recover than really European austerity. Because I mean, European infrastructure replacement is very slow and small business. In fact most of our customers that we deal with on an industrial side, most of their products go into Russia and China. So to the extent those two countries spend and buy capital goods, that’s probably a more important driver for our sales, then internal European consumption, maybe with the exception of Automotive.

Operator

And your final follow up is from UBS, Stephen Chin.

Stephen Chin – UBS

Thanks for the extra time to slip in a few more here. Hopefully another one on the Chinese clients and market again. Because I know that one has a good amount of waiting. In previous years you’ve said that – that the March quarter was typically when you had a strong amount of demand for your components that go into those appliances which you have built and then get sold throughout the year. I understand that right now because of the credit and also the housing market conditions in China, that didn’t quite play out as expected in the second half last year.

But I guess if to the degree that inventories does get work down in the appliance market, do you feel that there is – that there will be enough new housing starts or enough similar demand for inventory replenishment in the appliance market in the second half, or do you think seasonally speaking there won’t be a whole lot of new housing builds and hence new product build to replenish before the March 13 replenishing?

Oleg Khaykin

So, I think the – you’re also right, I mean, March quarter is generally strongest order for us for our conditioning market. And that’s why we were – when we initially guided our gross margin, even though we tampered our expectation on China, we felt it would so come in a little bit stronger.

But, still, given the level of finished good inventory that our customers have, it looks like the March quarter was a lot weaker than we anticipated. But seasonally, you’re right, March is a big quarter for Air cons– over the other like refrigeration, washers, dryers, there is really no specific seasonality.

So, it’s really the March quarter is purely for air con. As the market recovers, actually as inventory bleeds off and market starts recover in China, we – I mean the current expectations during the summer, most of the inventory will work itself out, especially if it’s a hot summer.

So, I think one area that we’re watching very carefully, because the lead-time a modules is pretty long because you have to first produce the ABTS and then you have to package and test them.

We’re getting concerned that when people are burning off inventory, they just don’t think about that order and reorder time. At the same time all the manufacture separately because we also a lot of our bears to look up to those module manufactures and we know they are not reordering any silicon so that means the hope of supply chain pipeline is sitting at very low replenishment levels and if indeed the inventory gets consumed, then nobody starts thinking ahead, we may find ourselves chasing customers chasing orders, customers chasing supply in the second half of the year just to maintain a reasonable level of production. So, that’s entirely possible.

Stephen Chin – UBS

I see. And IGBTs is the backend handle internally or is that outsourced?

Oleg Khaykin

We do both. We have internal production for discrete IGBTs and for modules we have an outsourced.

Stephen Chin – UBS

Got it. Okay. One last quick one on the PC market. Just given your notebook power management exposure, any comments on how demand is looking for the new Ivy Bridge platform?

Ilan Daskal

Well, I think probably it looks – I mean, judging from the orders that we are getting for distribution from us that’s they go into this product, it’s looking like they’re placing orders, I don’t know whether they’re going to sell or whether they actually going to ship, is a different story, but at least on the demand side it is looking better than the previous quarter. And that’s why a lot of the guidance in our PMG rebounding is driven by recovery in the computing space.

Oleg Khaykin

All right. Thanks, Steve.

Operator

At this time, I would like to hand the conference back over to Mr. Oleg Khaykin for closing remarks.

Oleg Khaykin

Thank you very much, and thanks for joining us today and we look forward to seeing you all in the coming months.

Operator

This concludes today’s conference call. You may now disconnect.

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