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Intersil Corporation (NASDAQ:ISIL)

Q3 2008 Earnings Call Transcript

October 22, 2008 04:45 pm ET

Executives

Jonathan Kennedy – IR

Dave Bell – President and CEO

David Zinsner – SVP and CFO

Analysts

Ross Seymore – Deutsche Bank

Craig Hettenbach – Goldman Sachs

Doug Freedman – AmTech Research

Romit Shah – Barclays Capital

Uche Orji – UBS

Craig Ellis – Citigroup

Joanne Feeney – FTN

Cody Acree – Stifel Nicolaus

Steve Smigie – Raymond James

KC Rajkumar – RBC Capital Market

Srini Pajjuri – Merrill Lynch

Gus Richard – Piper Jaffray

Roy King [ph] – JP Morgan

John Pitzer – Credit Suisse

David Wu – Global Capital

Patrick Wang – Wedbush Morgan Securities

Tore Svanberg [ph] – Thomas Weisel Partners

Krishna Shankar [ph] – JMP Securities

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Intersil Corporation earnings conference call. My name is Shamiqua and I'll be your coordinator for today. (Operator instructions)

I would now like to turn the presentation over to your host for today’s call, Mr. Jonathan Kennedy, Investor Relations. Please proceed.

Jonathan Kennedy

Thanks Shamiqua. Good afternoon and thank you for joining us today for Intersil’s third quarter 2008 earnings conference call. Today with me is Dave Bell, Intersil’s President and Chief Executive Officer; and Dave Zinsner, Intersil’s Senior Vice President and Chief Financial Officer. In a few moments, they will deliver remarks on the third quarter of 2008 and provide a summary of our business outlook. After our prepared comments, we will open the line for questions.

We completed our third quarter on October 3, 2008. A press release was issued today at approximately 1.15 Pacific Time. A copy of the press release is available on the Investor Relations section of our Web site at www.intersil.com. In addition, this call is being webcast live over the Internet and may also be accessed via the Investor Relations section of our Web site. A replay of the conference call and webcast will be available for two weeks through November 5.

Please note that some comments made during this conference call may contain forward-looking statements. I would like to remind you that while these statements reflect our best current judgment, they are subject to risk and uncertainties that could cause our actual results to vary. These risk factors are discussed in detail in our filings with the Securities and Exchange Commission. In addition, during this call, we may refer to financial measures that are not prepared according to Generally Accepted Accounting Principles.

We use these non-GAAP measures because we believe they provide useful information about the performance of our business and should be considered by investors in conjunction with GAAP measures that we also provide. You can find a reconciliation of non-GAAP to comparable GAAP measures on the Investor Relations section of our Web site.

For those of you interested in learning more about Intersil at an upcoming investor event, we will be participating in the Credit Suisse Technology Conference on December 4 in Scottsdale, Arizona and Barclays Capital Technology Conference on December 11 in San Francisco, California.

I'll now turn the call over to Dave Bell.

Dave Bell

Thanks Jonathan. Good afternoon and thank you for joining us today for Intersil's third quarter 2008 earnings conference call. Before we discuss the results for the third quarter, I'd like to make a few comments on our fourth quarter guidance.

For the fourth quarter, we are expecting revenue to be down 20% to 25% and our non-GAAP earnings per share of approximately $0.22 to $0.26. The current credit crisis along with the economic slowdown has caused many of our customers to become more cautious, diminishing our visibility, and making forecasting more difficult. We also remain very cautious given the economic uncertainties ahead. Our guidance is based on a detailed bottoms-up analysis with inputs from the sales force, management's judgment, and consideration of macroeconomic conditions.

As mentioned before, the global economic environment has severely diminished our visibility making it very challenging for us to forecast the near term. However, we continue to see the benefits of our business model. Intersil's balanced product portfolio, satellite strategy, and variable cost structure enable us to maintain profitability and positive cash flow during periods of economic slowdown. Despite their lower order rates, customers continue to show a strong interest in our products as evidenced by our growing design wins. Again, we believe the slowdown in orders reflects our customers' prudent caution going into an uncertain environment.

Now, let’s turn to the third quarter results. The third quarter was a record revenue quarter for Intersil. We achieved net revenues of $218.7 million, an increase of 10% over the same quarter last year, and grew our non-GAAP earnings by 22% over the same quarter last year. Intersil remains committed to returning cash to our shareholders. During the quarter, the company repurchased approximately $30 million or 1.3 million shares of our stock and also paid approximately $15 million in dividends.

As a result of our strong continued positive cash flow, the company’s Board of Directors authorized and declared a quarterly dividend of $0.12 per share of common stock. At our current stock price, this is a dividend yield of over 4%. In addition to our financial achievements, we successfully completed two acquisitions, D2Audio in Austin, Texas and Kenet in Boston, Massachusetts. These two acquisitions broadened our product portfolio and leveraged new and innovative technologies to further penetrate both existing and unserved markets.

At this time, I'd like to turn the call over to Dave Zinsner who will provide a financial summary. I will then discuss results from each of our end markets and provide additional comments on our fourth quarter 2008 outlook. Dave?

David Zinsner

Thanks. Let me begin with the income statement. As Dave stated, we reported $218.7 million in net revenue for the third quarter of 2008, a 10% increase from the same quarter last year, and an increase of 1% sequentially.

Our second quarter had 14 weeks instead of the normal 13. Normalized for the 13 weeks, revenue for the third quarter grew roughly 6% sequentially. As Dave mentioned, we are entering a period of uncertainty and many of our customers are being cautious with orders. As a result, we enter the fourth quarter with a lower backlog than last quarter.

Our guidance, which assumes a softer market, requires approximately 40% turns. As expected, gross margins were 56.3%, down 40 basis points from 56.7% in the second quarter due to product mix as computing grew to 36% of revenue. We anticipate gross margins will improve in the fourth quarter due to mix partially offset by some under-absorption.

In the third quarter, R&D expenses were $35.1 million or 16.1% of revenue, down $3.5 million from the prior quarter. This decrease was expected and is primarily due to one less week in the third quarter and lower incentive expenses.

Fourth quarter R&D spending should be approximately $2 million higher due to the acquisitions of Kenet and D2Audio. SG&A expenses were $31.8 million or 14.5% of sales, down $4.5 million from the second quarter, driven by one less week and lower incentive and deferred compensation expenses. Deferred compensation increases and decreases from this program are neutral to the P&L as they are offset by gains and losses on deferred compensation investments. We expect fourth quarter SG&A expenses to be approximately flat with the third quarter.

In-process R&D expenses was $100,000 during the quarter. This represents only the D2Audio transaction. In process R&D for the Kenet transaction, which we estimate will be approximately $5 million, will be recorded during the fourth quarter.

As previously discussed, we continue to execute on our major cost reduction and restructuring initiatives. We incurred $600,000 during the quarter as a result of these activities and expect approximately $1 million in the fourth quarter. We expect to realize approximately $6 million in annualized savings from these projects as they phase in during 2009.

We made improvements on our operating profits. Operating profits were $52.5 million or 24% of sales compared to 20.1% last quarter and 19.5 % in the same quarter last year.

Interest income was $3.1 million, down $1 million from the prior quarter as interest rates were lower this quarter. We expect interest income to be slightly lower in the fourth quarter. Our cash is invested primarily in high quality investments to maintain principal, which currently have a relatively low yield. Our tax rate for the third quarter was approximately 7% due to the R&D tax credit benefit that was reenacted by Congress on the last day of our quarter and a one-time tax reserve release recognizing the closure of a previous audit year.

For the fourth quarter, we expect our tax rate to be approximately 25% which includes the ongoing benefit of the R&D tax credit and the impact of Kenet’s non-deductible in-process R&D expenses. During the quarter, we continue to grow our earnings faster than revenues. Diluted earnings per share was $0.41 up 52% from the same quarter last year and non-GAAP diluted earnings per share of $0.44 grew 22% from the same quarter last year.

Now moving to the balance sheet. On an absolute dollar basis, net inventory increased by $11.7 million from the second quarter and our days of inventory increased to 106 days. Inventory at distribution was up moderately from the second quarter as we replenished historically weak inventory in the computing business. Looking ahead, we are taking steps to decrease inventory both on our books and at distribution and bring turns in line with the historical levels.

Days sales outstanding was 52 days, essentially flat with the prior quarter. Depreciation was $5.6 million and capital spending was $8.7 million. We expect CapEx to be approximately $4 million to $5 million in Q4 as we scale to revenue in return to a more normal spending for our fab like model. The increase of goodwill of $25.6 million was driven by our acquisitions.

For the third quarter, we generated $30.3 million in free cash flow and exited the quarter with approximately $408 million in cash and long-term investments and no debt. As Dave stated, we repurchased approximately $30 million or 1.3 million shares of our stock and paid out approximately $15 million in dividends in the third quarter. Our weighted average share count was relatively flat to the second quarter. For the upcoming quarter, we expect weighted average shares to be approximately flat with this quarter.

Last week, the company closed a $75 million revolving credit agreement with Bank of America acting as the agent. Securing the revolving credit enhances Intersil's ability to continue to strategically invest in our business, and given the current environment of the credit market, highlights how banks view the solid cash flow of our business model.

Now, I'll turn the call to Dave Bell who will provide highlights into each of our foreign markets.

Dave Bell

Thanks, Dave. As Dave mentioned, I’ll now address our business in each of our foreign market categories beginning with high-end consumer. Revenue in the high-end consumer market represented approximately 25% of third quarter revenue. On an absolute dollar basis, revenues in the high-end consumer market decreased 1% year-over-year and increased 7% sequentially. The sequential growth is due to seasonal strength in handhelds and growth in gaming and Ambient light sensor products.

The third quarter was a highlight for the area of gaming. We saw impressive sequential growth in shipments of our DC-to-DC controller used in game consoles. We're optimistic that we will be able to expand our footprint in this segment over time.

During the third quarter, we continued to see exceptional growth with our Ambient light sensor product family. Revenue ramped quickly as we continued building design win momentum with multiple Tier 1 customers. As anticipated, our optical storage business continued to decline with the slow adoption of Blu-Ray. However, we expect the business to begin its recovery in 2009 based on new Blu-Ray opportunities. In summary, with the uncertainty in consumer spending, we expect the consumer-end market will be down significantly in the fourth quarter.

Now let’s look at our computing business. Revenue in the computing market represented approximately 36% of third quarter revenue. On an absolute dollar basis, revenues into the computing market increased an impressive 39% year-over-year and increased 11% sequentially. We achieved record shipments in revenue in the third quarter and enjoyed solid demand for our full portfolio computing power management solutions. We saw particular strength from our VCORE and battery charging solutions for both Intel and AMD notebooks. We continue to win with our VCORE power solutions for the Montevina notebook platform. During the quarter, we maintained our position as market share leader in both Intel and AMD-based notebook platforms and we recorded numerous design wins for the Montevina refreshed platforms.

The rampant sales of Atom-based notebooks and laptops drove increased demand for low-power variants of our highly efficient notebook and desktop VCORE power solutions. These variants are optimized for NetX platforms which will help drive sales of chargers and additional power content.

As anticipated, we have seen our share in the desktop segment begin to recede. However, given the fierce competitive environment, we’ve been pleased with the level of design wins and design inactivities for our Intel VR 11.1 and AMD AM2+ VCORE solutions. Of particular note is strong interest in our designs that deliver industry-leading power efficiency. We continue to develop innovative solutions for desktops and servers and believe that our technical leadership in notebooks uniquely positions Intersil to participate in the greening of the PC.

Looking ahead to Q4, we expect our revenue in the computing market to be down strongly due to the current macroeconomic conditions and our actions to maintain inventory at healthy levels.

Moving now to the industrial market, revenue in the industrial market represented approximately 19% of second quarter revenue. On absolute dollar basis, revenue into the industrial market decreased 12% year-over-year and decreased 12% sequentially. This year-over-year and sequential decline is mainly driven by uneven timing for military programs.

In the third quarter, we designed in two new video drivers in our projectors. These video drivers enable significant reduction of board space and total component cost and are ideal for systems such as projectors and video conferencing equipment. We anticipate revenue to grow nicely for these two products through the remainder of 2008 and into 2009.

During the quarter, we delivered samples of our first micro-powered chopper stabilized amplifier. This amplifier offers best in class performance with superior speed, noise, and power consumption relative to our competition and is used in a wide range of industrial applications, factory automation, and medical markets.

Looking ahead to Q4, we expect the industrial market segment to be up slightly. We expect the industrial segment would grow steadily in 2009 as many design wins continue their momentum and recent design wins are slated to go into production.

And finally, moving to the communications market, revenue in the communications market represented approximately 20% of second quarter revenue. On an absolute dollar basis, revenues into the communications market increased 10% year-over-year and decreased 8% sequentially. The sequential decline was driven by lower spending for DSL in Asia and Europe.

During the quarter, we started shipment of our first generation LNB power controller for satellite TV receivers. This highly efficient, integrated controller is compliant with green energy standards and offers significant cost advantages over the currently available discrete solutions. We continue to expand our family of highly integrated, efficient, single-phase controllers with the release of a single-phase, non-synchronous buck controller. The controller features an ultrawide operating input voltage range providing maximum efficiency and flexibility for a variety of telecom and industrial applications.

We continued experiencing strong sales and high reliability space as numerous communication satellite programs in both Europe and Asia grew. Looking ahead to the fourth quarter, we expect the communications market to be down moderately from the third quarter.

Before we open it up for questions, I would like to summarize with these key points. The global economic downturn is discouraging to all of us and has created a great deal of uncertainty in the markets we serve. However, one thing has not changed. We remain absolutely confident about Intersil's strategy and we will remain focused on executing that strategy this quarter and in the quarters to come.

We continue to invest in highly differentiated new products and design win momentum is building because of these investments. We also continue to focus on driving cost reduction programs that will contribute to steady improvements in gross margins and operating profits.

Even though the economic conditions are discouraging, they actually create an opportunity for Intersil. As Warren Buffet recently said, bad news is an investor's best friend. It lets you buy a slice of America's future at a marked down price. We have clearly taken advantage of this fact during the last quarter with two various strategic acquisitions; D2Audio and Kenet.

D2Audio is recognized as the leader in intelligent Class D audio amplifiers. These amplifiers accept digital audio inputs, provide audio enhancement with a built-in DSP, and eliminate the sound quality tradeoffs usually associated with Class D amplifiers. Our entire sales organization is excited about these new design win opportunities this powerful technology is already bringing to Intersil.

Kenet is the world leader in very low power, high speed analog-to-digital converters. These ADCs consume three to five times less power than competing products and open a host of new applications in the industrial and communications markets.

As with D2Audio, Intersil's sales organization is already finding many new opportunities to sell this new product family. And as an ancillary benefit, these acquisitions have also given Intersil new designing centers and two analog rich communities; Austin, Texas and Boston, Massachusetts.

We will continue to grow Intersil both organically and through strategic acquisitions like D2Audio and Kenet. We continue to evaluate many acquisition candidates and plan to exploit the unusual opportunities created by our strong balance sheet and the present economic conditions.

During the last quarter, we also announced a top level reorganization in which two product groups were created; a power management products group and an analog mixed signal products group. We believe that this new organization will make us even more agile and will support Intersil's growth well beyond $1 billion in sales.

Despite the present downturn, Intersil's executive leadership is absolutely convinced that our recent re-organization, our cost control programs, our highly differentiated new products, and our strategic acquisitions position Intersil to continue outgrowing our competition in the years to come. The patient investor will be rewarded when Intersil emerges from the present downturn, a much stronger and more profitable company.

With that, I would now like to open the call to questions for either Dave Zinsner or myself.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Your first question comes from the line of Ross Seymore of Deutsche Bank. Please proceed.

Ross Seymore – Deutsche Bank

Hey guys, can you just dissect a little bit what went into the guidance of down 20% to 25%? Dave, you mentioned a number of factors, bottoms up, et cetera. Just help us understand the weighting of those.

Dave Bell

Well, sure. I think we've got a really good process for evaluating this, Ross. We've got a great track record many quarters, as seen in our guidance, so I think that's a testimony to the quality of the process. What we do is, on a quarterly basis, we work with our sales management, we do a bottoms-up analysis from our customers. We also kind of more thoroughly [ph] go at it from our product line. So our product marketing people and general managers work with them and agree on a consensus number. So, I think it's a very good process that really comes at the problem from two angles. How do you see on top of that? We have management that looks at the overall macroeconomic trends and provide some judgment there as well. So, again, although it's maybe discouraging to us as it is to our investors how deep this downturn appears to be at this point, I think that the numbers that we've come up with here we believe are very realistic and are based on a process that's really sound.

David Zinsner

The other thing we did was we looked at the inventory at distribution. Remember, 50% of our revenue comes from distribution and most of that is on a selling basis, although North America is on a sell-off basis. So we wanted to be active and in front of this in terms of how much inventory was being carried by distributors. So, the assumption within our guidance, which kind of the management play on this, is to try to bring down that inventory level so that it remains at a really healthy level going through this cycle.

Ross Seymore – Deutsche Bank

I guess the follow-up question would be, Dave, give us the puts and takes and remind us what you said on gross margin for the fourth quarter?

David Zinsner

Puts and takes on the third quarter, is that what you're talking about?

Ross Seymore – Deutsche Bank

No, the fourth quarter guidance on gross margin. You said it'd be up but partially offset by a number of things. Just give us the details on that.

David Zinsner

We expect gross margins to be up. What is going to drive this is the mix. Obviously, computing as a percentage of revenue we expect that to come down. And so, that'll be beneficial to us. We, because we have a fab-like model, do not have a lot of absorption, and so it's kind of unique that our revenue would come down as much as it does and yet our gross margin has actually improved. But we do have some absorption and so that's going to mute the increase. But you know it's going to be in the 10 basis points increase this quarter versus – Q4 versus the third quarter.

Ross Seymore – Deutsche Bank

Great. Thank you.

Operator

Ladies and gentlemen, please limit yourselves to one question only. Your next question comes from the line of Craig Hettenbach of Goldman Sachs. Please proceed.

Craig Hettenbach – Goldman Sachs

Yes. Thank you. If I can just ask on the cost controls, just surprised to see the guidance for SG&A flat with revenues, where they're going into Q4. Is there some lag effect there in terms of – will you see some reduction into calendar Q1 or if you can just help me out on the SG&A line?

David Zinsner

So, there is a little bit of increase associated with Kenet and a tiny bit that we still have to see an increase more from D2Audio because we only had two months of the quarter where we had D2Audio. So that's impacting us. And also, we got a fairly sizeable benefit in SG&A from the reduction in our deferred comp investment. So we had like $1.3 million decline in deferred compensation plan and so that benefits SG&A and then you'll see it as an offset a loss below the operating income line. And so we start out the assumption for the fourth quarter that that will be neutral and of course, we don't know how that will go. So that's the other piece.

And then the third piece is option expense. We did have a relatively low quarter for option expense. I want to say it was in the $8 million range and it was particularly low on the SG&A side. We're actually expecting that to increase a little bit in the fourth quarter mainly again due to Kenet and D2Audio.

Dave Bell

So, Craig, I guess what I'd point out as well is that there's a bunch of moving pieces like Dave just articulated there. But, I think that we've got some very good programs in place to make sure that we're doing everything prudent that we should to make sure there we're controlling operating expenses going forward following [ph] this downturn.

Craig Hettenbach – Goldman Sachs

And if I can ask you a very brief followup, just you've been very vocal on M&A and I know it's an environment where the public companies out there were not seeing many deals happen. It's more of the small private ones that you've done. But, with your stock price where it's at, how does your view change if any on the near term in terms of best use of cash, be it buyback versus M&A?

Dave Bell

Well, Craig, I think that for the near term, most of the opportunities probably are going to continue being in the private side. Obviously, we did D2Audio and we did Kenet. During the last quarter, we continued to evaluate other opportunities and I think especially, given the fact that the IPO market is virtually dead, it's very difficult for many startups to raise additional follow-on capital. It does create a good opportunity for us. So, I think you can probably count on us continuing to look for opportunities there. Given the conditions though in the market, and I will let Dave Zinsner comment on this, you probably couldn't necessarily say the same about public acquisitions.

David Zinsner

Yes. Both from our standpoint in that we don't like to give our stock at such a cheap level and also most of the targets, I'm sure, also are suffering from low stock price and are probably not anxious to sell at this point. So I would agree with Dave the likelihood that these are going to be small tuck in kind of technology plays. And right now, it's just a great market to find really, really good technology finally at a reasonable price where valuation is really much more in line with what our expectation would be in terms of getting it.

Dave Bell

Craig, one other thing that I'll add is regarding this small private company acquisitions, I want to stress again that what we're out looking for are first and foremost really strategic acquisitions. Companies are bringing in technology, open up new markets for us, bringing in product line as both D2Audio and Kenet did. It just so happens that you can get companies like that at very affordable prices. I want to stress though that we're not out looking for broken companies that happen to be really cheap. We're looking for really strategic addition that also happen to be very affordable right now.

Craig Hettenbach – Goldman Sachs

Okay, thank you.

Dave Bell

You're welcome.

Operator

Your next question comes from the line of Doug Freedman of AmTech Research. Please proceed.

Doug Freedman – AmTech Research

Great thanks for taking my question guys. We recognize that right now just figuring out where the world is going is really challenging. But, can you give us a sense of when you think you might start to see any sort of stabilization, what are day-to-day order rates looking like, and if you can give us sort of a little color on the 40% turns number and how that's progressed quarter to date?

Dave Bell

Well, I'll start out, Doug. This is Dave Bell. The visibility right now is extremely low. We've seen just a very rapid change as you and everybody in this industry knows just during the last six weeks. So this is really a moving target. I'm not trying to be evasive here but the honest answer is that we really don't know how deep this is going to go and we don't know how long it's going to go at this point. So, we're using our best judgment, the best numbers that we have got from our sales force and our customers and everybody to create this guidance at this point. But, Doug, at this point, I don't have any better idea than you do about just about how deep and how long this is going to go.

Doug Freedman – AmTech Research

How about putting in context the turns that you are required?

David Zinsner

Well 40% turns is lower than probably the average over a several-year look at historically what we've done. But, over the last couple of quarters, our turns have actually been a bit lower than that. Now, that's because we were getting all kinds of visibility from our computing customers which we're no longer getting. So 40% is pretty reasonable, I think, at this point.

Doug Freedman – AmTech Research

I guess if I could just one follow up. If I look at your guidance down 20% to 25%, clearly that's worse than we've heard out of anybody so far. Linear Tech came in and shocked the world a little bit with down 10% to 20%. We heard Arrow this morning tell us they are expecting sort of down 13% on the component side. Can you sort of add the pieces up and explain why you guys are seeing a little bit more than the rest of the industry?

Dave Bell

Well, let me start out again, then Dave Zinsner can maybe add a little bit of color. I think that we're looking at a combination of several things here, Doug. Our business is very broad based. I think that the guidance that Linear Tech gave, also being a very broad based company, in our view is probably a pretty accurate assessment of the overall broad based market conditions with their guidance down 10% to 20%. So then the next question would be well, why are we guiding down 20% to 25%? I think there's a couple of factors here. One is that we are actually coming on the back of a very strong Q3. If you look at the numbers, we were up 1% in Q3, but remember, Q2 was a 14-week quarter so kind of on a normalized basis, we actually grew roughly 6% in Q3. So pretty strong Q3 which is contributing to that.

The other thing though that is happening is all of you are aware, we spent the last almost year and a half adding capacity, trying to keep up with rapidly growing demand in our PC business. And as they would have it, just when we added enough capacity to keep up with this rapidly growing demand in the July-August time frame, then of course, the world started to change with demand going the other way. So we have a little bit of an unusual situation there where we were having a tough time keeping up with demand, inventories. We're lean earlier on. Lead times are very long. We got most of the inventories replenished, but now of course lead times have come way down. So I think that is creating a little bit of a perturbation as well especially in computing that is adding some number percent as well to this overall broad based number.

Doug Freedman – AmTech Research

Okay, thank you.

Dave Bell

You're welcome.

Operator

Your next question comes from the new line of Romit Shah of Barclays Capital. Please proceed.

Romit Shah – Barclays Capital

Hey guys. Just based on the previous question that you guys built a little more inventory than maybe some of yours peers coming into Q4, Dave, do you think that after this quarter or is your expectation that inventories in the computing segment will be back to more normal levels or do you think it's going to take a couple of quarters to burn through all that?

David Zinsner

Our goal is to bring them down to normal levels. Of course, all of that depends on what the overall demand picture looks like in the first quarter and we're certainly anticipating that it would be lower than the fourth quarter, which is usually what happens. So that's assumption for – that is the assumption we're building in. Of course, you never how the macroeconomic issues kind of play into the computing space and that may or may not be enough.

Romit Shah – Barclays Capital

Okay. And just on the two acquisitions. Can you quantify for us what the contribution is in Q4 to revenue and EPS?

David Zinsner

These are both essentially pre-revenue companies. So, they mostly added expenses. There were kind of a little less than $1 million of total revenues combined that they contributed.

Romit Shah – Barclays Capital

Okay. And then on EPS, is it $0.01 or $0.02?

David Zinsner

Yes, it's a little over $0.01.

Romit Shah – Barclays Capital

Okay, great. And then just last question on industrial. Can you help us to understand why you expect this business to growth?

David Zinsner

(inaudible) it's a penny reduction. You understand, right?

Romit Shah – Barclays Capital

Yes, I do. Just lastly on industrial, just give us a little more color on why you expect this business to grow in Q4?

Dave Bell

Hello, Romit. This is Dave Bell. I think what we're starting to see is the result from a lot of investment over the recent years in the industrial business. So, it's kind of bucking the tide in the industrial business. It's been a relatively small component of our business historically but it is growing. And frankly, I think you're seeing the result of really outstanding design wins in recent years and some new product families. A lot of the historical business were based on the legacy products where we have seen declining sales, but now we've turned the corner and we're starting to see rapidly growing revenue on new refreshed portfolios and some new product families. So, I don't think there is any other twist to it, other than it's just we're really starting to see the payoff from those investments.

Romit Shah – Barclays Capital

Dave, one clarification. Does the non-GAAP EPS include stock option expense?

David Zinsner

It does not.

Romit Shah – Barclays Capital

Okay, thanks.

Operator

(Operator instructions) Your next question comes from the line of Uche Orji of UBS. Please proceed.

Uche Orji – UBS

Right. Just very quickly, if look at you and Linear Tech and TI, I think one common trend is the fact that you tend to recognize a large part of your revenue on a sell-in basis. Can you please remind me, first of all, how much goes to distributors, how much is sell in and if there is any way to conclude that may have influenced the level of pushbacks you're getting from the distributors and may have influenced this guidance? Is there anything that one can draw from just looking at that train of thought?

David Zinsner

As I said, about 50% of our revenue comes from distribution and about 20% of our total distribution revenue is on a sell-out basis. Of course, that means 80% of it is on the sell-in basis. At a high level that’s – what your point is valid, although what we were trying to do in driving up the inventory was get it up to the turns that were necessary based on the demand we were seeing for our products at the subcontractor level at that time. And of course, that's changed and so now what seems like the adequate level of inventory suddenly doesn’t look like the adequate level of inventory which is driving our desire to bring that back down. But that’s really the driving force behind why the inventory needs to come down.

Uche Orji – UBS

Okay. Just one follow-up. You mentioned something on notebooks about your record market share, about your leading [ph] share in the desktop market, can you just talk about two things here? First, can you talk about the pricing trends you're seeing and in general and within notebooks in particular, are we expecting ASPs to fall as some of the Atom-based products and UMPCs comes around? That’s on the one hand and then, on desktops, are you at a point where you think you can now stabilize the market share that you have ceded on the desktop side? And that’s the last one. Thank you.

Dave Bell

Well, I think that as I mentioned in the prepared remarks, we are seeing some reduction in market share in the desktop space but that's kind of deliberate and not a surprise to us. More of the growth has been in the notebook area there. As far ASP decline is concerned, I think that we have seen just normal ASP decline. There's always some amount of ASP decline quarter-over-quarter and nothing really out of the ordinary in the transition from Q3 to Q4. Looking forward, as you start going out to the (inaudible) generation which will come along late next year, there is more aggressive ASP competition out in that time frame. But right now, part of your question is, is that what's impacting our computing business? I don’t think there's anything out of the ordinary that happened in Q3 or forecasted in Q4 from an ASP erosion standpoint. Then, I think lastly, you were kind of asking about Atom-based products. Atom-based products due tend to have a slightly smaller building materials from our end, so they are simpler products, they have less power consumption, so from a total dollar content proved netbook or NetX product, they will have a little bit less than a notebook computer would.

Uche Orji – UBS

And desktop market share?

Dave Bell

It was a question of what’s happening with our share? Is that –?

Uche Orji – UBS

Yes. Are you at the point where you are now going to stabilize market share on desktops given that you have been ceding market share for sometime now?

Dave Bell

I don't know where I can make any prediction I think right now about exactly where it’s going to end up. Our market share clearly is going down a little bit in desktops. Now, desktops aren’t growing either. So, overall units in desktops I think are generally flat. It might actually head down with the economic conditions. There is some ASP erosion so forth and then on top of that as I mentioned, we’ve got a little bit of market share reduction there. So you can conclude that our dollars in the desktop, yes, it will go down during the next quarter and probably in some of the quarters to come, but no specific projection there.

Uche Orji – UBS

Right, okay. Thank you very much.

Operator

Your next question comes from the line of Craig Ellis of Citi. Please proceed.

Craig Ellis – Citigroup

Thanks for taking the question. Dave Zinsner, a quarter ago you said that you thought that gross margin could bottom in the third quarter, I believe, and then start moving up. You've guided to gross margin improvement in the fourth quarter. Do you think that we can continue to move up from there or were all bets off now given the macroeconomy that we have?

David Zinsner

I don’t know that the margins are going to be dictated as much by the economy as they are about our – one, our pricing and two, our cost control. And I think we have a good set of programs in place to improve our costs. We have the 0.25 process. We actually have a 0.6 process where we're looking at reducing the cost. We have this move from gold to copper that I think will benefit us. We have this stronger pricing discipline. We have the consolidation of the two fabs in Palm Bay to one fab. So there are numbers of things that I think are going to provide some momentum in the upward direction for gross margins. Our expectation is that given the way mix normally trends in the first quarter that we would see gross margins improve again, and certainly our goal is to continue to improve gross margins now. Every quarter is different and there is always some mix changes that are unexpected, but certainly our goal is to consistently improve the margins.

Craig Ellis – Citigroup

Okay. Is it fair to think that the inventory build was more on the computing and consumer side of the business and less so on the communications and industrial, as we look at the balance sheet in the quarter?

David Zinsner

On our balance sheet?

Craig Ellis – Citigroup

Yes.

David Zinsner

Yes.

Craig Ellis – Citigroup

Okay. Thanks guys.

Operator

Your next question comes from the line of Joanne Feeney of FTN. Please proceed.

Joanne Feeney – FTN

Thank you. Yes. A couple of questions to clarify responses of obviously the (inaudible). So from what you described, as David said, computing strongly down, or more significantly down. Is it significantly bigger than (inaudible)? My first question, and then, I'm wondering could you talk about inventories? You (inaudible) that people have trouble to understand how much of the decline you are foreseeing in computing is because of the inventory issue and how much would you otherwise be computing decline [ph] and if you didn’t have the inventories, should we assume the end market demand change (inaudible)?

David Zinsner

Okay. Computing ­ I don’t know how the definitions work, but computing will decline the most out of all four end markets and hopefully I made that clear when I said that our mix will be improving from a gross margin perspective. So you can assume that computing is above the average of the 20% to 25% guidance in terms of our revenue decline. As to how much is related to inventory reductions and how much is related to end demand, I mean, I think most of you would probably read all the trade sheets on where computing is headed and so I think you can make your own assumptions but they both are playing a meaningful part in our guidance.

Joanne Feeney – FTN

Okay and then on the competitive front, are you seeing a more competitive pressure develop in Notebook and desktop and is that also part of this that ASPs are coming down and that’s part of the decline in your (inaudible)?

Dave Bell

Yes, Joe, as I mentioned just a few minutes ago, I don’t think that it’s a significant portion in the revenue decline right now. There’s just normally ASP decline and it happens quarter over quarter. We have not seen anything out of the ordinary for Q3 or Q4 in terms of ASP decline. What I will say though is that if you look further on the future, I think that the markets, especially the commodity portions of the markets where we’ve been deliberating exiting some of those businesses, has seen increasing ASP decline but those are for design wins that are going to come into play in 2009, not that we’re seeing in this third quarter or fourth quarter.

Joanne Feeney – FTN

Okay, great. That’s all for me. Thanks so much.

Operator

Your next question comes from the line of Cody Acree of Stifel Nicolaus. Please proceed.

Cody Acree – Stifel Nicolaus

That was close. Dave, you mentioned that with Atom and with the desktop market share loss a bit, where do you think those two shake out? Does notebook and Atom shared gains offset net computing steady state once we finally get past these near-term issues?

Dave Bell

Well I think it will help offset it. Again, I think it is reasonable to expect that we will continue to see some erosion in market share in desktops. That’s deliberate. We also are going to see growth in the whole Atom-based product and NetX products, and I think largely that’s going to be additive to the Notebook area. Perhaps a small amount of cannibalization but for the most part, I think it’s going to added in. So yes, I think that will help fill in and give us additional growth there. But I said previously as well, just the dollar content for an Atom-based product is going to be a little bit less than it is for a notebook computer.

Cody Acree – Stifel Nicolaus

Great. And then secondly, just looking back over your career, looking at this correction as downturn, if you had to make some comparisons to prior cycles, obviously you went through a period where lead times caused some inventory issues, how does this compare? Are we looking at something that you think is extremely unique or is this more of an inventory factor that we kind of get back to something more normal in an intermediate term?

Dave Bell

Well, I think this is really a very different downturn at least from the source standpoint. We’ve had the stock market bubble. We’ve had inventory-led downturns. We’ve had demand-led downturns. This I think is fairly unique in that it's a credit crunch downturn leashed at its source. But when you actually start looking at the impact that it has on our business, you just start seeing customers getting very conservative. You see visibility go down. And from that standpoint, regardless of the source, I think that a lot of the impacts on our business and our competitors’ businesses is the same.

Now, one thing that I will say though is that from my past experience here, this has certainly been a very abrupt downturn. Just if you look back at what’s happened in the worldwide economy during the last six weeks, it’s amazing. So that’s part of the reason that I think that not only are we lacking visibility but our customers are as well and they’re trying to figure out where are their markets headed. We’re being straight with you guys. Obviously, when we’re guiding down 20% to 25%, hopefully you understand we’re being straight shooters. We’re not sugarcoating this thing. We’re rolling up what we think the reality of the current market is as best as we can tell, and despite the lack of visibility, that’s where we think we’re headed.

Cody Acree – Stifel Nicolaus

All right. Thanks guys.

Operator

Your next question comes from Steve Smigie of Raymond James. Please proceed.

Steve Smigie – Raymond James

Great, thank you. Looking to Q1 to understand how much of the inventory reduction you guys are working on would impact Q1, so in other words, you are reducing inventory now in Q4, so could that mean that Q1 could buck these old trends because you won’t be reducing inventory in Q1, so could Q1 potentially be up consequentially?

David Zinsner

Anything’s possible Steve, but we have no idea. It’s just way too early to talk about what might happen in the first quarter. Suffice it to say, the visibility we’re getting on orders and a lot of forecast is really about the fourth quarter. We’re not getting much visibility on the first quarter. I don’t think anybody across any industry really knows how deep this economy might fall over the next few quarters. And so I think it’s just kind of premature to make any estimation as to what Q1 might look like.

Steve Smigie – Raymond James

Okay. Assuming 2009 revenue levels sort of ran on the same levels, this $0.25 now guidance you gave, how would you go about managing operating expenses for 2009?

David Zinsner

Well, as you can see in the third quarter, we have taken steps to manage OpEx. OpEx has gone quite a bit from the second quarter partly due to the extra week but certainly we’ve taken some steps to reduce it to offset the additional expense of D2Audio in Q3 and we’re offsetting a lot of the expensing of Kenet in Q4. It will be kind of a take it as we go kind of scenario. We certainly have other knobs we can turn to manage expenses and if things look like they’re going to be worse than they are today, we’ll take steps to reduce expenses again, but we’re managing on a kind of a day-to-day basis.

Dave Bell

Steve, we’re making all the right moves I believe and there are still some things that we’re looking at to control OpEx further. That said, with a steep downturn like we’ve got now, we can’t completely close the gap without tax reduction, but we’ll go as far as we think we can. But nor do we want to completely close that gap because there will be an end to this downturn and when it comes along, we want to have made the right investments in R&D and strategic acquisitions and so forth, so that we’re well-prepared and even better positioned than when this downturn started. So it’s going to be a combination of OpEx controls on doing what we ought to do as managers here. But, at the same time, continuing to invest appropriately in the things that are really going to propel our growth when we get past this downturn.

Steve Smigie – Raymond James

Okay, my last question was just in terms of the Q4 guidance, how much of that would you attribute to maybe from short-term desktop share erosion?

Dave Bell

Well, I’ll let Dave jump in here as well. The desktop share erosion really is not that significant. I don’t think that ­ I know there’s been a few comments on desktop share erosion. That is not a dramatic erosion, so you can’t really put that on the list for why computing is down strongly. I think it’s a combination of factors. It’s obviously the overall macroeconomic effects are affecting the computing industry and they’re being very cautious about it. Combined with this kind of perfect storm where we had a foot planted on the gas pedal for the last year and a half, and just when our capacity got to the point that it met demand, demand fell. So, a little bit of an extraordinary situation there with us right now in computing in particular, but again, we’re taking the steps that are appropriate to make sure that that inventory very quickly gets down into the target levels.

Steve Smigie – Raymond James

Great, thank you.

Operator

(Operator instructions) Your next question comes from the line of KC Rajkumar of RBC Capital Markets. Please proceed.

KC Rajkumar – RBC Capital Markets

Hi guys. If I read through your commentry, the way I think it is following up is that the computer segment in the December quarter looks like is going to parallel your pre-Santa Rosa RAM base. My question is going forward, when we come out at the other end of the downturn, would you guys be taking steps to limit your exposure to any one area in particular, such as the notebooks so as to minimize volatility to your top line in subsequent downturns?

Dave Bell

Well, in a way yes, but let me explain. I don’t think that we’re necessarily going to be taking steps to limit our involvement in computing. However, we’re going to focus our efforts on areas where we can differentiate, so there in a rapidly changing industry like computing, I think there’s going to be plenty of those opportunities. Those are the opportunities we are focusing on now and the ones that we’ll focus on going forward. We’re going to be focused on the more highly valuable opportunities in computing. But I also expect that over time, the percentage of our business that is computing will probably come down from where it is now. We’re expecting it’ll come down from the 36% in Q3 to some lower number in Q4, but a lot of that is going to be because of more rapid growth in other areas.

We talked earlier about industrial, industrial is bucking the trend in Q4 and is actually expected to grow slightly. We’ve been investing a large percentage of revenues much above the average for the company in industrial and communications infrastructure kind of application. My expectation is that those areas would continue to grow even faster and help the overall company outgrow our peers, but also help us have a nice balanced portfolio between the various market segments in the future.

David Zinsner

One thing I’d add just as a point of correction. The notebook business is nowhere near down to the level that it was pre-Santa Rosa.

KC Rajkumar – RBC Capital Markets

Great, thanks.

David Zinsner

I don’t know how you calculated that but just to correct you there.

KC Rajkumar – RBC Capital Markets

Okay. Do you have any quick comments on trends in the handheld and the LCD markets into Q4?

Dave Bell

Well, I think that they’re all going to be affected so those are both under the consumer products category if we’re looking at LCDs primarily going to TVs and Notebooks and so forth, and the handheld cell phones, MP3 players, portable navigation devices and so forth. All of those I think are going to see kind of similar downward pressure in Q4 and that’s been taken into account in our estimates.

KC Rajkumar – RBC Capital Markets

Okay guys, thank you.

Operator

The next question comes from the line of Srini Pajuri of Merrill Lynch. Please proceed.

Srini Pajjuri – Merrill Lynch

Thank you. A question on gross margins, Dave. You said mix usually helps you in the first half of the year but given the inventory correction you are seeing in computing and consumer, I am guessing that it is not going to be as bad in terms of how much this business decline in the first half. So, my question is, and if mix does not help you in the first half, is there anything else that could help you to improve the gross margin?

David Zinsner

We talked about the cost initiatives, they are actually starting to benefit us in the fourth quarter. They provide some really good benefit in the first quarter. That is where we start to see some volume with our transition from gold to copper. So, there are ­ and then I think by the middle of the second quarter, we’ll have the two fabs consolidated into one. So we will see some cost reductions there. I think we even said in our prepared remarks that the value of that to us was $6 million on an annualized basis. Absolutely, there are some definite costs improvement initiatives that will help us on the gross margin side.

Srini Pajjuri – Merrill Lynch

Okay. And just a quick followup, you said Blu-Ray is weak. I’ve heard actually Blu-Ray is pretty strong from Broadcom, so I am just trying to understand what is going on here. Can you explain that please? Thank you.

Dave Bell

Well, I guess I can’t really comment about what Broadcom is saying. I haven’t heard their remarks on that, but I think for the whole of 2008, Blu-Ray is clearly not done what the pundits thought it would do a year or so ago. There are also some questions about do people really need Blu-Ray drives with the availability of HD over cable and satellite and so forth. So, I do not think it clearly hasn’t grown as fast in 2008 as predicted. I don’t think that it’s going to grow as fast in 2009 as some people had predicted, but clearly its going to do better than it did in 2008. And as I mentioned during the prepared remarks as well, we’ve got some nice design wins that we think are going to allow us to start ramping our business in 2009. So, both on the back, some ­ clearly some growth in Blu-Ray in 2009, but also because of our design wins we have in some Blu-Ray drives, we expect that number to go up.

David Zinsner

The other thing is I do not know what Broadcom is in, but we are in the recorder and not the player. So, I think the player market is percolating along here right now. The recorder market really hasn’t materialized that much of the market yet. It really will come when the tax rate to PCs begins to increase some of the price points, so recordable drives and PCs comes down to a level that it makes sense for a consumer to add that to their configuration.

Srini Pajjuri – Merrill Lynch

Thank you.

Operator

Your next question comes from Gus Richard of Piper Jaffray. Please proceed.

Gus Richard – Piper Jaffray

Yes, thanks for taking my question. Most have been answered. Just two housekeeping questions. Where do you expect stock-based comp and amort to be this quarter and 2009?

David Zinsner

We’re expecting stock-based compensation to be around $9 million, so that will be up about $600,000 from the prior quarter. We’re expecting stock comp in total for next year to be about $35 million. Of course if the stock price ­ that assumes kind of a fairly high stock price, that we get a lower stock comp when the stock price is actually this low. So, it’s possible it could be down even lower. This year was down a little abnormally just because of the departure of our CEO, Rich Beyer. When he left, we had one big accrual release which benefited us but if you look at how many options we are giving and the value of the options we have been giving over time, they actually have been coming down on the annualized basis. As far as amortization expense, we expect – right now, it was $2.8 million in the third quarter. We are expecting it to be up about $1 million next quarter because of the acquisitions of D2Audio and Kenet. And so, we are expecting amortization for next year on a full year basis to be about $15 million.

Gus Richard – Piper Jaffray

I am sorry, how much?

David Zinsner

$15 million.

Gus Richard – Piper Jaffray

$15 million. Okay, great. And if I could sneak one more in, just how is your LCD business been tracking and how does that look going into Q4?

David Zinsner

LCD business actually has been tracking pretty well, all the way up until this point. It was down a little bit and I think that that was consistent with – in this third quarter which was consistent with what I think you saw probably from a lot of the industry reports. Our expectation is it will be down meaningfully. In fact, our consumer business will be down pretty meaningfully as well and that is really due to consumer spending. This market is still a great market. I think people will buy LCD televisions when – over time. It might be a little soft for a couple of quarters but I think it will definitely rebound.

We have a lot of great dollar content going into LCD displays. Our Ambient light sensor actually can be utilized there. Our LED backlighting products can be utilized there. In fact, actually the D2Audio products work nicely in televisions and if you can get the price point down to where it makes sense for a display maker or a television maker, that’s a really nice product to have. Our expectation is that this is still a great market. This is going to drive a lot of growth for us over time and we are really pleased with our product portfolio there.

Gus Richard – Piper Jaffray

Great. Thanks. Thanks for the help.

Operator

(Operator instructions) Your next question comes from Sean Webster of JP Morgan. Please proceed.

Roy King – JP Morgan

Hi, this is Roy King [ph] for Sean Webster. Just a question on where is your lead times right now and utilization rates in Q3 versus Q4? Can you comment on that as well? Thank you.

David Zinsner

As far as lead times go, they’re in kind of the four to five week lead time essentially as quickly as it takes us to get from die bank to finish this inventory above the lead time. That’s obviously come down and really the lead times were stressed in computing and given the environment, they have come back in line. Our expectation is that we would keep them somewhere in the four to six weeks for the remainder of this year and hopefully into next year. Utilization at ­ we only measure the utilization in our factory, obviously, was about 65% I believe, which is consistent with where it was last quarter, and really it’s consistent with where we would expect it to be. It will start to pop up as we consolidate our two fabs into one fab. Obviously, we’ll be able to get better utilization out of one fab putting all the volume through that fab, so it will pop back up probably into kind of the 80% range which is I think generally in line where that’s been crafted.

As far as the external boundaries go, we’ve obviously – we have the ability obviously to modulate those builds based on our demand and you can ­ and given the fact that our guided inventory would be down in the fourth quarter, you can expect that we modulated the wafer starts in our outside foundries to match well with what our demand is going forward.

Dave Bell

I would also add that regarding our Palm Bay fabs, we’d actually been doing new process development there as well, so we've got two new fab processes that we’re developing products on and those are going to be ramping during 2009. It’s still a very profitable fab for us and one that we continue to exploit with new processes.

Roy King – JP Morgan

Thank you.

Operator

The next question comes from the line of John Pitzer of Credit Suisse. Please proceed.

John Pitzer – Credit Suisse

Yes, good afternoon guys. Thanks for taking my question. I'll try to ask just one. Dave, just relative to being on allocation which you guys have been for a while, I guess it drives costumers to do a couple of things, one is to order more than they need which I think you’ve addressed relative to your December guidance. The other thing it does is drive them to try to second source. And I guess I’m trying to figure out why you guys are confident that that market share is not an issue relative to the computing business, which looks like it’s going to be down close to 40% sequentially in the December quarter, which is also the first quarter that we’re seeing a full quarter ramp on Montevina. Can you just help me understand Santa Rosa to Montevina your position again, I guess why you don’t think this is a market share issue?

Dave Bell

This is Dave Bell. Well, as I think we’ve said many times, we believe and in fact we’re confident we’ve got a leading market share in the Montevina platforms. Now, there’s really two opportunities within a year to lose or gain market share. The most important one is at a major platform transition. So for instance, when we went from Santa Rosa to Montevina which happened in the summer time, that’s the main opportunity either pick up market share or lose market share. The secondary one is at the mid year refresh and the mid-year refresh happens typically in the first quarter, so you’re going to see changes in market share usually in either Q3 based on a major platform change or in Q1 based on mid-year update.

So, you’re not going to really see any significant market share change going from Q3 to Q4. So that really is not a factor whatsoever there. There are other factors obviously, there’s always a gradual ASP erosion, we talked about that there earlier. I think the biggest factor as you pointed out is that when we were in an under-capacity situation and rapidly transitioning to one where the demand is falling. It created some extraordinary perturbations. Lead times were long, they were on the 12-week range. They’ve dropped down into the four to five week range like Dave just said, almost simultaneous with this economic crisis taking hold. So, bookings have dropped, lead times have come down, we were trying to build some inventories, not to get excessive inventory, but just to get some inventory in reasonable turns on the shelf when the demand was high. And now, of course, those turns which were appropriate back just a few months ago are now a little bit high and we’re going to try and bring those down. There’s a number of factors playing together but market share loss in the notebook area in this transition really is not a factor.

David Zinsner

The other thing -

John Pitzer – Credit Suisse

Just remind me, was computing the only area you guys were on allocation?

David Zinsner

For the most part. We had some consumer products. But I want just to add to Dave’s comments, the other thing that I'd like to point out is, if you map up against the computing demand, it doesn’t' necessarily map up that well. For example, in the second quarter, we were up I think in computing similar in the 25% range. Maybe if you took out the extra week, it’s almost 20%. And then normalizing for the 13 weeks, that would put computing up somewhere in the 17% range in the third quarter. That was not consistent with what you saw from kind of a microprocessor guy. They were down in the second quarter and then they were up a little bit in the third quarter, then they were up in the fourth quarter. So I think it’s safe to assume that when they were buying the power parts versus when they were buying the microprocessor, it was not the same quarter and I think that’s why you are saying it is dynamic agaiin in the fourth quarter.

John Pitzer – Credit Suisse

Great, thanks guys.

Operator

Your next question comes from David Wu of Global Capital. Please proceed.

David Wu – Global Capital

Yes, good afternoon and sorry for getting on late. I've got one clarification question. The clarification is, would the mix getting richer in Q4 and Q1, I guess gross margins going up, I assume that all these products in the consumer and computer business actually came from outside foundries, so you don’t have to absorb any overhead expenses from that. And the other thing I was wondering is, as we go into Q1, obviously nobody knows how bad Q1 will be, given what you know today, Dave, what’s your breakeven point in Q1 level of revenues rather?

Dave Bell

Okay, first question – let me take the second question first. It’s hard to determine exactly what a breakeven point is. Clearly, we’re making quite a bit of money still at the reduced revenue guidance that we’ve given. I think we probably could easily get down of $100 million and probably still make money if we could modulate expenses. It’s a far distance away to a point where we’re not making income. On top of that, since we’re not paying taxes, it’s even farther before we actually stop generating cash flow. So, that’s actually is a pretty good situation. On the gross margin side and the mix perspective and the absorption, you’re right in that it doesn’t generate a lot of absorption but there is some absorption that comes from even externally manufactured products. In fact, we have a big group that sits down and manages the outside foundaries and the outside back-end providers.

So there is some absorption but, as you pointed out, it’s relatively minimal. And so, as the ramp down occurs in areas like computing, consumer, which are mostly outsourced, we don’t that hit and this is one of the benefits of the fab-like model and one of things that I constantly pointed out when we weren’t getting the opposite side of it would benefit the gross margins when revenues were going up. Now, we’re not seeing the detriment when revenues are coming back down, so gross margins are much stickier in the fab-like model.

David Wu – Global Capital

So, the foundries in the fab that you have in Florida basically service the industrial and some comm markets, is that right?

David Zinsner

That’s true. We do outsource some of even the comm stuff and the industrial stuff. A lot of our very specialized processes greater than 1 micron are produced in the fab in Palm Bay or in the two fabs in Palm Bay and they tend not to have very much volatility one direction or the other in terms of revenue. So generally speaking, the utilization is not an issue in one quarter over another quarter in transitions. Now, over time sometimes there is less volume there and that is why we made to move to consolidate the two fabs into one fab but those are more of long-range planning issues than they are quarter-to-quarter issues.

David Wu – Global Capital

Okay, did you talk about tax rate from R&D tax credit for next year?

David Zinsner

Just that it would continue to be beneficial to us. I think our non-GAAP tax rate in the fourth quarter will be 20.5%, I believe. That’s on a non-GAAP basis. GAAP basis, it is 25% but that’s because we’ll have a charge to in-process R&D for Kenan [ph] which is non-deductible. I'd suspect that next year it will be consistent with that.

David Wu – Global Capital

On the GAAP basis.

David Zinsner

20.5% is the non-GAAP; it’s usually a little bit better on GAAP because you get to deduct the expenses (inaudible) options.

David Wu – Global Capital

Oh, I see. So, the GAAP would be below the non-GAAP in calendar '09?

David Zinsner

That’s correct.

David Wu – Global Capital

Okay. Thank you.

Operator

The next question comes from Patrick Wang of Wedbush Morgan Securities. Please proceed.

Patrick Wang – Wedbush Morgan Securities

Yes, thanks guys. I just wanted to ask you quickly about computing. Were you guys, I guess seeing for a true demand for notebooks in the fourth quarter? I guess, if we were to ex-out your inventory situation.

Dave Bell

That’s a good question, very difficult to tell. Clearly, there is a combination of things going on as we’ve already talked about here between inventory reduction, our ODMs trying to get their own inventory under control and then trying to figure out what the end demand is for their products. The honest answer is down; exactly how much it’s down, we don’t know.

Patrick Wang – Wedbush Morgan Securities

Okay, that's fair. If we were to model computing down 30% to 40% sequentially here, can you help us quantify it potentially, I guess kind of ball park at least, how much is excess inventory impacting the guidance there, say maybe a quarter or third is a small ballpark here?

David Zinsner

No, we’re not go there.

Patrick Wang – Wedbush Morgan Securities

No. Okay.

Dave Bell

It was a good try though.

Patrick Wang – Wedbush Morgan Securities

All right. Thanks.

Operator

(Operator instructions) The next question comes from the line of Tore Svanberg [ph] of Thomas Weisel Partners. Please proceed.

Tore Svanberg – Thomas Weisel Partners

Thank you. Dave, would you expect your own inventories to be down in Q4?

Dave Bell

I’ve said our expectations that we would bring down inventories both on our balance sheet and at distribution.

Tore Svanberg – Thomas Weisel Partners

Yes, great. The revolving credit, you guys obviously don’t need cash, so is that more of a safety net or should I read something into that credit line?

David Zinsner

I would not read anything into it. We were looking to have a nice line just to add to our liquidity. As you know, we have about $100 million of option rates, so our real cash excluding long-term investment is about $300 million. Ideally, we want it to be more in the $400 million to $500 million range. We’ll obviously build some cash, so that will help, but we thought we would add a revolver just to be additive to the liquidity. I would say when we made the decision to do that, it was well before these credit issue and I was actually really surprised that we were still able to get the deal done and in fact, I held the line and kept pricing really the same as what it was before all these credit issues occurred and I was kind of – I said, well, I’m not changing the pricing and yet the banks still stepped forward to deliver the credit. So it was kind of surprising given the environment they were in, but I think it’s great, I think it shows that the commercial banks have some real confidence in our cash flow model, believe we generate good cash, believe we’re a good credit risk, by guess is we are unlikely to utilize it anytime soon, but you never know, something might pop up and we might want some cash to invest in some really killer technology and it’s there if we need it.

Dave Bell

It has a primary use, I mean we are very cash flow positive obviously and will remain so even in Q4, so it’s really to have just a little bigger war chest to fuel our acquisition capability.

Tore Svanberg – Thomas Weisel Partners

Sounds good. Thank you.

Operator

Your next question comes from the line of Krishna Shankar [ph] of JMP Securities. Please proceed.

Krishna Shankar – JMP Securities

Yes. Can you give us some sense on what’s happening in your communications and infrastructure business, how the bookings are trending there and what do you expect that segment to do in Q4?

David Zinsner

Just so I’m clear, you want to know about the communications and industrial businesses?

Krishna Shankar – JMP Securities

The communications and networking segment.

David Zinsner

The whole communications network. So our expectation is that it is going to be down slightly. A part of it is, we had a little bit of a bubble in the third quarter related to satellite, it is just the way they placed orders and looked for delivery, they did want a fair amount of them in the third quarter, so that comes back off in the fourth quarter. I would say that the rest of the business trends a lot like what you see the broader analog guys guide their businesses. So you know, it’s clearly weaker that it’s been in the past but not significantly.

Krishna Shankar – JMP Securities

Okay. And then the $6 million reduction you talked about in OpEx, consolidating the fabs, how should we model that through the course of 2009?

David Zinsner

It happens – Jonathan really is probably the best one to answer that. It happens I think sometime in the middle of the third quarter. The $6 million is the annualized benefit once it happens, so there will be some benefit in the third quarter and then you will have a replicate [ph] quarter of $6 million benefit during the fourth quarter and then onwards.

Krishna Shankar – JMP Securities

Okay, thank you.

Operator

There are no further questions in the queue.

Dave Bell

All right, well, let me make a few closing remarks. I thank you all for joining us today for Intersil’s third quarter of 2008 earnings conference call. These are unprecedented times, so there is great deal of uncertainty; however, there are several things you can be certain about.

You can be certain that Intersil’s management has been honest and forthright in describing how we believe our fourth quarter will likely play out. You can also be certain that management is promptly taking appropriate actions to reduce expenses and inventories in order to minimize the financial impact of this downturn.

And finally, you can also be certain that we will continue to make sound, strategic investments to ensure that Intersil exists this downturn even stronger and a more profitable company, positioned to once again outgrow our peers. So again, thank you very much and we wish you all a good evening.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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Source: Intersil Corporation Q3 2008 Earnings Call Transcript
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