Executives
Chris Toth - Executive Director, IR
Ilan Daskal - CFO
Oleg Khaykin - CEO
Analysts
Steve Smigie - Raymond James
Alex Guana - JMP Securities
Amanda Scarnati - Citi
James Schneider - Goldman Sachs
Amit Chanda - Wells Fargo
Christopher Rolland - FBR
International Rectifier Corporation (IRF) Q2 2014 Earnings Conference Call January 29, 2014 5:00 PM ET
Operator
Good afternoon. My name is Eva, 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 2014 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). It is now my pleasure to turn our call over to Mr. Chris Toth. Mr. Toth you may begin.
Chris Toth
Thank you, Eva. Hello and good afternoon. We all welcome you to the International Rectifier second quarter fiscal year 2014 results conference call. On the call today are Chief Executive Officer, Oleg Khaykin, and Chief Financial Officer, Ilan Daskal. I trust you’ve 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 we’ll be describing this afternoon will be forward-looking statements that are dependent upon certain risks and uncertainties, including factors such as orders shipped and received during the quarter, level of bookings, 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, and in our most recent SEC filings.
I would also like to mention that in addition to reporting our GAAP financial results, we present supplemental non-GAAP financial data. A reconciliation of the non-GAAP to GAAP measures set out in our press release and in discussion today can be found in our press release and on our website. We believe providing our non-GAAP measures, combined with our GAAP results, provides a more meaningful representation regarding the Company’s operational performance.
Our non-GAAP presentation and EPS calculation exclude certain items such as accelerated depreciation, restructuring charges, amortization of acquisition-related intangibles, and certain discrete tax items, among others. Lastly I would like to highlight the following upcoming investor relation events.
On Monday, February 10th, we’ll be attending the 2014 Stifel Technology Conference and Tuesday February 11th we’ll be attending the Goldman Sachs Technology Conference in San Francisco. And on March 4th, we’ll be attending the JMP Securities Conference in San Francisco.
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 2014 IR reported a revenue of $270 million which was about flat compared to the prior quarter and a 20.6% increase from the second quarter of fiscal year 2013. GAAP gross margin increased to 36.3% in the quarter. Gross margin exceeded the high end of our guidance due to operational efficiencies and lower inventory reserves.
Non-GAAP gross margin was 36.5% and excluded $639,000 of accelerated depreciation associated with the resizing of our Newport, Wales fab. Overall, GAAP net income was $17.9 million or $0.25 per share for the quarter. This compares with GAAP net income of $8.7 million, or $0.12 per share in the prior quarter and GAAP net loss of $32.7 million, or $0.47 per share in the prior-year quarter.
Non-GAAP net income was $13.4 million or $0.19 per share for the quarter. Non-GAAP net income excluded accelerated depreciation of $639,000, asset impairments, restructuring and other charges of $1 million, amortization of intangibles of $1.6 million, and the net tax benefit of $7.8 million. This compares with a non-GAAP net income of $15.1 million or $0.21 per share in the September quarter, and a non-GAAP net loss of $30.3 million or $0.44 per share in the December quarter of last year.
Moving on to operating expenses; R&D expenses were $32.8 million and represented 12.1% of revenue. R&D expenses included additional investment associated with the engineering builds to qualify new product. These investments include products for the Grantley server launch and other advanced technologies including GaN and Next Generation IGBTs and modules.
SG&A expenses were $44.7 million and represented 16.6% of revenue. Amortization of acquisition related intangibles was $1.6 million. During the quarter, we reported $1 million in asset impairments restructuring and other charges. Excluding the accelerated depreciation asset impairment restructuring and other charges and amortization of intangibles operating income was $21.1 million or 8% of revenue.
Other expense net for the quarter was $1.5 million and was impacted by unfavorable foreign exchange rates. GAAP tax for the quarter was $1.6 million benefit. Non-GAAP tax expense for the quarter was $6.2 million and excluded discrete tax items and net tax effects on one-time items totaling $7.8 million. We ended the quarter with $505 million of total cash, cash equivalent and investments which is an increase of $25.4 million. During the quarter, inventory increased $4 million to $248 million which is about 18.5 weeks. In the December quarter we generated $33.4 million in cash from operating activities.
Cash capital expenditures for the quarter were $10.7 million or 4% of revenue. Free cash flow was $22.7 million. Depreciation and amortization expense was $21.5 million and stock-based compensation expense was $6.6 million. Total shares outstanding at the end of the quarter were 71.2 million shares.
Now moving on to our outlook; we currently expect revenue for the March quarter to be between $265 million and $275 million. For this projected revenue range we currently estimate non-GAAP gross margin to be between 35.5% and 36.5%. We expect R&D expenses to be about $33 million. SG&A expenses are expected to be about $45 million. Amortization of acquisition related intangibles is expected to be about $1.6 million. For the March quarter we expect approximately $1 million to $1.5 million in restructuring and other charges resulting from the resizing of our manufacturing facilities. Other expense net is expected to be about $1 million. Non-GAAP tax expense for the quarter is expected to be about $3 million mainly due to foreign tax accruals. And finally for the March quarter we expect our cash capital expenditures to be about $15 million.
Now Oleg will give you the latest update on our business. Oleg.
Oleg Khaykin
Thank you, Ilan. Revenue for the December quarter came in at the high end of our guidance driven by steady demand across all of our business units and a greater level of churns business. Our high reliability and high end computing businesses grew modestly which offset seasonal weakness in the industrial and appliance end markets. Quarter push outs and cancellations remained low and end market demand remained significantly stronger versus a year ago.
Margins and profitability also improved nicely and we ended the calendar year with a cash balance over $500 million. We look forward to the March quarter and 2014. We are seeing continued strength in the fundamentals across all of our end markets. We remain optimistic that business conditions will continue to improve over the year as economic recovery continues. Geographically, for the December quarter, North America, Europe and Japan were each slightly down due to seasonal factors and customer inventory reductions. And Asia was slightly up due to better than expected demand in the high performance computing and consumer end market.
Moving onto individual business units; the enterprise power business unit revenue increased to $33.2 million. The increase was mainly due to strength in computing at a Tier 1 gaming platform. We also saw steady demand from server and communication infrastructure customers. For the March quarter, we expect enterprise power to be slightly down due to PC market seasonality.
Overall, we expect 2014 to be a good year for enterprise power. We remain well positioned on the Grantley server platform scheduled for launch later this year. Design win (Ph) activity for our digital power management solutions has been strong and we are confident in significant share gains when Grantley ramps. Power management devices business unit revenue increased 1% to $103 million in the quarter. Stronger churns business proceeding Chinese New Year in the consumer and computing end markets slightly offset seasonal weakness in the industrial and power supply markets. Overall lead times for MOSFETs continue to remain about normal and pricing pressure remains minimal. For the March quarter, we expect PMG to be flat to slightly down.
Our energy saving products business unit revenue declined to $46.6 million during the quarter as customer reduced their year-end inventories to prepare for New Year model launches in 2014. However, we remain optimistic for growth in ESP. Over the past year we have expanded our product offering to include new lines of modules for the industrial and appliance applications. And we have broadened our portfolio to include high end solutions in audio and other consumer applications.
In the March quarter, we expect ESP revenue to rebound nicely driven by seasonality and new product ramps. Expected economic recovery in China later this year would be a strong positive factor for continued revenue growth. Our automotive product business unit revenue remained about flat at $36.4 million. The automotive end market continued to remain strong for us and our design win activity is robust, particularly, in new hybrid and electric vehicles that are expected to go into production over the next couple of years.
With fewer holidays in Europe and North America in the March quarter compared to the December quarter and continued ramp of new product. We expect our overall automotive demand to slightly increase in the quarter.
For 2014, we expect revenue to continue to grow throughout the calendar year. Lastly, our HiRel business unit revenue increased to $50.7 million. Satellite and commercial aviation remained the predominant end markets for our business. Military business is small and we do not see any impact associated with the U.S. government’s funding. Overall our bookings and backlog remains stable in all of our HiRel markets and we continue to see steady long-term growth in that business.
Now an update on channel inventories, during the September quarter sell-through decreased 6% compared with September, channel inventory dollars however remained about flat but overall weeks increased to about 11.5 mainly due to stronger churns order by some Asian distributors ahead of Chinese New Year. That said the higher churns business in late December has been all set by higher sell-through sales so far in January.
Lead times continue to remain normal and pricing remains stable. Tax utilization was in the lower 80% range and internal inventory levels rose by about half a week. We continue to vigilantly track end market demand and adjust our wafer starts accordingly. That said we remained comfortable with a slightly elevated inventory levels as we continue to see greater level of churns business and customer expedite.
Now, I would like to provide a few updates on some of our ongoing initiatives. We are entering the final phase of our operational transformation. Our fab resizing in Newport, Wales is on track and is about one-year away from completion. We are also getting ready to start production in our new ultrathin wafer processing facility in Singapore. This facility is expected to commence initial production in February.
Now, I would like to share with you our current thoughts on 2014. Over the past couple of years, we have reprioritized our R&D to focus on core technology platforms with Tier 1 customers that provide significant growth opportunities. We have been highly successful in securing design wins in our core markets and expect to start to see the benefits of these investments this year.
There are several notable revenue growth drivers that we would like to highlight for 2014. The first one is digital power management. We have successfully penetrated new markets in digital power management such as gaming, notebooks and desktops. In 2014, we expect to start realizing the benefits of additional design wins. Digital power management proliferates in the server market. We expect significantly increase our share when Intel’s Grantley platform ramps.
Furthermore, we’re positioning digital power management into other end markets such as communications infrastructure, industrial and automotive and already working with Tier 1 customers in those areas. The second driver is IGBT modules, starting with our lower power modules and high voltage IGBTs which were launched last year. We have significantly expanded our total addressable market in the automotive industrial and appliance end markets.
Later this year, we plan to introduce high power modules that will further expand our addressable market. The third driver is the next generation of low voltage MOSFETs. IRS currently the market leader in MOSFETs and we continue to invest in new platforms to maintain our leadership.
And lastly Gallium Nitride on Silicon, we begin shipping commercial product last year and we will be expanding our product line in early 2014 to include high voltage commercial products. We are already in discussions with customers on a broad range of applications in industrial, appliance, consumer and power supply markets.
In closing, we remain optimistic about 2014 and we see a steady strengthening of fundamentals across all geographies. Last year, we saw North America led the recovery followed by Europe and Japan which have now stabilized. In 2014, we expect China to start contributing to the recovery and could provide additional tailwinds in the second half of the year.
As such, we continue to make appropriate investments in our core power management areas to execute on our technology strategy and provide high value solutions to our customers.
This concludes our prepared remarks and I would like now to open to Q&A. Operator?
Question-and-Answer Session
Operator
Thank you. (Operator Instructions) Your first question comes from the line of Steve Smigie with Raymond James.
Steve Smigie - Raymond James
Great, thank, and congratulations guys on the nice gross margin improvement. On that theme, I was hoping you can talk a little bit about what revenue level you need to get at this point to get to say 40% gross margin?
Oleg Khaykin
Well, Steve, thank you. As we’ve been saying all along $300 million is kind of the bare minimum number that we would need to get to 40% and that assumes that our mix roughly stays in the current balance. As we’ve mentioned during the conference call, our fab utilization today in the low 80% range. Getting from where we are now, an additional $30 million and greater recovery in our industrial business, we will top off the loading or put the loading in our fabs over 90%, and that’s what’s really is required to get us to 40%.
Ilan Daskal
So Steve I will also add to that, if you recall, we have one quarter leg for the gross margin after we get to the $300 million. So probably the second quarter after we get to that level, gross margin will follow, and you know there are few levels there, I mean Oleg mentioned the utilization definitely and the mix with quite a few tailwind kind of supports from EP for example with our Grantley and ESP, the modules in the next generation IGBTs. And also the more we expand or the revenue that will continue to grow the manufacturing strategy of the internal and external mix will contribute an additional tailwind to the gross margin. And lastly the closure of our six-inch Fab in Newport coupled with continued loading of our new Singapore facility will get us further in terms of support or is a 40% margin.
Steve Smigie - Raymond James
Okay, great, and just as a follow up on that, you mentioned the Singapore facility which has started this quarter, so when should we expect a positive contribution -- what quarter should we expect positive contribution from Singapore?.
Ilan Daskal
Steve we incurred currently about $2 million to $3 million start-up cost per quarter, which probably will continue for the next two quarters or so. So as of the September quarter it will start to go down and more we kind of load that facility but it’s kind of level off, start-up cost that we incurred so far.
Oleg Khaykin
But the other thing, already reflected in our ---
Ilan Daskal
It’s all embedded in our forecast and the actual results, correct.
Steve Smigie - Raymond James
Okay great, and just on the revenue side, as I look through your businesses it sounds like there are a lot of pretty good opportunities. Can you talk through sort of the rank order of which will be the strongest growth next year and sort of rank order them in terms of which areas is going to be strongest growth?
Oleg Khaykin
Talking in more percentages, right in terms of meaningfully moving the needle; the first one is enterprise power and really our expectations for that in the second half as Grantley platform starts shipping. That would be a meaningful uptick in the revenue growth in this particular business unit, right. Clearly, we are now counting on Intel where we’ll be seeing Grantley, you know sometime in September, any type of push out, they’d rebound. Now that said we actually been pleasantly surprised with some upside in that business unit from the gaming as you might have seen the new gaming consoles are getting received very well and clearly given us a little bit of wind in our sales. But clearly the single biggest mover for that business unit will be the Grantley going to production.
The second element is industrial business unit, energy saving products business unit. It is still one of the biggest swing factors in our business unit is the China demand. And clearly there was a lot of anticipation by everybody for second half of last year, for China started to recover and obviously did not materialize. We do believe that just based on our discussions with our customers and just looking at broad range of metrics that second half of this year things should start improving in terms of domestic consumption and exports since Europe and North America have been doing a lot better in couple of last years.
So clearly with China recovery and greater orders in the plants and industrial area, that would be anther nice opportunity for an uptick. And then we continue to expect continuous steady growth in both our automotive and discrete business unit as we continue to releasing products and ramp production. But the few kinds of individual pieces that can move the needle this year is enterprise power, and some of our energy saving products.
Operator
Our next question comes from the line of Alex Guana with JMP Securities
Alex Guana - JMP Securities
Congratulations on the solid result. Oleg, you gave some clarity around your gross margin expectations, but I wonder if you could really walk through the March quarter puts and takes around gross margin that seems to be with some of the mix you’re expecting, we might be able to get a stronger number than what you just guided to. Is it Singapore? Is it the inventory levels that are still too high? Some clarity there would be helpful, thank you.
Oleg Khaykin
Well, thanks Alex. There are several things, right. The first one is, as I mentioned we are being very vigilant about our inventory and we’re seeing some increase in general inventories even though by now it have been largely taking care of with early shipments in January. But we also have some increase in our internal inventories. So one of the things we are planning to do in the March is slightly dial back on the wafer starts, which obviously puts a little bit dampens some of the margin for the March quarter. Also, we are seeing slowdown in some of the consumer and high performance computing businesses, which obviously drive some mix change. Although some of it is going to offset by the some increase in the industrial demand we don’t know exactly yet how all these puts and calls are going to come out. So I think I’d say probably the biggest drag on the margin to do more than that is still keeping our utilization at around 80% and without playing cautious with our internal and external inventories. So that’s pretty much what still keeping us in that range.
Ilan Daskal
Alex I would also add to that that we see continued improvement in our manufacturing efficiencies every quarter. And March is a little bit impacted by the lower utilization that we have in December, that’s the one quarter lag. However, obviously, if we end up towards the high end of the guidance in terms of the revenue, that will contribute to the manufacturing efficiencies and variances that we’ll incur this quarter and will have a positive impact as well on the gross margin.
Alex Guana - JMP Securities
Okay, that’s very helpful. Thank you. Can you give us any sense of where you would like to get your inventory turns or days back to that you would think is balanced based on the current business climate?
Oleg Khaykin
Well, we’re not that far off, we are anywhere between half of week to one week of inventories from what we would feel comfortable with. So, I mean, we’ve been last three quarters we’ve had roughly the same level of revenue. So it helps you to fine tune and reach equilibrium of how you do with the factories. I mean the matter of fact we haven’t seen much significant fluctuations on the end market demand. We’ve been able to dial-in efficiencies much better. But I think at that point we are still comfortable around 16 weeks of internal inventories and about 10 to 12 weeks of the channel inventories.
Ilan Daskal
So Alex for the short I mean one to one and half week slower, that would be the target since we had a much higher term business every quarter, turn revenue. However, the target model for the long run is definitely 16 weeks.
Oleg Khaykin
Yes. And then as Ilan mentioned, it’s been very interesting dynamic in the market at least in last three-four quarters since a lot of our distributors and customers are very nervous about their end market demand. There is lot of hesitancy to place longer term orders. As a result, we’ve seen significant number of trend opportunities. So, we look at it is by having a little bit more inventory we’re able to grab the business upside as they materialize during the quarter. So in that respect, although our levels are slightly elevated, we still feel comfortable with where we are.
Operator
Yes. Your next question comes from the line of Terence Whalen with Citi.
Amanda Scarnati - Citi
Hi. This is Amanda on for Terence. Quick question on the gallium. Are we looking at, when will we reach a critical mass I know [indiscernible] of sales is that two half ’14, is this another two half ’14 story or is it going to be later on in 2015?
Oleg Khaykin
Hi. Presumably you’re talking gallium nitride, right?
Amanda Scarnati - Citi
Yes, for the gallium nitride.
Oleg Khaykin
Okay. So gallium nitride I mean it’s far to talk about critical mass. I think we just started commercializing this technology last year and at this point we are still very much involved in a lot of design activity and working with our customers to help them integrate these technologies into their product. What we are doing now is we are moving down our roadmap. We started by introducing medium voltage products last year and we’re going to release a family of high voltage products, 600 volt products, in the first half of this year, starting in very short term and then continuing throughout the next couple of quarters.
And I would say that takes anywhere between six months to 12 months for these products to go into production with our customers. So, for us GaN is very much a nascent technology in terms of the market adaption but it’s now entering the commercialization stage and we feel that within the next three years it should be growing very nicely.
Amanda Scarnati - Citi
Okay, thank you. And then on operating margin side, what sort of improvements could we expect to see in operating margin over the next couple of months, couple of quarters?
Ilan Daskal
So, it all basically depends on the revenue. I mean, as we indicated the gross margin continues to improve and we continue target the 40 level, the 40% level. Revenue, we believe will gear to about 300 million this year. And on the operating expenses, we are at 75 million target with the SG&A at that level already that we target about 45. And R&D is slightly elevated for the next two quarters or so and with that structure we’ll in the themes.
Amanda Scarnati - Citi
And after all that restructuring is done as well.
Ilan Daskal
Correct.
Operator
Our next question comes from the line of James Schneider with Goldman Sachs.
James Schneider - Goldman Sachs
Good afternoon, thanks for taking my question. I was wondering if you could maybe talk a little bit more about the channel inventory situation, it sounds like its little bit rudderless out there people want to keep inventories very lean and then coming back with returns orders. What do you think is going to take for them to break the cycle here and direction it over the next couple quarters? Do you think that the distributors are more likely to build inventory rather than deplete further?
Oleg Khaykin
Well, we had a very volatile last few years. Jim as you can appreciate. So, I mean our distributors equally had a very volatile time and I think it will probably take maybe three four quarters of stability and the whole thing is like, hey the new world is no longer 20% swings quarter-to-quarter. Once people start feeling comfortable, the greet starts to set in and by greet I mean, if people relies, hey if I have inventory I can win more business form my customers and that’s why I need distributor start speculate.
At this point, what I see with more distributors, they’re very cautious, they don’t want to take any possessions or any speculative risks and but once they see an opportunity, they go and scramble and from our perspective we’ve seen this behavior over and over the past several quarters that’s why we’re comfortable having a little buffer because that allows us to be more nimble and grab the business and actually make our distributors look very good to their customers because they’re able to fulfill the demand. So, I think, it will probably take few more quarters of stability and less volatility. Clearly, last week in the stock market does not help. That behavior so I expect for at least next several quarters for them to be as you called it rudderless and you just have to be more nimble and responsive if you want to win in the market space.
James Schneider - Goldman Sachs
That’s helpful, thanks. And then I think you obviously gave some comments relative to China geographically and you expect that to get better as you go through the year. But can you talk about more tactically what you’re seeing from some of the other geographies namely U.S. Europe and Japan.
Ilan Daskal
Well, you know, I mean from the major industrial markets, I mean we’re seeing a very -- I’ll say very robust tone in terms of the confidence and yes there is seasonality here and there but the level of customer optimism is actually pretty good. So, in that respect, I think industrial markets Europe, North America, Japan continue to report pretty bullish for us.
Operator
Your next question comes from the line of Christopher Rolland with FBR.
Ilan Daskal
Christopher? Let go to the caller.
Operator
Thank you. Your next caller is Amit Chanda with Wells Fargo.
Amit Chanda - Wells Fargo
Hi gentlemen, thanks for taking my question. Congrats on the strong quarter. Oleg, can you maybe talk about your fab like strategy, your internal versus external mix at the moment and how that’s sort of tracking relative to your expectations.
Oleg Khaykin
Well, I think our long-term strategy involving revenue growth is to get around 50-50 mix currently at the current revenue level where about 75-25. So, from our perspective we do have some underutilized capacity internally which is more specific to the products we are running but as we outlined our growth strategy and as revenue growth, most of that growth is going to come out from the foundries and that will get us to about 50-50 target in the mix. But lot of the newer products and technologies things like digital power management are all being driven by the foundry business.
Amit Chanda - Wells Fargo
Okay. Thank you for that color. And Ilan, given the several product initiatives that you guys are excited about in 2014. How should we expect R&D spending to track in FY14 relative to FY13?
Ilan Daskal
Only for the next two to three quarters R&D will be slightly elevated to about 33 level that regarded for March it will stay that level for the next two to three quarters and then it will start to taper down towards the 30 million per quarter target. That’s in our goal right now.
Operator
Your next question is a follow up from Steve Smigie with Raymond James.
Steve Smigie - Raymond James
Great, thanks guys. I just wanted to follow up on that R&D a little bit. So, for that $33 million what’s the urgency of accelerating now? Is it just you’re trying to get ahead of something or why the acceleration?
Ilan Daskal
Sure, the $3 million -- large part of it is accelerating some of the new product release but there is also portion that we’re in a new calendar year so there is lot of reserves that you take in first half of the year. But more specific ratio product acceleration, for example right now we are releasing when we talk about the Grantley, it’s not just one product, it’s a whole family of products we’re releasing. We’ll have a product for every power management socket on the server blade and there is multiple server blades. So it’s power stages, its point of load controllers, there is digital power controllers, there is voltage regulators all these whole new platform generation, whole new family of products that involves [indiscernible] building engineering samples, pre-production builds and things like that.
All of these builds before the platform is released are accounted as R&D not as the cost of goods or production. So that elevates your cost of R&D. the second thing is you know they talked about releasing a whole new family of power modules with our new IGBTs which will expand our product offering range in terms of power availability in industrial modules. All of this is also at this point as you’re running qualification lots and engineering builds and customer samples are all being treated as R&D expense. So for us to really launch all of these products and be ready by the middle of the year we have to build them now. So that’s why we’re running slightly higher level of R&D.
Steve Smigie - Raymond James
And with regard to going down to this 30 million, what I presume that you would return to that 30 million if we were still at $270 million so if I am modeling you guys getting to the 300 million, do you guys were talking about the dollars probably wouldn’t dip that down neither percentage would come down. But the dollar probably wouldn’t come back down to 30 unless you are back at 270 something like that, million of revenue.
Ilan Daskal
The goal is to take down to 30 million on a dollar basis that’s still the target.
Oleg Khaykin
So I think for example Grantley platform, with products that are like for say industrial products we have the luxury of kind of spacing them out over couple of quarters when we release them. Unfortunately with things like server platforms we all have to come out all or nothing, right. And there is a fixed date by which all of them have to be launched. So there you don’t have the luxury of kind of space them out or couple of quarters, so you can smooth out your R&D spend. Once those things are released, there will be a nice drop off in these material, we call it materials and I think materials cost. And that will drop us down to the 30 million revenue run rate. So it’s really more specific to the product lines rather than any particular revenue of quarter.
Steve Smigie - Raymond James
So seems like a lot of activity here on enterprise power. And you guys outside of high rail that’s your highest margin business in the most recent quarter at about 42% up nicely. Now you are saying that’s outsource, so I guess you are not going to get margin bump there from utilization. Is there anything that would keep driving enterprise power margin higher or now that we have had this jump here sequentially is that kind of where you will likely to be for a while?
Oleg Khaykin
We do have also a number of products for enterprise power that run internally, but they are running in a fab that’s already pretty full. So there -- in that thing there is not much. The further margin improvements and we do expect margin improvements in that business will come from the mix. As Grantley -- the server business sees a higher margin than a lot of the kind of PC and gaming business that we have today. So clearly as that ramps the mix within that business unit will shift to a higher margin mix. So I would say probably the biggest driver of further expansion in that business is the shift in mix in the short term towards having more servers and then shift in the market that we target that makes in the next couple of years as we enter other types of communication infrastructure markets, which has also better profile than the desktop computing.
Steve Smigie - Raymond James
Okay, great. And then if I could just sneak in one more here on the IGBTs investment there and again that’s in I think your power module business there that you are hoping to have pretty good growth on it this year. Where does that position you competitively? I know that you guys have partnered with a packaging partner and you maybe going up against fair trial. But also there is a -- maybe Mitsubishi out there. But they seem more confined of a Japanese market. So wondering if you could talk a little bit competitively where does this put you in terms of technology relative to them and growth opportunity. And I guess what I am getting at is does the new technology puts you at advantage there?
Oleg Khaykin
There are two things to the industrial module technology, first one is the quality of your IGBTs and the second one is the packaging, right. So IR traditionally -- if you look at IGBT market is about $5 billion addressable market, about a billion of it is in discreet form and 4 billion is in modules. IR traditionally played in a discreet space where we packaged individual IGBTs and sold them and the only module play we had was the what you call smart power modules for the appliances which are about 600 to 1200 volt range, anywhere between 10 to 20 ampere current and that was the place where we played. What we have done now is we have, and normally we have sold our IGBTs in dye form to various module manufacturers. What we are doing now is we are expanding the portfolio of our module product to go after the bigger share of that $4 billion remaining market and that means making lower power modules and our smart appliance modules going with the smaller IGBT modules and as we mentioned companies like Fairchild and such in that space but also making the higher power modules above the appliance level and obviously that growth competing against modules made by Mitsubishi and Infinium and so on.
But still we don’t go to the very high power but it’s kind of going from the low power to mid range. And what makes our modules very competitive, the first and foremost our next generation IGBT is very high performing platform with also good cost performance component to it. And by having broader range of packages into which to put that silicon will allow us to address $4 billion market which was to-date pretty much not addressable market for us. And really if you look at the, our initial production of these modules and compare them to the best in the field on performance and cost, they are highly competitive and in many cases superior.
Operator
(Operator Instructions) Your next question comes from the line of Christopher Rolland with FBR.
Christopher Rolland - FBR
Hey guys thank you very much for letting me ask the question, sorry I dropped there earlier. So maybe you guys can expand a little bit more on IGBT, talk about how penetration is going in the low end for you guys and also what are the gross margins look like there, what do they look like in the higher power IGBTs and how do you expect mix to work over time? Thanks.
Oleg Khaykin
Sure. So, I mean we sell IGBTs in various shapes and forms, the most basic form is a dye form where we sell to the module manufacturers and clearly their margins are very high because there is very little material content, you are just selling the dye right. So the price per unit is smaller but the margin on the silicon is higher. The moment you start putting more and more packaging around it the margin decline because you are increasing the on one-hand the ASP of the product but on the other hand you have a lot more third party material like soft grades and mold compound and lead frames that you are buying.
So, from our perspective the lower power modules which are mainly lead frame based modules, they will be somewhere in line with our company average margin. The higher power modules on the other hand we believe will be on power or better than our overall company margin.
Christopher Rolland - FBR
Okay, great. Thanks. And then also maybe you guys can give us some hints about maybe some strategic opportunities or some markets that you might be thinking about longer term, may be that you are not in now or that you are underrepresented call it 2015, 2016 something like that?
Oleg Khaykin
Well I mean clearly I mean from our perspective all strategic opportunities that we would consider would be only to the extent they take us more deeper into where we already playing. So, I mean really we have some of the segments; we are making a big push in automotive, so if we find technologies or products that make our position in automotive market stronger we will definitely consider them. But as you know with us the price has to be right and we don’t fall in love with any particular deal just because it looks nice right I mean to me it’s got to make dollars. And HiRel is always an interesting area for us, I mean from my perspective right now it’s a bit of a disadvantage area standing but these things don’t lost forever. And if you look back in the early 90s with the some of the most opportune times to acquire HiRel or military type products was in the early 90s and those paid out very well in the long-term.
So, I mean we are not really sat on making strategic deal at any cost but I mean to extent where we are looking where we could strengthen our position in our core markets such as HiRel, automotive and things like digital power. Those are the areas where will consider investing.
Operator
This concludes the time delegated for the Q&A portion of today’s call. We will turn the call back over to senior management for further remarks.
Oleg Khaykin
Thank you for joining us today and we look forward seeing some of you at the investor conferences later this quarter. Have a good quarter. Thank you.
Operator
This concludes today’s International Rectifier second quarter fiscal year 2014 conference call. You may now disconnect.
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