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Intersil Corporation (NASDAQ:ISIL)

Q4 2008 Earnings Call

January 28, 2009 4:45 pm ET

Executives

Jonathan Kennedy - Interim CFO

Dave Bell - President and CEO

Analysts

Ross Seymore - Deutsche Bank

Craig Hettenbach - Goldman Sachs

Romit Shah - Barclays Capital

Tore Svanberg - Thomas Weisel Partners

Steve Smigie - Raymond James

John Pitzer - Credit Suisse

Cody Acree - Stifel Nicolaus

Doug Freedman - Broadpoint

Patrick Wang - Wedbush Morgan Securities

JoAnne Feeney - FTN Midwest Securities

Blayne Curtis - Jefferies

K.C. Rajkumar - RBC Capital Markets

David Wu - Global Crown Capital

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 Intersil Corporation Earnings Call.

(Operator instructions).

I would now like to turn the presentation over to your host for today’s call, Mr. Jonathan Kennedy, Interim Chief Financial Officer. Please proceed sir.

Jonathan Kennedy

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

We completed our fourth quarter on January 2, 2009. 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 website at intersil.com.

In addition, this call is being webcast over the internet and may also be accessed via the Investor Relations section of our website. A replay of the conference call and webcast will be available for two weeks through February 11.

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 would 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 website.

For those of you interested in learning more about Intersil, our Annual Analyst Day will be held at Santa Clara, California on February 12th. In addition we will be participating in the Oppenheimer Semiconductor Summit in Vale, Colorado on February 19th, the Goldman Sachs Technology Symposium in Las Vegas on February 25th, and the Morgan Stanley Technology Conference in San Francisco on March 3rd.

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 fourth quarter 2008 earnings conference call.

Let me start by welcoming Jonathan Kennedy to the call in his new role at Interim CFO. I know many of you have met or spoken with Jonathan, but for those who haven't, Jonathan has been with Intersil since 2004 when he joined as Director of Finance and became Corporate Controller in 2005. I am very pleased to have him step into this new role and provide such a seamless transition.

As all of you are painfully aware, the industry entered one of the worst downturns in its history during the fourth quarter. While the downturn was broad based, the decline in our computing and consumer businesses was usually steep. We responded quickly to the changing business conditions.

In early November, we were one of the first to announce a reduction in work force, cutting 9% of our employees to reduce expenses. Because these reductions affected all ranks within the company from the VP level and down, the payroll expense reduction was also in the range of 9%.

In addition, we instituted several other initiatives designed to further reduce expenses, including suspended bonuses, operational shutdowns, travel constraints and hiring restrictions.

We also continued to focus on several previously announced long-term cost savings initiatives, including the consolidation of our two Florida wafer fabs, migrating from gold to copper wire and releasing products on a new quarter micron process. These initiatives are still on track and we expect to reap the reward as we progress through 2009.

Our asset light manufacturing structure allowed us to quickly reduce production volume, limiting the amount of inventory growth. Our asset light structure also minimized the impact of underutilization and combined with a reduced mix of computing shipments actually resulted in gross margins increasing in the fourth quarter, an achievement few other companies will be able to match.

Even though sales dropped by 40% in the fourth quarter, we finished our 2008 fiscal year on a positive note, with sales growing by 2% over 2007. A rapidly growing computing business put pressure on gross margins, but that impact was also minimized with non-GAAP gross margins dropping by only 60 basis points from 2007. All in all, a very successful year, despite the deteriorating economy.

Now, let's turn to the fourth quarter results. We achieved net revenues of $131.1 million, a decline of 38% from the same quarter last year. During the quarter, we took several one-time charges that we believe were prudent and better positioned Intersil for strong growth once the economy recovers.

Jonathan will discuss these in more detail in a few minutes. Excluding these items, our non-GAAP earnings per share declined by 72% over the same quarter last year. During the quarter, the company repurchased approximately $15 million or 1.3 million shares of our stock and paid approximately $15 million in dividends.

Our strong business model, combined with rapid expense controls, enabled us to generate over $50 million in free cash flow during the quarter. The Board of Directors continues to be confident in our business model and has, therefore, authorized a quarterly dividend of $0.12 per share of common stock.

At our current stock price, this results in a dividend yield of 5%. Because of our strong cash flows, our cash balance increased even after subtraction of the dividend. Despite the depth of this downturn, and its discouraging impact on our stock price, the entire Intersil management team is committed to exploiting these extraordinary conditions to build an even stronger company.

We have reorganized the company into two product groups, power management and analog mixed signal, making us more responsive to the needs of our customers. In addition, we have been building closer and more strategic relationships with our key customers, resulting in many new design win opportunities.

We have reviewed all of our R&D programs and focused our product development efforts on the most strategic areas, and we continue to make very strategic acquisitions as shown by the purpose of Zilker Labs during December.

While these actions may not have an immediate impact on our business, we're confident that they will accelerate our growth once the economy recovers.

At this time, I'd like to turn the call over to Jonathan Kennedy who will provide a financial summary. I will then discuss results from each of our end markets and provide additional comments on our first quarter 2009 outlook. Jonathan?

Jonathan Kennedy

Thanks, Dave. Let me begin with the income statement. As Dave stated, we reported a $131.1 million in net revenue for the fourth quarter of 2008, a 38% decline from the same quarter last year and a 40% decline sequentially. We saw a dramatic falloff in demand in the fourth quarter and visibility continues to be poor. As a result, we enter the fourth quarter with a lower backlog and the midpoint of our guidance assumes approximately 50% terms.

On a GAAP basis, fourth quarter gross margins were 34.1%, down from 56.3% in the third quarter. During the quarter, we incurred several unusual charges to cost of sales, totaling $30.2 million. These charges were the result of one-time write-down of inventory and one-time expenses related to certain foundry related equipments and the impairment of production equipment.

These valuation charges were caused by the significant decline in demand as seen across the entire industry. Excluding these items and equity compensation, non-GAAP gross margins improved to approximately 57.7%, primarily due to improving mix. This is the power of our fab-lite model. Significant changes in demand have a minimal impact on our gross margins.

Looking ahead, we expect Q1 '09 gross margins to be lower by roughly 100 basis points, driven by mix and underutilization in our internal fabs. In the fourth quarter, R&D expenses were $35.4 million, or 27% of revenue, up $0.2 million from the prior quarter due to our D2Audio, Kenet and Zilker Labs acquisitions. First quarter R&D spending should be approximately $2 million higher than Q4, as we experience a full quarter of spending for Zilker Labs.

SG&A expenses were $28.5 million, or 22% of sales, down $3.3 million from the third quarter, due to reduction in headcount and a reduction in our deferred compensation accrual.

Deferred compensation increases and decreases are substantially neutral to the P&L, as they are offset by gains and losses on deferred compensation investments. We expect first quarter SG&A expenses to be approximately flat with the fourth quarter.

Amortization of intangibles increased by $0.5 million in the fourth quarter, due to the three acquisitions previously mentioned. Each year during the fourth quarter, we perform a goodwill impairment analysis in accordance with GAAP. This analysis provides an estimate of the fair value of our goodwill assets, by comparing the difference between our net book value and the implied value of the company.

In prior years, the implied value of our company was significantly higher than our book value and no impairment charges were ever recorded. This year, given the sustained period where our market cap has been significantly below our net book value and other valuation assumptions, the analysis indicated an impairment of our goodwill.

As such, we have recorded a charge of approximately $1.1 billion during the fourth quarter to write-down the value of our goodwill. Substantially all of this goodwill is related to the acquisitions of Elantec in 2002 and Xicor in 2004. This charge is a non-cash item and is non-deductible for tax purposes. The final amount of goodwill impairment is still subject to adjustments and will be reported in the company's Annual Report filed on Form 10-K.

In process R&D was a $0.2 million benefit. Upon the final valuation, the previously recorded estimate for Kenet was reversed and offset by an end process R&D charge related to the Zilker Labs acquisition.

As previously discussed, we continue to execute on our major cost reduction and restructuring initiatives. We incurred a $3.2 million charge during the quarter as a result of these activities and expect approximately $1 million of restructuring expense in the first quarter as we complete the consolidation of our two Florida fabs.

We expect the fab consolidation project to be completed by the end of the second quarter. Once completed, we expect this project to reduce our annual cost of sales by approximately $6 million.

We also recorded an impairment charge of $25.4 million to recognize a reduction in the fair market value of our auction rate securities. Many of these securities are insured, however, lower interest rates combined with continued down grades have a negative effect on the fair market value of these securities.

Interest income was $2.6 million, down from $0.6 million from the prior quarter as interest rates remained low. We expect interest income to be down approximately $800,000 in the first quarter as rates continue to decline. Our cash and short-term investments are invested primarily in higher quality investments to maintain principle which currently have a relatively low yield.

Excluding the goodwill item, our GAAP tax rate was approximately 9% and our non-GAAP tax rate which excludes goodwill and the other unusual items and stock compensation was approximately 29%. Because of our tax structure, our tax rate generally has an inverse relationship with profitability. As 2009 profit rates are expected to be lower than 2008, we anticipate a GAAP tax rate in Q1 '09 in the low 20s.

Net loss from continuing operations impacted by the large one-time items was $1,187.2 million. On a non-GAAP basis, excluding one time and certain non-cash items, net earnings were $13 million or $0.11 per share. We were pleased that despite the decline in revenue, we continued to show very strong cash flow.

Now, moving to the balance sheet. On an absolute dollar basis, net inventory decreased by $3.1 million from the third quarter and our days in inventory increased to 114 days, primarily due to the steep declines in revenue. Working capital management will be a focus for us throughout 2009 as we look to maximize cash flow, reduce inventory and manage receivables.

Our Q1 guidance assumes significantly lower inventory purchases and internal productions in Q4 and we expect to drive inventory back toward our 108 goal by year-end. Inventory distribution was also down in the fourth quarter as we indicated. We took steps to decrease inventory at distribution and bring turns in line with historical levels.

Day sales outstanding was up, up to 68 days, up 16 days from the last quarter as our average receivables were significantly higher than actual receivables at the end of the quarter. Looking ahead, we expect DSO to return to the 50 day level as average receivables reset to current levels.

Depreciation was $6 million and capital spending was $0.4 million. We expect CapEx to be approximately $1 million in Q1 as a scale to revenue. This is one of the key benefits of our asset-lite model. Goodwill decreased by $1.1 billion as a result of the previously discussed impairment. For the fourth quarter, we generated $50 million in free cash flow and exited the quarter with approximately $394 million in cash and long-term investments and no debt.

As Dave stated, we purchased approximately $15 million or 1.3 million shares of our stock and paid out approximately $15 million in dividends in the fourth quarter. Our weighted average share count was down slightly as most of our stock options have exercised prices much greater than the current stock price. For the upcoming quarter we expect weighted average shares to be approximately flat with the fourth quarter.

Now I will turn the call back to Dave Bell who will provide highlights into each of our four end markets.

Dave Bell

Thanks, Jonathan. I will now address our business in each of our four end markets beginning with high-end consumer. Revenue in the high-end consumer market represented approximately 25.2% of fourth quarter revenue. On an absolute dollar basis, revenues in the high-end consumer market decreased 47% year-over-year and 40% sequentially.

As noted earlier, the high-end consumer market was particularly hard hit in the fourth quarter as demand declined and our customers worked to aggressively bring down their inventory levels. However, design activity continues to be strong and we're excited about growth in several segments of the market.

Sales into the gaming market grew strongly during 2008, and we continue to gain share in this large market. Our game console power footprint is expanded to include GPU as well as CPU power management and we expect shipments for these new design wins to begin during Q2. In addition, we believe we're well positioned for the next refresh of the major gaming platform due in late 2009.

Although the overall display market has been weak, we continue to support our customers with new products and innovations. For example, our PMIC products have begun to gain traction in LCD display applications. During the quarter, we started shipments of these products for use in a 120-hertz LCD TV application.

We've begun supporting key customers to develop an active matrix OLED power management IC. OLED displays offer superb image quality and ultra thin profile and extended battery life that are critical in high-end portable applications.

Looking ahead to Q1, we expect consumer sales to be down sequentially due to continued channel inventory reduction and seasonality.

Now, let's look at our computing business. Revenue in the computing market represented approximately 22.4% of fourth quarter revenue. On an absolute dollar basis, revenues into the computing market decreased 54% year-over-year and 63% sequentially. For the year, computing grew over 15% due to the success of our VCORE and battery charging solutions for both Intel and AMD-based notebooks.

Despite the recent drop in demand, Intersil remains committed to the computing market. As with every vertical market, new high value sockets continue to emerge and low value sockets become commoditized.

Intersil has a proven track record of developing industry-leading power management solutions and we will continue to focus our R&D efforts on future high value opportunities.

Intersil's market share in the computing business has been a hot topic lately, ripe with speculation and misinformation. It's impossible to be precise about market share since it depends on the success of competing PC models in the marketplace, however, I'll provide some commentary on where we believe we stand.

In the notebook market, we have maintained and won a strong share of Montevina Refresh VCORE sockets and AMD sockets. We have also won a strong share of Intel’s Capella VCORE sockets with first production expected later in the year. We estimate that roughly half of these Capella VCORE wins are determined at this time with a balance to be selected later in 2009.

We are also expanding our customer base in new geographies and are seeing excellent adoption of our products in the rapidly growing notebook segment. The bottom line in notebook decor is that we believe we are holding approximately the same market share that we enjoyed during the last year.

At the same time, we are gradually walking away from commodity non-core applications, replacing those with higher value design wins, in areas such as battery charges and LED backlighting.

The desktop PC market has a slower rate of technological advancement and therefore more rapid commoditization. Our efforts have been selective in this market, as we focus on higher value sockets and deliberately see lower value, lower margin share.

Looking ahead, visibility continues to be poor as inventories consume from the supply chain. However, reductions in channeled inventory during the fourth quarter were favorable and we expect computing revenue to be flat to slightly lower in Q1.

Moving now to the industrial market. Revenue in the industrial market represented approximately 27% of fourth quarter revenue. On an absolute dollar basis, revenue into the industrial market decreased 24% year-over-year and 13% sequentially. The industrial market was less impacted by the economic conditions than other areas, and this provided a boost to our margins in the fourth quarter.

During the last year, we invested in many general purpose products aimed at the industrial market, investing R&D funds at a substantially higher rate than the corporate average.

The depth of our portfolio on data converters, precision amplifiers, voltage references, interface ICs, linear regulators and many other functions continues to grow rapidly. We're beginning to reap the rewards of these investments as sales to industrial customers builds in strength.

The industrial market was more slowly impacted by the downturn than the computing and consumer markets, but it will not be immune during Q1. During Q1, we expect the industrial market segment to be down, in line with Intersil's overall decline, as weakness spreads across the entire market.

However, we are consciously optimistic that revenue from this market will grow steadily in 2009, as design wins continue to build and recent design wins are slated to go into production.

And finally, moving to the communications market, revenue in the communications market represented approximately 25.5% of fourth quarter revenue. On an absolute dollar basis, revenues into the communications market declined 15% year-over-year and 24% sequentially.

In September, we acquired Kenet, an industry leader in high speed, low power analog to digital converters. The largest market for such ADCs is in communications and our sales organization is excited about the many opportunities we're discovering for Kenet's broad product portfolio. High speed ADC is a very strategic component for communications customers.

So this is also getting us involved in system architecture definition and opening design win opportunities for other ICs in our portfolio. We also acquired Zilker Labs in December, a company that has a leadership position in digital power conversion.

Communications and networking infrastructure equipment is a key market for digital power products because these customers are increasingly concerned about energy conservation and maintainability.

As with our other acquisitions, many more doors are now being opened to large customers that were reluctant to deal with startup companies.

Looking ahead to the first quarter, we expect the communications market to be down in line with Intersil's overall decline. However, R&D investments and products aimed at this market together with Kenet and Zilker's products should result in growing design win activity in the coming quarters.

Now, let's turn our outlook to the first quarter. As with nearly everyone in our industry, bookings have been weak and visibility very limited, particularly in the computing and consumer markets, end customer demand has dropped and inventory is being consumed from the supply chain before new orders are being placed.

Once inventory in the supply chain has been depleted to low levels we expect to receive very shortly TAM bookings for components at a rate approximating consumption. We're already beginning to see this occur in some instances, but the majority of this effect is not expected to occur until sometime in the second quarter.

Our customers have little ability to predict their business for the first quarter, so our visibility is poor as well. Nevertheless we continue to use a rigorous process which combines forecasts from each sales manager and business manager. Management then applies judgment based on several other factors to reach a final guidance range.

Based on this process, we expect our revenue to be in the range of $105 million to $115 million for the first quarter. On a GAAP basis, we expect a loss in the range of $0.02 to $0.06 cents per share, however, cash flow is still expected to be strongly positive.

Before we open up the call 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.

We continue to invest in highly differentiated new products and design wins continue to build because of these investments. We also continue to focus on driving cost reduction programs that will contribute to steady improvements in operating profits.

Since capital is tight, many small companies with excellent technology are looking to be acquired so that they can continue executing on their strategy. Over the past year, we have acquired three companies with exceptional leadership positions.

D2Audio is a recognized leader in intelligent class D audio amplifiers. Kenet has developed a lowest power high speed analog to digital converters in the industry, and Zilker Labs has the most advanced digital power management IC's in the world. We acquired all three of these companies, combined, for less than $45 million, something that would have been impossible just six months ago.

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. Rest assured that we will continue to review all acquisition candidates carefully and maintain the strictest standards to ensure an excellent return on investment for our shareholders.

Despite the present downturn, Intersil's executive leadership is absolutely convinced that we're even better positioned today than we were a year ago. We have realigned our businesses and refocused the R&D effort on more innovative products. At our Analyst Day on February 12, we'll have the opportunity to discuss the future of Intersil in more detail.

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

Questions-and-Answer Session

Operator

(Operator Instructions).

Your first question comes from the line of Ross Seymore with Deutsche Bank. Please proceed.

Ross Seymore - Deutsche Bank

Thanks. Guys, the first quarter revenue guidance seems like 50% turns is your assumption, versus 40% turns, if I recall right, heading into the fourth quarter. Given what visibility has done why are you more confident that turns are going to be up quarter-over-quarter?

Jonathan Kennedy

Ross it is Jonathan. I think, like we said in the prepared remarks, as inventories get depleted and we have pretty good visibility what’s on our dusty shelves and some of the pipelines. So we have a very good idea that inventory has been depleted substantially, that that’s an indication that turns will come in with very short lead times. So we expect a higher rate of turns business than we would normally.

Ross Seymore - Deutsche Bank

Are you seeing that already?

Dave Bell

Yes, Ross, this is Dave. As I kind of alluded to we’re already seeing that in some instances. So we’re starting to see bookings reappear and I think that’s just the beginning of a trend that I think largely is going to unfold in Q2. But yes, we are beginning to see that occur, and of course the revenue levels that we’re at right now are way below the consumption, the actual build rates at our customers.

So we know that inventory is being depleted and we also know that customer is going to be pretty cautious. So, when they do need to start ordering, it’s going to be with short lead times and that kind of implies also fairly high turns ratio when it picks up.

Ross Seymore - Deutsche Bank

Last little tweak to that question. Could you quantify at all the channel inventory burn, where it was dollar basis last quarter, versus where it is now, et cetera?

Dave Bell

I don’t think we would talk about the actual balances, and it’s down significant double digits.

Ross Seymore - Deutsche Bank

Okay, thank you.

Dave Bell

Ross, one of the things that we can see more accurately, of course, is what’s on the inventory or on the distributor shelves. What we really don’t have is clear picture of, it’s of course, is what’s on the shelves at our OEMs and CEMs, but Jonathan’s right, we had a pretty substantial reduction of the inventory in the distributor supply chain.

Dave Bell

Great, thank you.

Ross Seymore - Deutsche Bank

You’re welcome.

Operator

Your next question comes from the line of Craig Hettenbach with Goldman Sachs. Please proceed.

Craig Hettenbach - Goldman Sachs

Yes, thank you. You mentioned on the manufacturing front the $6 million savings for the fab consolidation. Can you provide any update on the move to 0.25 micron as well as from gold to copper in terms of the impact you see this year and when that will take place?

Dave Bell

Yes, Craig, this is Dave. Yes, you’re right. We do expect to see that improvement in expenses when we complete our fab consolidation and that $6 million, by the way, is an annualized rate. So since we’re not really going to complete that conversion until sometime in the quarter from now, you shouldn’t see all six of that in the current year.

As far as the other improvements, 0.25-micron process gold to copper and so forth, those things, I think the savings will be real as anticipated. However, because we’ve also slowed to production on building new wafers and building products in the back-end, we’re not going to realize those cost savings until a little later than we otherwise would have expected. But still, when we are back producing those new products, I think those cost savings will be real.

Craig Hettenbach - Goldman Sachs

Great, thank you.

Operator

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

Romit Shah - Barclays Capital

Hey, guys, how are you doing?

Jonathan Kennedy

Good. How about you, Romit?

Romit Shah - Barclays Capital

Good, thanks. Dave, you mentioned that Intersil’s revenue run rates are down dramatically, especially relative to consumption. And I was looking at your computing figures and I think it was in Q2, Q3 you were running north of $70 million, which was probably looking back an inflated number, and today you are below 30. And I just wanted to get your sense on what you think maybe normalized run rates are for your computing business?

Dave Bell

Well, it’s really hard to tell, Romit. You probably read the same reports that we do and I think that some of the reports for Q4 is the competing, is maybe down somewhere in the 25% range, but there isn’t a whole lot of visibility in to the details of what the OEMs are making and so forth.

But what is clear is that our shipments into the computing space are down much more than their actual build rates, and that just means that there’s inventory being consumed out of the supply chain.

Romit Shah - Barclays Capital

Okay. And I just wanted to ask on, I don’t remember, I guess you, providing any specific guidance for operating expenses, but can you give us a sense on whether they’ll be up or down and by how much in Q1?

Dave Bell

Yes. We didn’t get into specific guidance, but I think we’re going to be in the same ballpark as they were in Q4. There are some expenses that do kick in, Jonathan can probably give you a little bit more color on that, but we’re looking at OpEx. That’s going to be roughly in the same range as Q4.

Jonathan Kennedy

Yes. That’s right. I mean there are some changes that go up and down. But just to give you some idea in Q1, we’ve got mandatory vacation days that will sort of neutralize the effect of the Christmas holidays that we usually see in Q4, so that’s being repeated in Q1 by mandatory vacation days. We’ve done some very decent sized cost control measures. So from Q4 to Q1, we should see relatively flat operating expenses.

Romit Shah - Barclays Capital

Well, I would just expect with revenues down 15, 20% that, OpEx would be not down by a similar percentage, but would be down, so what’s kind of offsetting the forced vacation?

Jonathan Kennedy

Yes. Most of it is about a $2 million increase as we realized the effects of fourth quarter of Zilker and D2Audio and Kenet. Most of the uptake is in R&D. Most of the uptick is in R&D.

Romit Shah - Barclays Capital

Okay. And if I could, just last question, Dave, Maxim and Linear, both companies, I think, in the couple of months accelerated divesting for options for all their employees. Didn’t sound like you guys were thinking about that, but I just want to get your take.

Dave Bell

Certainly, we’ve not announced anything like that at this point. Obviously with the stock prices where they are, we are looking at what is the appropriate thing to do in terms of stock options and RSUs and so forth. And I think we’re going to be really careful to make sure that we’re looking out for both the shareholders’ interests as well as the interests of our employees to make sure that we have retention of the key employees.

But you’re right, we have not announced any sort of acceleration or we had announced any kind of special plans at this point.

Romit Shah - Barclays Capital

Okay. Thanks a lot.

Dave Bell

You’re welcome, Romit.

Operator

(Operator Instructions).

Your next question comes from the line of Tore Svanberg with Thomas Weisel Partners. Please proceed.

Tore Svanberg - Thomas Weisel Partners

Yes, thank you. Given the dynamics of on the consumption and maybe some stability in bookings, is there a chance book-to-bill could actually be above 1 this quarter?

Dave Bell

It’s a good question, Tore. I would imagine that it would not. But honestly, we haven’t really looked at the book-to-bill. Clearly book-to-bill in Q4 was less than 1, no big surprise there. In Q1, we haven’t made any projection on that.

What is going to happen, obviously, as we kind of start getting towards the point where inventories mostly depleted within the marketplace, then we would expect to see the book-to-bill tip over, at some point going to the positive range. We haven’t really looked at whether we think that would happen in Q1 or not to be honest.

Tore Svanberg - Thomas Weisel Partners

Great. And just a quick follow-up to Jonathan. Jonathan, on the auction rate securities, could you just give us an update going forward, is there more risk of write-downs there, just give us an update, that would be great?

Jonathan Kennedy

Sure. As we said in the script, we wrote down $25.4 million, that’s in addition to the impairments we’ve taken in the past. And at this point just to give you sort of a scale of it, we had $129 million in auction rates securities and we’ve written those down to about $81 million, I believe. And some of the biggest inputs to that valuation are interest rates and interest rates being down where they are, that becomes almost a non-issue.

The other input that’s significant is the downgrades or upgrades to the securities themselves vis-à-vis the insurance companies that insure them. Our take is that there’s not a lot more to go, but this sort of unprecedented time share with these valuations, there’s no liquid market for them. So it’s very difficult to tell what the implied valuation models are going to come up with, but my take is that we should be near bottom.

Tore Svanberg - Thomas Weisel Partners

Fair enough. Thank you very much.

Operator

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

Jonathan Kennedy

Are you there, Steve?

Steve Smigie - Raymond James

Yes, sorry. I was hoping you could talk a little bit about, as we look out at Q2, if we were even, assume, say, flat revenue, would that suggest a deterioration continuing in demand, just because it seems like, you’re under shipping by doing it by so much, that you know, assuming flat, which is just something to about continuing weaknesses. Am I right in sort of thinking that way?

Dave Bell

Well, you’re probably right if that were to occur. We’re obviously not making any forecast for Q2 right now. That said, once the inventory is depleted or largely depleted in the supply chain, we expect that our shipments are going to bump up substantially because we’re shipping well below the level of consumption, that’s absolutely the case.

So, as I said in the prepared remarks, we think that although we’re starting to see a little bit of that going on right now in some parts with some customers, I think the bulk of that happens in Q2. So, you can probably translate that in a meaning that we think if that in fact is the case, that most of that inventory is depleted during Q2, then yes, I think that revenue should be popping up if that’s the case. Again, we’re not making any forecast, obviously, for Q2 at this point.

Steve Smigie - Raymond James

Well, I understand, thank you. And just a question on the consumer business. Can you talk about particular areas that were weak or continue to be weak and is any of that weakness related to, are there certain areas maybe, you under invested in, that you didn’t want to be in any more, of that, may that, be weaker than it normally would be, or is just all end demand that is driving weakness here?

Dave Bell

The near term downturn scene is really just due to weakness in the marketplace and inventory burn again. The two areas we are down the strongest within consumer are LCD displays and handhelds, which is, largely, cell phones. So those are the two areas where we saw the biggest drop and I think the bulk of that is just the overall business being down combined with inventory being burned out of the supply chain. I wouldn’t attribute any of that to any deliberate or even accidental loss of market share in those areas.

Steve Smigie - Raymond James

Thank you.

Operator

Your next question comes from the line of Sumit Dhanda with Banc of America-Merrill Lynch. Please proceed.

Dave Bell

Sumit, are you there?

Operator

Sumit, your line is now open. Your next question comes from the line of John Pitzer with Credit Suisse. Please proceed.

John Pitzer - Credit Suisse

Yes, good afternoon guys, thanks for taking my question. Dave, you talked about the gap between production and consumption likely to close in Q2, but when I look at the revenue guidance you gave for computing sector in Q1 of flat to slightly down, it sounds like you’re actually going to be outperforming consumption in the computing market in the March quarter. A little bit of detail of that. Is that just a easy compares, given how sharp of a drop you saw in December, help me understand that dynamic a little?

Dave Bell

Yes, I think that’s certainly a lot of the case here John, because computing obviously got hammered during the fourth quarter. So, running at a pretty low rate compared to where it was back for the earlier part of 2008. So part of it is just because it got hammered so much early on, it’s not going to get hammered as much in Q1. But as well, I think that there’s going to be a little bit of what I described earlier where we’re starting to see some short lead time orders, which is guiding us to stay flat to slightly down in computing.

Now, some of the other markets, like I mentioned, industrial and comps infrastructure, they tended to lag this downturn and as a result, they held up better in Q4, but they’re now starting to head down a little bit in Q1. So I think, ironically, as a result of that, computing is probably actually going to hold up on a relative basis, Q4 to Q1 better than some of the other markets.

John Pitzer - Credit Suisse

And Dave, just a quick second one. Can you talk a little bit about the linearity in the March quarter and I guess a lot of us are sitting here trying to figure out how important sort of the post Chinese New Year pickup is relative to some of the guidance’s their companies are giving. Your perspective on that would be helpful.

Dave Bell

We’re trying to figure it out too, John. It’s all from what we hear from the customers. So, obviously a lot of Asia is shutdown right now during Chinese New Year, but we also know that there is number of major manufacturers that announced that are going to be shutdown for a week or two after Chinese New Year as well. So we’re anticipating that there’s going to be a bit of a lull in bookings and whatnot coming out of Asia during this period, but we’re doing our best to kind of predict from all angles.

Like I said, we got our sales managers doing their best projections, largely what they hear from the customers, we’ve got our business managers looking at it and we’re using any other kind of factors that we can find in the industry to try and read the tea leaves in what’s going to happen there. But truth be known, there really is very little clarity as to exactly what’s going to happen after Chinese New Year.

John Pitzer - Credit Suisse

But given what you know so far in the quarter, is linearity and March tracking, sort of, a normal calendar first quarter are you expecting more back end loaded quarter or less backend loaded quarter relative to the reporting guidance.

Dave Bell

Are you referring to shipments or bookings there?

John Pitzer - Credit Suisse

Shipments.

Dave Bell

Shipments. Most of the quarters end up being a little bit backend loaded. To be honest with you, I don’t have any specific data on that. A typical quarter would not be perfectly linear. It would be a little bit backend loaded. I would imagine if the trend of inventory being depleted gradually continues to build through Q1, we probably, as well, would be a little bit back-end loaded in Q1.

John Pitzer - Credit Suisse

Thanks, guys.

Dave Bell

You’re welcome.

Operator

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

Cody Acree - Stifel Nicolaus

Thanks, guys. You have historically given us a non-GAAP outlook as well as your GAAP numbers. Could you provide a little bit of clarity for your non-GAAP expectations?

Jonathan Kennedy

It’s Jonathan. We announced in Q3 that the fourth quarter would be the last quarter that the company does disclosures and forecasts on a non-GAAP basis. So this is a continuation of that expectation. So I will tell you that going forward in future press releases, we will provide enough information so that analysts who want to do non-GAAP analysis will have the information that they otherwise would have gotten.

But in terms of guidance going forward, I use GAAP, if you wanted to build into your model, you can pull out the amortization intangibles and end process, stock compensation, it should be about a normal run rate, what you see in Q4 should roll forward into Q1, maybe a little bit higher, but not much.

Cody Acree - Stifel Nicolaus

Those amortization and options should be about the same?

Jonathan Kennedy

Should be about the same.

Cody Acree - Stifel Nicolaus

All right. Very good. Secondly, maybe any quantification, Dave, that maybe you can give to shipments versus consumption. Obviously that’s the million dollar question. It sounds like we’re starting to get back towards some of that. You were so early going into the decline by far the largest in the negative revisions. I guess, if you had to put some percentages or some qualification around that, do you believe you’re getting closer to that and more likely to ship to consumption during second quarter?

Dave Bell

Well, yes. Again, it’s really difficult to get precise information on this, Cody. We know exactly what’s in our distributor’s portion of the supply chain. We don’t have good clarity as to what amount of components our customers, the ODMs, have on the shelves and what they have and with and finished goods and so forth.

So there’s a good chunk of the total supply chain that we don’t have great information on. But, like I said in the prepared remarks, we’re already beginning to see some instances where the inventory has obviously been depleted down to variable levels and starting to get short lead time orders.

We believe that not surprisingly is a trend that’s going to continue here. But we also just based on our best judgment, I can’t give you lots of data to back this up, but we believe that that is largely going to occur not in the first quarter, but in the second quarter.

So based upon that, if that assumption is correct, then I think it also would be correct to assume that we would show stronger sales in Q2, but we’re not at a point to give any specific projections at that point.

Cody Acree - Stifel Nicolaus

Great. And then just very, very quickly. OpEx trends, you gave a little bit of guidance for Q1. Given your restructurings and efforts to cut costs, what do you expect for OpEx trends through the rest of the year?

Jonathan Kennedy

Yes, if you look at OpEx from Q4 to Q1, what we said was it would be approximately flat. And just looking at the models that we have, our midpoint guidance assumes a flat OpEx. So if you want to look at the pieces of it, R&D is up a couple million dollars primarily from the full quarter effects of the acquisitions. SG&A drops down from Q4 to Q1 as a result of vacation days, mandatory vacation days and extremely tight expense control.

Cody Acree - Stifel Nicolaus

What about the remainder of the year?

Jonathan Kennedy

We’re not making any specific projections, of course, Cody. If you look at the things that we’re doing, we said there are no increases for 2009. There are no bonuses for management as there weren’t in the second half of 2008. Hiring is minimal. We’re only hiring for key replacements and extremely key additions, so from a headcount perspective, we’re going to be roughly flat.

So if you kind of roll all of that stuff together, I think you assume that OpEx is roughly flat going out through the year. That’s what we would expect until it’s clear that we’ve got kind of an economic recovery going on, but we obviously have our operating plan that’s built around very detailed assumptions in those areas, but roughly flat, I think, it’s probably a good assumption.

Cody Acree - Stifel Nicolaus

Great. Thanks for the clarity.

Jonathan Kennedy

You’re welcome.

Operator

Your next question comes from the line of Doug Freedman with Broadpoint. Please proceed.

Doug Freedman - Broadpoint

Great. Thanks for taking my question, guys.

Jonathan Kennedy

You’re welcome, Doug.

Doug Freedman - Broadpoint

Can you talk a little bit about what the mix shift, or if you need mix shift, what revenue levels is it going to take to get back into your gross margin targets?

Jonathan Kennedy

You’re talking about for Q1 specifically, Doug, or just longer term?

Doug Freedman - Broadpoint

Longer term. So do we need to see a mix shift and you guys sort of not have as much PC exposure and at what revenue levels are required to start to see you’re making a lot of cost saving actions here, you really are changing, sort of, the infrastructure of the company a bit.

Jonathan Kennedy

Let me answer your question a little bit this way and then maybe I can add a little bit more color. But there are two things that are going in the opposite directions in Q1 and in Q4. That is that we have seen our PC business drop dramatically in Q4, so that actually helped gross margins from a mixed perspective. On the other hand we also saw shipments drop dramatically. So there was some impact of under utilization. Not nearly as much as you would see in an IDM, but we do have some impact from under-utilization with the company owned resources and what not.

So those things kind of largely offset each other, but we actually did see some improvements. So, obviously the mix had a bigger impact than the under-utilization. As we kind of go through recovery, we would expect that our PC sales grow once again. So that’s going to provide some downward pressure on gross margins, but at the same time the utilization gets better.

So, there’s going to be both those factors that are going to be largely off setting each other I think as we go forward. So, bottom-line of all of that is, my guess is you’re not going to see wild shifts in gross margins as we come out of this downturn.

Jonathan Kennedy

The other thing, Doug, it’s Jonathan, I would point out that our computing and consumer businesses are primarily outsourced. So in terms of utilization that you would normally get as you asked what revenue level, as revenue grows higher and higher for those businesses, it’s a fixed cost. So our margins are relatively stable at any revenue level for those product lines.

So if you’re thinking about it in a traditional fab scenario, we don’t get the acceleration of over-utilization. On the other side, we also don’t get the impact to the situation we’re in right now where stuff was manufactured in-house, we would be looking at margins significantly lower than what we are.

Dave Bell

As Jonathan mentioned in the prepared remarks for Q1, we’re actually expecting our gross margins to drop a little bit. In Q4 they went up around 100 basis points. In Q1 because of those factors, we are expecting gross margins probably to drop in the ballpark of a 100 basis points again.

Doug Freedman - Broadpoint

Yes, I guess what I was getting at was, I’m trying to understand what gets them back into the target range of 58% to 62%?

Jonathan Kennedy

Well, what gets us there is a longer road than the next quarter or two, but what gets us there is the mix weighing itself out towards industrial and comps business, and that just takes some time. If we see the computing consumer businesses accelerate out of this downturn faster, which is what I would expect to see. Then we’re going to see mixed pressure on margins for a while until our businesses in the industrial comp pick back up and those businesses seem to have lagged in the drop, and so it makes sense they might actually lag coming out of it.

So, from a revenue perspective, we should grow nicely as we turn out, but from a margin perspective, we’ll be facing the opposite situation, but eventually as things level off, at some point in the future then it’s really, margin increases are really dependent on us increasing as a percentage of our business, the industrial and comps businesses.

Dave Bell

And that’s a long-term goal as you know Doug, you get that more balanced and long-term probably are computing representing somewhere in the range of 25% of our business, which means the other portions which are more profitable are going to help out.

Doug Freedman - Broadpoint

And then just one last question on the contract losses that you took some charges for. Have those contracts been rewritten, is that something that’s going to be ongoing? Are there minimum purchases you’re not meeting? How should we think about those losses?

Jonathan Kennedy

Yes, it’s the middle thing. We have some minimum contract for purchases with our major suppliers. So as we go through at the end of the quarter we have to evaluate the likelihood of a take-or-pay penalty and those charges we recorded were actually an estimation of that event.

Doug Freedman - Broadpoint

So there will be none going forward, or I need to plan for them going forward as well?

Jonathan Kennedy

At this point, I don’t think there will be any going forward. If conditions deteriorate a lot more, then I suppose that’s always a possibility, but at this point, I think we’ve got it.

Doug Freedman - Broadpoint

All right. Thank you.

Operator

Your next question comes from the line of Patrick Wang with Wedbush Morgan Securities. Please proceed.

Patrick Wang - Wedbush Morgan Securities

Yes, thanks. Just first, I wanted to talk about turns real quick. Can you tell us what your turns orders in the fourth quarter was, and I guess maybe, how much progress you’re making in turns for the first quarter thus far given that we’re about a third of the way through?

Jonathan Kennedy

Yes, turns for the fourth quarter were about in the 40% to 50% range and going forward in terms of you have asked what turns are midway through at this point?

Patrick Wang - Wedbush Morgan Securities

Right.

Dave Bell

I’m not sure that’s a really relevant question because of the non-linearity with shipments. So kind of doing a turn mid-quarter, I’m not sure if that’s really a meaningful number. But we expect the turns to be a little bit higher probably in the 50% ballpark for the whole quarter, but the bookings aren’t necessarily linear and the shipments aren’t necessarily linear, so kind of doing a data point mid-quarter is probably not all that meaningful.

Patrick Wang - Wedbush Morgan Securities

Okay. But in terms of progress and where you thought you would be; are you guys?

Dave Bell

Yeah. Well, what I will say is that I think we’ve been pleasantly surprised with the bookings that we’ve seen thus far this quarter, but even that, you’ve got to be careful as you read into because there may have been some kind of pre-ordering going on before the Chinese New Year since they are certainly shutdown this week and many companies have shutdown for a couple of weeks after. So again, it’s been looking good from a bookings perspective so far, but I think we’re going to have kind of a little bit of a dry spell for the next few weeks as well. So, you’ve got to be careful about how much you read into these data points mid-quarter.

Jonathan Kennedy

Yes, I would just, the conditions, right now, I mean, trending is just out of the window.

Patrick Wang - Wedbush Morgan Securities

Okay that was helpful. Thanks for that. And then also, utilization. I know you said that you’re looking for some under-utilization charges in Q1 to margins. Is that still expected going forward in Q2, or is this essentially kind of the bottom for utilization in Q1?

Jonathan Kennedy

For Q2, I guess it depends on what revenue looks like in Q2 and we really haven’t gotten to that point yet. For Q4, utilization was 55%. Going to Q1, it will be lower than that. As our business drops down to these revenue levels, the percentage of that business is actually higher in the internally fabed products.

So, at these revenue levels, underutilization affects us more as a percentage of revenue than it would at higher revenue points. So as we get into Q1, we mention underutilization because we’re kind of at a point where it starts to play a role in the percentage calculations.

Going forward, I would say, it’s unlikely given our inventory level that utilization will go up in Q2. So, without making predictions about Q2, I think we’re probably in a steady state in the internal fab for a while.

Patrick Wang - Wedbush Morgan Securities

Okay. And just on that note in terms of inventory, I know inventory is down just slightly on the quarter, in Q4 here. I’m assuming that most of it’s more biased towards finished goods than what appear, but can you confirm that? And also, can you talk about some of the, I guess, the makeup of inventory in your balance sheet?

Jonathan Kennedy

Sure. I mean our inventory, generally speaking, we keep inventory in a [WIP] state, just looking at gross percentages, I mean two-thirds of our inventory is in [dye] form and [WIP], so in terms of having excess inventory or really more importantly, being able to meet shipments as we come out of this, we keep it in dye form. The cycle time from dye to finished good is typically about two to three weeks.

So, in terms of getting out of this, I think we’ll have plenty of inventory and plenty of capacity to turn within the inventory. To answer your question, we keep most of the inventory in a [WIP] state.

Patrick Wang - Wedbush Morgan Securities

That’s helpful. And then, last question here, just, I wasn’t exactly clear about the timing behind the margin improvement initiatives here, I guess the shifts to 0.25, the gold to copper and the consolidation of Palm Bay, the $6 million improvement – where is that comparing it from, and what is that comparing it to?

Jonathan Kennedy

Well, it’s absolute dollars. So if we’re modeling out cost of sales in Q3 and Q4 of ‘09, we should see just a decrease in overhead expenses which ends up in cost of sales in the second half of the year and those expenses are associated with closing the facility and the employees that go along with that facility.

Dave Bell

But keep in mind that $6 million is an annualized rate. So you won’t see all $6 million this year, but once the consolidation is complete, you will see that on an annualized rate.

Jonathan Kennedy

That’s right. But it is an overhead expense. So it doesn’t necessarily scale with the higher or lower production.

Dave Bell

But I think the thing that is really going to drive the long-term margin expansion is going to be growth in our product portfolio aimed at industrial and infrastructure products. At the same time, we’ve got always dozens of various cost control programs, cost reduction programs in manufacturing and elsewhere.

We’ve talked about some of the biggest ones, the 0.25-micron conversion for new products, the consolidation to fab, the gold to copper wire. Those are some of the big ones that tend to move the needle. But just to the culture within the company, we’ve always got many member programs going on.

So that kind of helps us offset the ASP decline as natural within the industry. But the big thing, the long term if you look out a year or two that is I think going to contribute to gradual growth in gross margins is going to be mix.

Patrick Wang - Wedbush Morgan Securities

Okay. That’s helpful. Thank you so much, guys.

Dave Bell

You’re welcome.

Operator

(Operator Instructions).

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

JoAnne Feeney - FTN Midwest Securities

Hi, guys. Really, some clarification, if possible, on the notebook and inventory situation. So, if I could just, on an aggregate level, what would aggregate PC builds have to look like in the first quarter to meet your guidelines of your computing being flat to slightly down?

Jonathan Kennedy

JoAnne, when you say PC build, you mean numbers of units?

JoAnne Feeney - FTN Midwest Securities

No, it's just like the percentage. So a lot of the other players that are exposed to the PC world are predicting anywhere from 15% to 20% to 25% down for the first quarter sequentially, and you guys are predicting your business related to computing only flat to slightly down. So I am wondering what you are assuming about the aggregate PC situation from 4Q to 1Q that’s behind that estimate you have for your own business?

Jonathan Kennedy

Well, I don’t think fundamentally we’re going to be affected any differently. We sell one core power DC to DC converter processor for notebook computers and what not. So fundamentally, we see the same kind of percentage drop that everybody else does.

One thing, however, though, that I think probably made us drop a little bit further or faster in Q4 and not drop as much in the PC space in Q1 is just we were quick to react. I think we were straight shooters. We were honest with the investment community. We didn’t try to, kind of, build up Q4 unnaturally in anyway.

We deliberately reduced our inventory in Q4, in the double-digit range. So I think we were just quicker to react to this downturn and took our medicine in Q4 and as a result, I think you’re going to see us recover faster.

JoAnne Feeney - FTN Midwest Securities

So, then, if I could ask one follow-up. If the aggregate PC situation in Q1 follows seasonal norms in terms of final system builds, would that then be consistent with your own guidance on your parts selling into that world?

Jonathan Kennedy

I don’t think we’re going to see normal seasonal activity right now, bit it’s really, really difficult to apply norms that have applied in past years to what’s going on right now, JoAnne. I’m not trying to be evasive, but then, in fact, it will be; know there just is very little information you can hang your hat on out there.

So we are doing the best we can, but clearly the build it rate at the notebook manufacturers, the major ODMs, is down, and they are consuming inventory out of the supply chain from the distributors, from their own inventory and what not, a lot of moving pieces out there.

So, it’s really hard for us to make much of a specific commentary on what’s happening in regards to seasonality and what not. What we do know is that our shipments, certainly in Q4, were well below what their build rates were, they are consuming inventory and we believe that, probably for the most part in Q2, that will be normalized and we ought to see our shipments enter the PC market start heading out towards consumption, kind of normalize there.

JoAnne Feeney - FTN Midwest Securities

And then on the composition of your inventory, is there a concern that some of this inventory is going to be specific to the Montevina-based platform. Would you be facing the possibility of a write-down if you didn’t work through all the internal inventory that you have for the notebook space for example?

Dave Bell

It’s a good question. I mean there is always a little bit of that risk, but we’re very-very sensitive to the kind of model specific numbers and always are carefully watching our inventory on products that won’t carry into the next generation. Fortunately, there aren’t many of those. Most of the products that we’re using with the exception or say things that are very core specific do have utility and follow-on models. But we watch that really carefully and hopefully if we’re doing our job right, there is not a whole lot of inventory that we need to write-off. Now that said, we did write-off some in Q4 that Jonathan talked about, a little bit of that inventory was in the computing space, but frankly, I think the majority of it was not.

JoAnne Feeney - FTN Midwest Securities

Okay, thanks very much.

Dave Bell

You’re welcome.

Operator

Again, we ask callers to please limit themselves to one question. Your next question comes from the line of Blayne Curtis with Jefferies. Please proceed.

Blayne Curtis - Jefferies

Good afternoon, guys. Dave, you talked about some of those market share dynamics in the PC market. I was wondering if you could talk a little bit about the pricing environment in the Montevina Refresh and also Capella. And then, what kind of gross margin trends do we look for as those platforms ran throughout the year as you kind of net pricing versus some of the cost reductions you’re doing?

Dave Bell

In that marketplace, it’s obviously a very competitive marketplace and you tend to have ASP erosion in the 15% to 20% per year kind of range in many of the most competitive parts. We haven’t seen that change a whole lot in this environment here. But our goal has been to make sure that we at least keep up with ASP degradation by cost savings in our manufacturing area and to-date, I think we’ve been doing a pretty good job at that. Some of the things we’ve talked about already contribute directly to that. Going to quarter micron processes, going to less expensive assembly with the copper wire, future processes that we can use in power and whatnot. So, the goal is to keep up with that ASP reduction.

Blayne Curtis - Jefferies

And based on what you’ve seen so far for Capella, you’re pretty confident you can maintain that?

Dave Bell

Yes, I think we are. Again it’s really difficult to kind of make specific projections on what future ASP erosion will look like, but assuming that it isn’t a lot different than what it has been, I think that we ought to be able to keep up with that the same way we have so far.

Blayne Curtis - Jefferies

Great, thank you.

Operator

Your next question comes from the line of (inaudible) with JPMorgan. Please proceed.

Unidentified Analyst

Hi. Thanks for taking my call, couple of quick questions. One on the lead times, you did say that lead times were coming down, but could you help quantify it for the fourth quarter and also a follow-up question is, in terms of the overall pricing environment, you talked about Capella in particular, but what can you say about the overall pricing environment in the industry right now?

Jonathan Kennedy

Well, first of all, I don’t think we made any specific comment about lead times coming down. Lead times are very short right now. We’re not unique in that regard. I think everybody can ship stuff pretty quickly and even if we don’t have the finished goods inventory, we can get it through the back end in about four weeks. So, lead times are short in Q4 and they’re going to stay pretty short in Q1. And then your question, I guess is, regarding pricing, regarding?

Unidentified Analyst

Yes, the overall pricing environment?

Jonathan Kennedy

Well, what we have seen in the competitive areas, again, like notebook computers and some consumer sockets and what not, you tend to see may be in the range of 15%, sometimes a little bit more ASP erosion per year. We’re not seeing any major change in that regard. Of course, you would expect that it really wouldn’t soften very much when it’s very competitive and that’s kind of what we’re seeing going forward.

Unidentified Analyst

Okay helpful. Thank you.

Jonathan Kennedy

You’re welcome.

Operator

Your next question comes from line of K.C. Rajkumar with RBC Capital Markets. Please proceed.

K.C. Rajkumar - RBC Capital Markets

Hi, guys. Thanks for taking the question.

Dave Bell

Welcome.

K.C. Rajkumar - RBC Capital Markets

I infer from some of the comments through that the quarter-on-quarter decline in the consumer space in the March quarter is going to be a bit higher than the other three segments. Is that a fair statement?

Dave Bell

Yes. I think that’s fair statement. We do expect to see consumer go down a fair amount in Q1.

K.C. Rajkumar - RBC Capital Markets

And if that is the case, is it also fair to then conclude that: how would you compare the above seasonal inventory in the handset and LCD space and how would you compare that to the inventory in the computing space?

Dave Bell

Well, to be honest with you, I wish I knew. We don’t really have specific numbers, as I have mentioned in a couple of questions so far in the PC space. We can only see part of the supply chain and even there the data sometimes is pretty fuzzy or suspect.

So I think the problems are similar. Whether the magnitude is greater or less than the PC space, honestly, I couldn’t tell you at this point, it’s just too difficult to get very accurate reading on it.

But what I would say is I believe that the downturn that we saw in Q4 in consuming, in consumer, rather, and the downturn we’re going to see in Q1 is not the result of market share loss. It’s just simply the result of both the downturn in consumption and we know that LCD TVs weren’t being consumed at the rate that they were hoping, as well as just burning inventory in the supply chain. So that too will pop back up when the supply chain gets down to a low enough level.

K.C. Rajkumar - RBC Capital Markets

Yes. And one last question. How would you characterize the inventory in the other two segments, industrial and comp?

Jonathan Kennedy

Well, I guess one thing that I would say is I think you probably have the biggest inventory bubble in the PC end of the business and the reason for that is partly kind of the perfect storm that we got hit with in the middle of last year or as we entered the fall because we were ramping up capacity to try and keep up with customers. We were expediting even as late as August and then of course the bottom fell out.

So we did have a little bit more of an inventory situation in the PC business, in the computing space than we did in other areas, but to say anything specifically, I think, about industrial and the com infrastructure, again it’s just really, really difficult to figure out what is throughout the supply chain.

K.C. Rajkumar - RBC Capital Markets

Okay. Thanks.

Operator

Your last question comes from the line of David Wu with Global Crown Capital. Please proceed.

David Wu - Global Crown Capital

Thanks for taking my call. I have got one question. If we go into the fall, are you assuming particularly for the consumer computer business, if we finish the inventory reduction by Q2, as we go into the fall, are you assuming that the end demand will revert to normal seasonality, or this is a big recession year and, therefore, the end demand would not be “normal”. Which is stronger; second half than the first half?

Jonathan Kennedy

Well, it’s a great question. I wish I knew anybody that could answer that. I don’t know. I think we’re hopeful that the consumption will begin to improve in the second half of 2009, but perhaps that’s just wishful thinking.

What I do know is that, our shipments again are well below what the consumption is. Consumption is down, no question, from what it was earlier in 2008, but our shipments are much lower than even that reduced consumption.

I believe that as we go through the year, probably most of this happened sometime in Q2, the inventory is depleted and then we start shipping at close to consumption levels. But the $60,000 dollar question is, okay, what is that consumption level and does it start improving in the second half of the year and I don’t know. I don’t know the answer to that, but I wish I knew somebody that did.

David Wu - Global Crown Capital

Thank you.

Jonathan Kennedy

You’re welcome.

Operator

I would now like to turn the call over to Mr. Dave Bell for closing remarks.

Dave Bell

All right. Well, thank you for joining us today for Intersil’s fourth quarter 2008 earnings conference call. Despite the discouraging economy, we hope it’s clear that management at Intersil is exploiting this opportunity to restructure, to refocus our R&D and to build an even stronger company.

Although we’re carefully controlling our expenses, we’ll continue to invest in highly differentiated new products and the fruits of these investments will be realized over the coming years and we’re confident we’ll reward the patient investor. We wish you a really good evening and we look forward to seeing you at our upcoming analyst day. Thank you.

Operator

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

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