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Intersil Corporation (NASDAQ:ISIL)

Q1 2009 Earnings Call

April 22, 2009 4:45 pm ET

Executives

Dave Bell - President and CEO

Jonathan Kennedy - SVP and CFO

Analysts

James Schneider - Goldman Sachs

Parag - UBS

Ross Seymore - Deutsche Bank

Romit Shah - Barclays Capital

Shawn Webster - JPMorgan

Tore Svanberg - Thomas Weisel Partners

Steve Smigie - Raymond James

Mahesh Sanganeria - Royal Bank of Canada

Terence Whalen - Citi

Doug Freedman - Broadpoint

Joanne Feeney - FTN Equity

Blayne Curtis - Jefferies

Patrick Wang - Wedbush Morgan Securities

Operator

Ladies and gentlemen, welcome to the first quarter 2009 Intersil Corporation Earnings Call. My name is Tanya and I will be your coordinator for today. At this all participants are in a listen-only mode. (Operator instructions)

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

Jonathan Kennedy

Thank you Tanya. Good afternoon and thank you for joining us today for Intersil's first quarter 2009 Earnings Call. Today with me is Dave Bell, Intersil’s President and Chief Executive Officer. In a few moments, we will deliver remarks on the first quarter of 2009, and provide a summary of our business outlook. After our prepared comments, we will open the line for questions.

We completed our first quarter on April 3, 2009. A press release was issued today at approximately 1:10 pm Pacific Time. A copy of this press release is available on the Investor Relations section of our website at 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 website. A replay of the conference call and the webcast will be available for two weeks through May 6th.

Please note that some comments made during today’s 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 sometimes 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.

For those of you interested in learning more about Intersil, we will be presenting during the second quarter at JPMorgan Global Technology Conference in Boston on May 20th and the UBS Global Technology Conference in New York on June 8th.

Before I turn the call over to Dave, I would like to welcome Brendan Lahiff, as our new Senior Manager of Investor Relations. Brendan has many years of Investor Relations experience and will add significant benefits to our efforts. So please feel free to contact Brendan directly for any of your IR requests.

Now, I'll now turn the call over to Dave.

Dave Bell

Thanks, Jonathan. Good afternoon and thank you for joining us today for Intersil's first quarter 2009 earnings conference call.

First I would like to congratulate Jonathan Kennedy on his promotion to Senior Vice President and CFO. Jonathan became Interim CFO four months ago, during very challenging business conditions and we have all been impressed at how quickly he came up to speed. We expect Jonathan’s leadership will help drive Intersil forward and assist us in achieving our strategic goals.

Now, let's move on to review of the first quarter. For the first quarter in 2009, we achieved net revenues of $118. 2 million, a decline of 42% from the same quarter last year, but above the high end of our guidance range of $105 million to a $115 million.

This result was driven primarily by a stronger than expected rebound in our computing business. Not surprisingly, the strong mix of shift put more pressure on gross margin than we had forecast and Jonathan will discuss this further in his remarks.

We continued our tight control of operating expenses in response to the poor macroeconomic conditions and again reduced OpEx by over 10% sequentially from the fourth quarter.

These reductions were the result of various initiatives including the elimination of salary increases and bonuses, operational shutdowns, travel constraints and hiring restrictions. These expense controls ultimately led to earnings per share of $0.02 also considerably better than our expectations.

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

Our strong business model, combined with rapid expense controls, enabled us to generate over $11 million in free cash flow during the quarter. We remained very confident in our unique business model and as a result the Board of Directors has authorized quarterly dividend of $0.12 per share of common stock. At our current stock price, this results in a dividend yield of nearly 4%.

The strong bookings during the last part of Q1 and a positive book-to-bill so far in Q2, we're confident that we've turned the corner in this downturn. The computing market was hit very early with sharp declines in Q4 that is now on recovery. However, the consumer, industrial and communication's markets were slower to respond to the downturn and continue to be soft. The recovery in those markets is likely to lag by appropriately one quarter.

Despite improvement in the overall business, visibility remains limited with very short lead-times and many orders particularly in the PC market. Having reduced distributor inventory significantly during the last two quarters, we now plan to increase inventory modestly during the currently quarter, so we can respond to such short lead-time orders.

As we discussed at our Analyst Day in February, our efforts for SAM expansion are beginning to take hold. Our recent acquisitions of D2Audio, Kenet and Zilker Labs have all been very successful and have contributed significant number of design opportunities and design wins during the last quarter.

We continue to build closer and more strategic relationships with our key customers as we move to the left in the selling cycle selling cycle resulting in many strategic design opportunities.

This multitude of opportunities, fueled both by acquisitions and in-house development, is diversifying our product portfolio and leading to a more balanced business. However, growth in the industrial, infrastructure, and automotive markets, requires long-term investments and patience; so we don't expect to achieve the desired balance in our business until 2011.

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

Jonathan Kennedy

Thanks, Dave. Okay, let me begin with the income statement. As Dave stated, we reported $118.2 million in net revenue for the first quarter of 2009, a 42% decline from the same quarter last year, and a 10% decline sequentially. Quarter rates increased steadily throughout the quarter, with particular strength during February, and we ended the quarter with a book-to-build greater than one.

During the last half of the quarter, we saw some customers placing orders with longer lead times; but overall orders continue to be placed with short lead times, and our longer-term visibility is still less than normal. The mid-point of today's Q2 guidance assumes approximately 35% churns, compared to Q1's actual churns of about 47%. Q2 churns are expected to be lower than Q1 due to the expansion of customer lead times.

On a GAAP basis, first quarter gross margin was 55.1%, up from 33.7% in the fourth quarter. Q1's gross margin result is about 110 basis points less than we anticipated going into the quarter. Some of this additional change was driven by stronger-than-expected sales of competing products, particularly from the desktop and network markets, where margins are lower than the company average.

Also affecting the margin by about 85 basis points was a $1 billion collection allowance we recorded related to a specific customer. Receivables from this customer are now fully reserved and we do not expect any further related issues.

We expect our Q2 gross margin to decline further, as the computing and consumer markets continue to rebound faster than the higher margin industrial and communications markets. Longer term, we expect our efforts to achieve a more balanced product portfolio and realize the benefits of our ongoing cost reduction initiatives.

We believe GAAP gross margin in the 58% range are attainable as our business returns to growth and we execute our plans. During the quarter, we continued very tight operating expense controls and despite the added expenses of three acquisitions. We achieved significant reductions from the prior quarter.

Operating expenses included 10 days of mandatory vacation for employees resulting in approximately $6 million in savings during the quarter. Looking into Q2, we will have a minimum of five days mandatory vacation, which will benefit the quarter by about $3 million.

The first quarter also benefited from a full quarter's effect of the 9% forced reduction we announced last February, resulting in an additional $1.5 million in savings over Q4 and our ongoing savings of approximately $3 million per quarter. We will maintain tight discretionary expense controls during the second quarter, including travel restrictions and bonus suspensions.

In the first quarter, R&D expenses were $32.8 million or 28% of revenue, now $1.9 million from the prior quarter. Despite a full quarter of R&D spending for Zilker, Kenet and D2Audio, R&D declined more than expected due to expense control efforts, mandatory vacation and a reduction in equity compensation expense.

We expect second quarter R&D spending to be approximately $3 million higher than Q1, driven primarily by a reduction in mandatory vacation days, higher equity compensation expense and increased investments in R&D programs.

SG&A expenses were $25.8 million or 22% of sales, down $2.9 million from the fourth quarter due to the same operational controls, mandatory vacations and lower equity compensation expense.

We expect second quarter SG&A expenses to increase by approximately $3.5 million from the first quarter, primarily from a $2.5 million increase in equity compensation. We make our annual equity grants at the beginning of Q2, and we typically see a spike in equity compensation, as a result of this grant.

The remaining increase in SG&A is driven by reduction in mandatory vacation days and increased selling and marketing expenses. And just for clarity, let me breakout our Q2 equity compensation assumptions.

Our midpoint guidance assumes approximately $800,000 of equity compensation in cost of sales, $3.5 million of equity compensation in R&D and about $4 million in SG&A for equity compensation.

Amortization of intangibles increased by $200,000 during the first quarter, as we realized the full effect of last year's acquisition. Amortization is expected to remain flat at about $3.5 million during Q2. And we incurred $1.6 million in restructuring expenses related to our internal fab consolidation. This quarter's restructuring expenses were higher than expected, as we recorded additional severance benefits to accommodate a further workforce reductions announced in this facility.

We expect to complete the fab consolidation during the second quarter and our Q2 guidance assumes approximately $1 million in final restructuring expenses. The completion of this project will benefit our annual cost of sales by approximately $6 million and we should begin to see the benefit of this reduction later in 2009.

Our internal utilization during Q1 was approximately 60% and utilization is expected to remain at this level for Q2. In-process R&D was a $200,000 benefit as we finalize purchase price allocations for the acquisitions we completed last year.

Interest income was $1.4 million a decrease of $1.2 million from the prior quarter as interest rates remain depressed. We expect interest income to be about flat in to Q1 during the second quarter. Our GAAP tax rate was approximately 18% during the quarter and we expect this rate to extend into Q2.

Our primary backend package and test operations are located in Kuala Lumpur, Malaysia. And over the past few years we have established a talented operations team with critical math in that location. As a result, we initiated a plan during the quarter to move our international headquarters from Switzerland to Malaysia. This move better aligns our manager resources with a significant business activity in the region.

The financial benefits of this move also attractive. By operating at Malaysia, we expect to save approximately $1 million per year in SG&A expenses, as the cost of Malaysia are much lower than Switzerland. In addition, we expect to benefit from a significantly reduced income tax rate on our foreign income, which we expect will benefit us the years to come.

Net income from continued operations was $2.4 million or $0.02 per diluted share. And we are pleased that despite the sequential decline of revenue, we achieved profitability and solid cash flow.

Now move into balance sheet. Day sales outstanding was 49 days, down 19 days from the last quarter. Net inventory decreased by $9.8 million from the fourth quarter and our days of inventory decreased to 278 days.

Looking ahead to Q2, we expect continued inventory declines at a pay similar to Q1 and we are striving to return our inventory levels closer to 100 days by yearend.

Let me take a minute to give you some color on channel inventories as well. Many of our products are sold to distributors throughout the world. In North America, we recognized revenue, when these distributors sell our products through to the end-customer.

Internationally, we recognized revenue, when we ship products to the distributor. As a result, significant levels of channel inventory depletion or re-stocking internationally will cause our revenue to differ from end-demand trends.

During the fourth quarter of 2008, we saw 20% decrease in international distributor inventory for the previous quarter, which resulted approximately 95 days of inventory at the end of the fourth quarter of 2008.

During the first quarter of 2009, we saw an additional 20% decrease in international distributor inventory. Using our current expectations, this implies the balance of about 65 days of inventory, which is much closer to historical norms and significantly leaner than last quarter.

Based on this analysis, we believe that the rate of channel inventory depletion reached a trough during the quarter and we may begin to see modest inventory replenishment in the second quarter.

Q2 depreciation was $5.5 million and CapEx was slightly higher than expected at $2.5 million. We expect Q2 CapEx to be approximately $2 million driven primarily from the completion of the internal fab consolidation.

For the first quarter, we generated $11.4 million in free cash flow and exited the quarter with approximately $308.2 million in cash, short-term investments and no debt. We paid out approximately $14.6 million in dividends in the first quarter, and we did not repurchase shares during Q1 and we do not have an active program at this time.

Our weighted average share count was slightly less than the fourth quarter, and we expect second quarter weighted average shares to be approximately flat with the first quarter.

Now, I will turn the call back to Dave Bell who will provide highlights on each of our core end markets.

Dave Bell

Thanks Jonathan. I will now address our business in each of core end markets, beginning with high-end consumer. Revenue in the high-end consumer market represented approximately 21% of first-quarter revenue. At an absolute dollar basis, revenues into the high-end consumer market decreased 60% year-over-year and 24% sequentially.

Sales in the consumer market continued to fall in Q1 as customers drove inventory in the supply chain to low levels. Regardless of the short-term inventory difference, design activity continued to be strong, and we're encouraged of our growth in several key segments of the market.

Gaming continues to be an important new market for us, and we continued to gain share in this large market. For example, during the quarter we reached agreement with a major manufacturer to supply a highly integrated IC for hand-held gaming product. Gaming market will continue to be an area of focus for the Company, as performance demands increase from gaming hardware makers.

Although the overall display market remains weaker than last year, we continue to support our customers with new product innovations. Our display PMIC products are gaining traction in growing numbers of LCD applications. We're sampling a new product aimed at local dealing of LCD backlights, and new ICs are in development to support the large potential markets for OLED displays and laser pico-projectors.

In recent months, Intersil's ambient light and proximity sensors have gained traction at several Tier-1 accounts. Most notably, our new proximity sensors have secured design wins at a couple of Tier-1 accounts this last quarter, in addition to considerable design activity at other customers.

In January, we demonstrated D2Audio’s portfolio of products at the consumer electronics show in Las Vegas, including the new five-channel DAE-4, Class D amplifier. This new amplifier brings an array of audio processing and psycho-acoustic enhancements to high volume applications such as LCD TV's, media players, MP3 docking stations and gaming consoles.

Looking ahead to Q2, we expect consumer sales to begin recovering with sales up moderately and we expect a stronger second half of the year driven by normal seasonality.

Now let’s look at our computing business. Revenue in the computing market represented approximately 31% of first quarter revenue. On an absolute dollar basis, revenues under the computing market decreased 43% year-over-year, but increased 26% sequentially.

Power management for computing applications remains one of Intersil's core strengths and we continue to develop industry leading solutions. PCs represent the bulk of our computing business today with notebooks and netbook PCs now accounting for the majority of those sales.

Competition has become intense in PC power with many suppliers battling for market share and driving ASP erosion. Despite the competitive nature of this business, we believe we are retaining the leading market share in notebook VCORE and are holding nearly equivalent market share in the rapidly growing netbook segment.

The desktop PC market has been shrinking due to the shift towards notebooks and it is also a slower rate of technology advancements. We will continue to support this market by being selective, focusing on higher value opportunities and deliver receding market share and lower margin commodity opportunities.

Servers today represent a relatively small portion of our computing business. However, this is a targeted area for growth and we expect server sales to increase during the coming years, as new products aimed at this market are released to production.

Inventory in the PCs supply chain has been reduced significantly during the last two quarters and as a result we saw considerable growth in short lead time bookings during the second half of Q1. We believe that some of these orders are driven by an increased consumption but a portion is also being used to restore channel inventory to more normal levels.

Looking ahead, visibility continues to be limited, but we expect computing revenue to grow moderately in Q2.

Moving now to the industrial market; Revenue in the industrial market represented approximately 23% of first quarter revenue. On an absolute dollar basis, revenue into the industrial market decreased 42% year-over-year and 24% sequentially. The industrial market, our highest margin business impacted by the economic conditions during the last quarter as we saw steeper drop-off in revenue than in other areas, and this negatively impacted our gross margin. We continue developing many general purpose products aimed at the industrial market and investing R&D funds as a percentage of revenue at a substantially higher rate than the corporate average.

During the last couple of quarters, we have reached some important product development milestones. We recently released our first ultra precision chopper-stabilized amplifier and completed the qualification of our proprietary 40-volt low-noise precision amplifier process and our foundry wafer fab.

This new process allows us to rapidly expand our amplifier portfolio with state of the art Op Amps, Instrumentation Amps and Current Sense Amps. We are now sampling our first three families of 40-volt amplifiers with a full pipeline of additional products to begin sampling within the next couple of quarters.

In addition to precision amplifiers we have recently released several families of Precision Voltage References, Real-Time Clock modules and RS-485 interface products. These new products significantly expand our SAM with industrial customers.

Looking ahead we expect the Industrial Market segment to be up in Q2, but this market segment was slower to drop and will also be slower to recover than the computing and consumer markets. However, we are now beginning to reap the awards of steady investment in industrial products and we expect revenue from this market to grow steadily in 2009 as design wins go into production.

Finally moving to the communications market, revenue in the communications market represented approximately 25% of first quarter revenue. On absolute dollar basis revenues from the communications market declined 24% year-over-year and 11% sequentially.

Last week we reviewed the status of our high-speed A to D converter product line acquired from Kenet and our Zilker Labs digital DC to DC converters. We were very pleased to see the escalating number of design opportunities and wins that our sales force is closing and the growing strategic relationship that are being built with key communications infrastructure customers.

Although product design cycles are long, this clearly bodes well for future growth in the communications market. You are seeing increasing interest in our Rad-Hard products and have won several new designs during the quarter. We've increased our Rad-Hard R&D in recent years and will continue to release a growing number of high margin products aimed at the satellite market.

Looking ahead to the first quarter, we expect the communications market to be essentially flat with Q1. However, continued R&D investment together with Kenet's and Zilker's products should result in growing design win activity during the coming quarters.

Now let's turn our outlook for the second quarter. As mentioned earlier, we had strong bookings during the latter part of Q1 and closed the quarter with a positive book-to-bill. We have also seen a positive book-to-bill so far in Q2 and are confident that we've turned the quarter in this downturn. Despite improvement in the overall business visibility remains limited with very short lead times and many orders particularly in the PC market.

Based on our current outlook, we expect our second quarter revenue to be in a range of $123 million to $132 million, an increase of 4% to 12% from Q1. On a GAAP basis we expect earnings per share in the range of negative $0.01 to positive $0.03 per share. Free cash flow is again expected to be positive.

Gross margin will continue to be a challenge in the coming quarter as PC's rebound faster than other markets and become a larger portion of our business in the near term. We will also face reduced utilization at our Palm Bay wafer fabs as we've recently ceased production at our fab 54 and are completing transfer of all remaining equipment into fab 59.

Rich inventory has been built on transferred products and production will not resume until early 2010 after those products have been requalified by our customers. Because of these near-term factors we expect our gross margin to be down approximately 100 basis points in the second quarter.

As a result of the reduced utilization of our Palm Bay wafer fabs we will implement a reduction in force of approximately 30 employees in our Palm Bay manufacturing operations, because these employers will continue to work for another six weeks. This will have little impact on Q2 gross margin, but will have a positive impact on gross margin in subsequent quarters.

We will continue to be responsible managers, controlling operating expenses to maintain profitability and cash flow but make no mistake our primary focus is on maximizing shareholder returns by achieving our long-range goals and we plan to continue R&D investment that levels similar to 2008 to achieve those goals.

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

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question will come from the line of James Schneider with Goldman Sachs.

James Schneider - Goldman Sachs

First of all could you tell us, do you think you are shipping to end consumption levels now across all your end markets or are there any areas where end markets where you're still reducing inventory?

Dave Bell

Yes James this is Dave Bell. It's always hard to tell exactly how much is going to consumption and how much might be going to some inventory replenishment. We can see how much inventory is in our distribution channel and as we mentioned we've actually dropped that quite a bit. On the other hand, we don’t have a completely clear picture of how much is going in our shelves at our OEMs and manufacturers. So it's a bit of guesswork there.

My guess, as I mentioned during the prepared remarks, is that a good deal of our resumption in bookings for the PC business is going to consumption. On the other hand, I think there's a portion of that, how much is not really clear, but a portion of that I think is probably going into certain inventory replenishment.

We know a little bit will go into the inventory in our international distributors, but I think there's probably a portion that's going on the shelves primarily as a result just to the fact that lead times or that the orders were placed in the later part in Q1 were very short lead times and many suppliers were unable to react. So I think some customers are going to build a little bit of inventory there.

In the other markets, I guess we don’t have quite as much clarity there. Some of the other markets are still going down. So, my guess is that if there is some inventory replenishment it probably is not as much as we're seeing in the PC market right now.

James Schneider - Goldman Sachs

Fair enough. That's very helpful. And then maybe just as a follow-up, Dave. I think on the last call you talked about some Vcore design wins for the Intel notebook refresh coming up this year still having to be decided. Could you give us an update on the status of those design wins please?

Dave Bell

Yes, what I probably told you last quarter was that some thing like half of those designs probably were decided or something like that for Calpella, and that the refresh, which is kicking in usually early in the year and those things, what are in production now in ramping.

So, both on the refresh that is in process now, we think we've held market share, as far as Calpella designs, which will go into production probably around the end of this year. Again we think we are holding about similar market share percentages that we did in the past.

Operator

Your next question will come from the line of Uche Orji with UBS.

Parag - UBS

Hi, this is Parag for Uche. Just wanted to get a clear picture on gross margins and also wanted to tie that, with what's happening in computing. Firstly, how much of the impact is on the gross margin, you're seeing from ASP erosion and also if you could talk a little about, what kind of ASP erosion or competition you are seeing in the computing market, and how do you expect it to shape out going forward?

Jonathan Kennedy

Hi, it's Jonathan Kennedy. So, we typically break-out how much the margin erosion comes from ASP versus mix. I can tell you there is ASP erosion going on particularly in the computing business.

It’s stronger now that has been, in the past although it's been this, the double-digit range for the last six months or so. Mix is the primary driver in our guidance for margins to come down, but then also in there is cost for underutilization in our internal fabs.

If you look at our revenue level at $128 million at the midpoint every $150,000 makes a difference in margins. So, mix I’d say is the number one driver. Second to that would be ASP erosion and third to that is just operating cost of running at such a low volume.

Dave Bell

Could you repeat the second part of your question as well?

Parag - UBS

Yeah, I mean as we go forward in the sense that you have unfavorable mix now, but as in the seasonality again as we go into second half of the year, there will be again seasonally strong computing and consumer assuming that industrial and communication remain flat. So, how should we think about your gross margin, as we progress through remainder of the year?

Dave Bell

It's good question because typically with normal seasonality computing and consumer would be stronger in the second half of the year. I’d imagine that, that would still be true this year even with the economic downturn. However, kind of offsetting that to a large degree is the fact that the other businesses, industrial and communications infrastructure have lagged in their downturn and we are still seeing the softness in those markets and in some cases continuing to soften. But I think those will start coming back stronger in the second half of the year as well.

So, kind of two kind of reacting factors seasonally stronger growth or stronger sales in computing and consumer in the second half of the year. But we also expect consumer or rather the communications and industrial to come back out of their slump as well. Little bit hard to predict the precise components of those and how they will offset, but I think that they will to some degree offset one another.

Operator

Your next question will come from the line of Ross Seymore with Deutsche Bank.

Ross Seymore - Deutsche Bank

Hi, guys just looking at where your backlog ended the quarter up significantly. It looks like it's about equal to what you guided to at your midpoint. Talk to us about how we are suppose to interpret that in returns requirement, please?

Jonathan Kennedy

Sure, Ross. It's Jonathan. That the backlog that we reported that's typically what we had been reporting in our Q, we put it in the press release this time around just to make it a little more timing. So, the backlog that we reported is six months backlog, so not all of that is applying to Q2.

In terms of turns, as we guided a 35% turns looking at that backlog, I suppose you could do the math to figure out how much of that backlog is actually applied to Q2. But that's the answer on the turns.

Dave Bell

Yeah, Ross one of the a little bit of color that I’d add it's interesting there is kind of a combination of extremes going on here too. When the PC business started rebounding in the second half of Q1, it did show a very short lead time orders, which was predictable, but what happened, when those customers replacing very short lead time orders they found out that many suppliers couldn’t respond to the very rapid and sharp upturn and that caused many of these PC makers have to delay their ramp up plans. Their response in turn to that was to start weighing in lots more backlog to make sure that they could get the material they need in the months and quarters to come.

So, it's been kind of a combination of some very short lead time orders in response to their surprised business. But as well weighing in, I think longer aging at backlog than they might ordinarily do just to make sure that the material is going to be ready, when they needed.

Ross Seymore - Deutsche Bank

Okay. And then that the follow-up question is on the gross margin side. Jonathan, correct me if I’m wrong, but I think you said you had about an 85 basis points hit for a one-time issue in the first quarter gross margin. Talk to us about, why if that's not going to recur in the second quarter, why the incremental hit to gross margin and even worse than it otherwise would have been in the first quarter versus the fourth.

Jonathan Kennedy

Sure. So let me talk to just quickly about the 85 basis points. So we have a particular customer, it's a small distributor in Asia that we have a collection issue with and we reserved $1 million to cover the entire collection. So that was something that happened in the first quarter that won't repeat in the second quarter. All the other receivables are typically, are doing as historical and very well.

In terms of -- so even if you look at that then everything else being equal you're right, you are 100 points plus the 85, going from Q1 to Q2. And the primary driver of that is really the mix that Dave was talking about in the last call -- on the last question. The rebound of industrial and communications products has not happened. So those are still fairly well depressed and not rebounding. So computing and consumer, however, are going to rebound and our expectations are much better in Q2 than the other two. So primarily mix driving it.

David Bell

Ross, let add this as well in the other confluent that Jonathan and I both mentioned was the reduction in absorption coming from our fab 54. Back about a year ago we decided that we would be in the process of closing down our fab 54 and basically merging that in with our fab 59. We were running fab 54 at very high volumes through the end of Q1 as we built inventory, but is now shut down.

So we are going basically from fab 54 being full to fab 54 having no output whatsoever. So that has a fairly significant impact on our absorption in gross margins for the next several quarters until we start resuming production of wafers.

Ross Seymour - Deutsche Bank

Thank you.

Operator

Your next question will come from the line of Romit Shah with Barclays Capital.

Romit Shah - Barclays Capital

David Bell

Sure, Romit.

Romit Shah - Barclays Capital

Just, I wanted to reconcile the GAAP EPS with a pro forma number we're trying to come up with, In terms of restructuring expenses, impairment, anything that might be one-time, is it roughly just $1 million?

Jonathan Kennedy

This is Jonathan. There's -- I'm not sure what -- everybody's got their own blend of what pro forma is these days, so I've put in -- there's a supplementary table on page 2 in the press release that has all the aftershock effects of most of the things that people are using to determine a non-GAAP-type EPS. But if I had to guess what you're using, I would say there's the $1.6 million for the restructuring expense, there's an in-process R&D credit of $200,000, there is the components of equity compensation, and there's amortization of intangibles. Those are the items that most people tend to take out, and that’s a…

Romit Shah - Barclays Capital

That's for Q2?

Jonathan Kennedy

Pardon?

Romit Shah - Barclays Capital

That was for Q2?

David Bell

That's for Q1.

Jonathan Kennedy

That’s for Q1. You’re right Romit, you had asked about 2Q.

Romit Shah - Barclays Capital

For Q2 the -- you guys did $0.02 in GAAP EPS in Q1 and I think you're guiding into $0.01. And I was trying to strip check out what was perhaps one-time.

Jonathan Kennedy

Oh, sure, that would just be the restructuring spends, that was about $1 million.

Romit Shah - Barclays Capital

Okay. Okay. And then Dave, I just want to ask you about industrial and communications, because we haven't seen any evidence at this point that those markets are bottoming, and I noticed that you're expecting industrial to grow, I think modestly in Q2 and your expectation was maybe within a quarter we could see more improvement from that market as well as communications. I was just hoping to get some more color on why you think that might be the case?

David Bell

Well, you're right. We do expect industrial to have some modest growth in Q2. I think we're working at a couple of factors combined Romit. Certainly, the industrial market was slower to downturn and will be to rebound. So I think we're still seeing the business being very soft there, but probably in the next quarter or so we would expect that to turnaround.

So it does begs the question if that's the case, why do we think that we're actually going to see some growth in industrial. And I think I would primarily just point to the fact that we are beginning to see the fruits of our investments we have been making for many years in industrial products.

One of the things that I kind of responded too in the prepared remarks here is that, I've heard from a number of people about, “Hey, you guys have been investing in industrial products for a while now. You keep saying that, that eventually will create a more balanced business.” Both of those things are true, but I wanted to underscore the fact that the things do move slowly and gradually in the industrial business.

We have been investing at much higher than our average percent of revenue in the industrial market in the last several years. I articulated some of the new product families that are coming out during last quarter and the quarter to come. Just to try and put some meat on the bones of the fact that, we really are coming out with a lot of products aimed at that market.

As you know those design wins in the industrial market they are not multi-million piece wins like you get in consumer and computing. They tend to be lower, 50 K and 100 K per year wins and you just layer those down layer-by-layer, quarter-after-quarter.

So it will be a while until I think that that will really provide a sizable balance to our business, but I think we are starting to see it. I think the fact that we are simply bucking the trend with industrial still being soft in Q2 and yet predicting our number go up is the beginning of the impact of those investments.

Romit Shah - Barclays Capital

Is it fair to say though that maybe over the intermediate term in 2009 and 2010, consumer is probably where you have the biggest opportunity and that might be the segment that helps you guys diversify a bit out of computing?

Dave Bell

I think it depends on your time horizon. Consumer clearly has the opportunity to grow faster than industrial and comps infrastructure. So you are probably right in the near-term, you probably see a bigger boost in consumer. If you kind of go further out to like a three-year horizon we were talking about at analyst day I think that the investments we've been making in industrial and comps infrastructure can have a huge impact out there.

Romit Shah - Barclays Capital

Yes, and you guys talked about this design win in gaming. Can you give us some more color or perhaps what you think the revenue opportunity might be this year?

Dave Bell

I really can't do that. There aren't too many players in handheld gaming, so if I give you too much more information you will probably figure out who it is.

Romit Shah - Barclays Capital

There's one really big one I think?

Dave Bell

It suffices to say that the volumes in that business are very large and we are excited clearly about this opportunity. Not just excited about the opportunity for revenue and how quickly that can ramp when it goes to production, but just the strategic relationship that we are building with that particular gaming customer and others in that market.

Operator

Your next question will come from the line of Shawn Webster with JPMorgan.

Shawn Webster - JPMorgan

Good afternoon. Thank you. What were your, I think your average lead times last quarter were about three weeks if I have the data correctly. What were they in Q1?

Jonathan Kennedy

Hi, Shawn Sean, it's Jonathan. Our lead times have not changed significantly from last quarter. We are still in the two to three-week generally speaking the backend cycle time.

Shawn Webster - JPMorgan

Okay and that's your order lead time, correct?

Jonathan Kennedy

That's right. Obviously it's dependent on which product it is. Some products we have in stock and finished goods, the lead time is very short. Most products we keep in dye form and the lead time is equal to the backend, which is anywhere from two and a half to four weeks.

Shawn Webster - JPMorgan

Do you think that all stay in the same kind of range throughout Q2?

Jonathan Kennedy

I think so. I think we've got capacity both the backend and in the front end in the foundries to support a much higher demand we have now. So that to get to a shorter situation that's constrained by manufacturing capacity would be, would require much high revenue than any of us can anticipate right now.

Dave Bell

The one thing that I would add to that though is that in the PC market, because there is such a sharp spike up in demand in the latter part of Q1, we and many other suppliers I believe had some instances where our buffer inventory was completely utilized. And that means on certain products lead times are longer, because you have to wait for the cycle time.

Shawn Webster - JPMorgan

Okay. And on the inventory, not issue but question, you've provided some more detail on your channel inventories and I believe it was mostly for the PC market. You said they were in the 90s, they came down to the mid 60s and you considered that normal. If the inventories at your distributors are normal why would they be building inventory now is my question?

Dave Bell

Yes. Again I think a lot of that was in reference to the PC market in particular. And overall just to remind you what we've done in the last couple of quarters is we dropped our inventories at international distributors in Q4 by $12 million and we dropped it by another $10 million in Q1.

So, the last two quarters we've taken $22 million out of international distributor inventories in an effort to bring that inventory down to more normal kind of levels. Now what's happening obviously is sales resume and consumption is going up especially in the PC industry during instances where the inventories is linear than it ought to be, especially when those customers expect their short lead time orders to be shipped.

So, we actually have to bring those inventories up in some cases modestly just to make sure we have got enough on hand to deal with these short lead time orders.

Shawn Webster - JPMorgan

I see, and as we go into the back half of the year, can you hazard a guess on whether things could be seasonal in terms of sequential growth rates or do you have any kind of specific products or design win catalysts that can help you relative to your end markets as we go through Q3 and Q4?

Jonathan Kennedy

Are you talking about overall, Shawn.

Shawn Webster - JPMorgan

Overall and then if you have any specific design areas that will be new if dollar opportunities for you that can help your overall revenues?

Jonathan Kennedy

Well, we do. Overall we do have quite a number of opportunities some of which I talked about here that I think can start having an impact in the second half. One example, for instance, is bucking the tide right now is our (inaudible) light sensors and proximity sensors.

The sales in those products continue to go up and we expect it to continue going up for the second half of the year. We've got lots of those different areas like that where we are bucking the tide because of market share growth.

As far as the seasonality question is concerned my crystal ball is no better than yours, but I would expect that there would be some seasonality perhaps similar to other years with consumer and computing products but kind of riding on top of the overall economic curve whether that would be up or down I don't know.

Shawn Webster - JPMorgan

Right. And as computing and consumer remain your stronger categories as we get into the back half should we expect similar magnitude of declines in your gross margins in those quarters?

Jonathan Kennedy

It's hard enough to predict what the gross margins are going to be for Q2 in this environment. So I am not going to hazard a guess going further out, but what I will say categorically, Shawn, is that I don't think that you and anybody else should lose a whole lot of sleep over [preservations] in the gross margins during this turbulent market.

We and everybody else has seen gross margins bounce around largely to the downside. In fact, I think we've been really benefiting because of our asset-like models that our gross margins are only as low as 55% here, where many of competitors have had a much bigger impact. But again, I don’t think you ought to get myopic on gross margins.

We're going to do everything we can to keep our gross margins going back up, do everything. Do everything we can to control OPEX. But and I don’t think that you really should get too focused on that, and really focus more on what you think the model will support out maybe a year from now, when we're looking at more stable and normal business conditions.

As Jonathan mentioned in his prepared remarks, we're still holding to our goal looking out a better part of three years ago like we talked about in our analyst day that we think we can attain something in the range of 58% GAAP gross margins and we got plans in place to achieve that. And I'm confident of that goal. If you try to nail me down as to exactly where the gross margins are going to be in Q3 or Q4. I don’t know.

Shawn Webster - JPMorgan

Okay. Fair enough. Last question, what was your headcount at the end of the quarter?

Jonathan Kennedy

We were just under 1500.

Operator

(Operator Instructions)

Your next question will come from the line of Tore Svanberg with Thomas Weisel Partners.

Tore Svanberg - Thomas Weisel Partners

Yes. Thank you. My first question, if you look at your guidance of 4% to 12% growth and I know this is not perfect sign, but how much of that do you think is related to through end demand versus some of this inventory replenishment you might be seeing as well?

Dave Bell

Well, that is certainly a very important question. I really wish I knew the answer to that. I think that in the PC market, Tore, there is a portion of it that is inventory replenishment, because the customers rightly so are worried about getting product with their steep increasing consumption. So, there is a piece of it. Honestly I don't know, how much of it is inventory replenishment and how much is consumption.

In the other areas, I don't think there is a lot of inventory replenishment going on. There is probably a little bit, but my guess is, there's not a whole lot. But certainly that's a $64,000 question is, when we get these estimates and look forward, how much of this is actually going to flow through the consumers. And how much of this is actually going into the supply chain?

Tore Svanberg - Thomas Weisel Partners

Great and my final question is on gross margin. So, you say that utilization will remain flat to down between now at the end of the year. If that's the case, with the only variable in gross margin for the second half to be mix?

Dave Bell

Well, you referred to our fab comments in Palm Bay, where we said we're going to be under utilized there.

Tore Svanberg - Thomas Weisel Partners

Yeah.

Dave Bell

In Palm Bay, as I mentioned, we are doing a reduction in force right now is partly as a result of a closing our Fab 54, as we work through the back half of the integration process there. So, we're going to get less absorption there from that, but also we're going to help our operating costs a little bit with the reduction in force that we are implementing now.

So, our hope is that utilization in our Palm Bay wafer fabs does go up somewhat in the second half of the year, if revenues continue to go up as well. So, there will hopefully be some benefit there, but again we are not making any projections about precisely, what those revenues will be, and mix could have an impact on it. But as I mentioned earlier, I think we've got kind of a couple of counteracting effects going on. You’ve got seasonality in PCs and consumer, but you’ve also got later rebound in industrial and comms infrastructure that can possibly offset some of that.

So, those are some of the factors. But again in this kind of turbulent environment with very little visibility is difficult enough for us to make an accurate projection on gross margin for Q2 let alone the second half of the year.

Tore Svanberg - Thomas Weisel Partners

Very fine, thank you very much.

Dave Bell

You're welcome.

Operator

Your next question will come from the line of Steve Smigie with Raymond James.

Dave Bell

Steve, you are there?

Steve Smigie - Raymond James

Yes, I’m sorry. Just to mean can you talk a little bit more detail about the Rad-Hard business and what your split is there now satellite versus other and if you can define that at this point and versus military. And I've been hearing some weaker data points out there in the military side just curious, if that's impacting you or given the way your lead times work, whether it's not really a significant impact?

Dave Bell

Well, we did see some weakness in military during the last quarter. So, that certainly was one area that did go down a little bit. I'm not just sure, it was interesting actually seeing that military held quite strong through 2008. So, kind of the right hand of the government didn't know the left hand was doing, maybe not a big surprise. But now, I think they finally got connected with each other and we have seen military sales drop a fair amount during Q1.

Steve Smigie - Raymond James

Okay.

Dave Bell

Rad-Hard business is concerned, and Steve, that's a business that kind of goes up and down. It's a fairly lumpy business there as well, so.

Steve Smigie - Raymond James

Okay. And then just I was hoping you could do a little bit more discussion on acquisitions, how well the integration is going, once you've done recently, you talked a little bit about them, but also any new potential acquisitions going?

Dave Bell

Sure, well, I guess it's really not surprising that we are going to tell you that we think things are going really well, but quite honestly I'm very pleased with the way the integration of all three of those recent acquisitions went.

The integration process kind of from a logistic standpoint has gone very smoothy. I'm proud of the process that we've fine tuned here at Intersil and it works very well. But even more important thing I suppose is that we are very pleased with the kind of response we are hearing from our sales force.

As I mentioned in my prepared remarks we have reviewed some of those programs last week. And we saw a growing number of design opportunities and design wins on all three of those acquisitions, D2Audio, Zilker Labs and Kenet. So, they are certainly exploiting the benefits of our much larger sales force, our relationships at big strategic accounts. So, it's doing just as well if not better than what we had anticipated when we made those acquisitions.

As far as acquisitions going forward it's certainly in our strategic plans to continue doing that, to continue looking both at private acquisition opportunities. The IPO market is still dead and VCs are holding on to their funds, so they're still remains a lot of opportunities out there in the private area and we continue to evaluate those.

As far as public acquisitions, as we mentioned at the Analyst Day we are continuing to look at opportunities there, but you guys should feel comfortable that we are going to be very, very cautious when it comes to public acquisitions and make sure that we are confident that those can clearly be accretive within a year's timeframe with synergies.

Steve Smigie - Raymond James

Thank you.

Operator

Ladies and gentlemen, again, due to the interest of time please ask one question. Your next question will come from the line of Mahesh Sanganeria from Royal Bank of Canada.

Mahesh Sanganeria - Royal Bank of Canada

Hi, guys. Could you give us a rough estimate as to, in your computer segment, what is the rough mix of shipping into desktop versus notebooks?

Dave Bell

Yeah, Jonathan you want to take stab at that for Q1?

Jonathan Kennedy

Yeah. Sure, Mahesh, how you are doing? I guess later in 2008 we crossed an inflexion point where the notebook business has become substantially larger than the desktop business. And today the desktop business is about a third or so of our computing business and notebook is the remaining portion. And that jumps up and down quarter-to-quarter but generally speaking that's the ratio we are at right now.

Mahesh Sanganeria - Royal Bank of Canada

If I can squeeze in a follow-up, as you seed your share in desktops to lower margin players, would you expect the blended margins in the computer segment to improve as the time goes on?

Dave Bell

Well, unfortunately I don't think we are going to see a big change in margin there and the reason being is that in years past the gross margins in the notebook business were larger. They were superior to those in desktop. And today the margins are roughly equivalent. So at a top level whether it's dollars from the desktop market or dollars from the notebook market it doesn't have a big impact on our margin.

Mahesh Sanganeria - Royal Bank of Canada

Okay. Thank you, guys.

Dave Bell

You're welcome.

Operator

Your next question will come from the line of Terence Whalen with Citi.

Terence Whalen - Citi

Thanks for fitting me in. First of all congratulations, Jonathan on the appointment. This one is actually for you. It's in regard to how we should be modeling OpEx going forward. I believe you said OpEx would be about $3 million up in 2Q. My question is from there on now, how should we be thinking about OpEx? Will it be growing at about half the rate of sales from thereon now?

Jonathan Kennedy

Well, I think what I said, well I know what I said about the OpEx, R&D would be up about $3 million SG&A up $3.5 million including equity compensation. So that's about a $6.50 million increase quarter-to-quarter.

In terms of how you think about that, it's probably best to think of the things that we've done in OpEx that are more short-term cost controls, as a way to sort of model out what OpEx is going to do. So if you look at [demands] at vacation days I said that saved us about $3 million a quarter, almost all of that is in OpEx, a little bit of that cost of sales moves to OpEx. The lack of employee incentive plans is approximately $3.5 million to $4 million a quarter when those layer back in. And then the effects of pay raises, we've done no pay raises this year and uncertain when and if we will do those again, but if you're going to model out further in the future, you are going to layer this back in as well. So that's kind of how I would think about ongoing OpEx going forward.

Terence Whalen - Citi

Great. And then, the follow up would be regarding the prior question. What would be the mix of netbooks, they’re not notebooks, but netbooks out of computing exiting the year, you’d think in the fourth quarter? That's it. Thank you.

Dave Bell

Yes. It's a good question. Unfortunately I don't know the exact answer to that. What I can say is two things, is that today netbooks as a percentage of our overall computing revenue is still fairly small. However, the netbooks numbers are growing at a much more rapid rate than notebooks, and of course desktops are really going down. So I think you'll see it become much more significant as we go on, but I don’t have exact percentages. But today, it's not a very large percentage. End of the year it will certainly be larger but I don't know the exact percentages for you.

Terence Whalen - Citi

Thanks, Dave.

Operator

Your next question will come from the line of Doug Freedman with Broadpoint.

Dave Bell

Are you there Doug?

Doug Freedman - Broadpoint

Yes. Can you hear me now? Sorry about that.

Dave Bell

Pretty well.

Doug Freedman - Broadpoint

Thanks for getting me in, and Jonathan congratulations as well on the appointment. Without beating a dead horse here, gross margin target of 58%, you guys happen to have a corresponding revenue of which you think you can achieve that, and if not a revenue number in absolute. Is there's sort of a percent of sales that computer needs to get down to for that to occur?

Dave Bell

What I'll tell you Doug is, going to reiterate what we've said at our analyst day. The goal was that exiting 20/11 that we would be in excess of a $1billion run rate, so $250 million a quarter. That we would be in a range of 58% GAAP gross margins, and that our operating margins would be in excess of 26%.

So, and also as far as a market split roughly even market split is our goal to get computing, which last year was about 31% of sales, get that down to 25% of sales, getting industrial up to close to 25% infrastructure and so forth. So you get a rough balance in there.

Now there's no magic to the exact percentages, but certainly reduce our reliance on computing and in particular PC's. And by the way, of that 25% computing that is kind of a rough goal looking out three years we would expect a sizable percentage of that to be server business as well, whereas that's a fairly small percentage today.

Doug Freedman - Broadpoint

Then switching gears sort of similar type of question, but in dealing with OpEx we now have sort of the numbers of the cost saving items. How do we think about at what trigger you are going to sort of unwind those cost saving items? Is there sort of a minimum revenue level that you are sort of looking to achieve before you start getting rid of the shutdowns or is it a point in time. Can you do it for three or four quarters and at which point it just becomes too taxing on the operations of the company?

Dave Bell

It's really good question and frankly one that we agonize over Doug. So I don't have any magic answer for you. There is not a set formula, but we tightened our belt pretty tight when we went into Q1 here with the 10 days forced vacation, no increases, no bonuses, restricted travel so forth.

Those things have helped us to control OpEx, but I don't think that there are things that we can expect to do as things improve. Now, at what point we decide to relax some of those is going to be more or less a real time decision and it depends not only on how we feel about the current quarter that we are going into, but how we feel about the long-range future as well.

So that's what we get paid to agonize over and we do and we will continue to agonize over those things. But like Jonathan said, if sales do increase in the second half of the year, we certainly hope that they will, we will have to start layering in back some of those things, but we're going to be very thoughtful about how we do that.

Doug Freedman - Broadpoint

Great. Thank you and I don't want to upset the operator, so I'll make that my last question.

Dave Bell

Thanks, Doug.

Operator

Your next question will come from the line (inaudible).

Unidentified Analyst

It's [Manish Goel]. I want to first clarify your gross margin guidance. Are you including the one time AR write-off in that or that is your gross margin guidance of 100 basis point decline, is that excluding that write-off?

Jonathan Kennedy

It's quarter-to-quarter. So would include that right off.

Unidentified Analyst

Secondly for the operating expenses beyond 2Q. Can you layout a couple of scenarios. Let's just say that if your revenues do see quite a bit of acceleration in second half. For example, your consumer revenues are substantially below what you achieved prior to December quarter of '08 in $50 million to $60 million range. And let's just say if you were to achieve towards the low end of that range in second half of the year. What kind of an impact that could have on your operating expenses in second half of this year?

Jonathan Kennedy

I think Dave gave a pretty good answer to that question before, but if you think of it this way Manish, when we decide for employs to take vacations and decide on bonus structure and things like that. It's generally with a forecast in mind and not with an actual.

So what's likely to happen we look at the upcoming quarter and decide is profitability going to be acceptable given our forecast and then we run through the quarter. We make the decisions, we make the announcements and that the savings is sort of baked in throughout the quarter.

I guess that the point of my answer here is that you'll have, we will probably be talking about this next quarter or the quarter after when we start to reduce some of these restrictions and I think we will have a better forecast at that time. It's hard to say today at $150 million or $200 million we would relax ask to relax why. I think we have to look at it with profitability what else was going on and then we also look very hard to cash flow, so it will make some difference there as well.

Dave Bell

[Manish] let me add just a little bit to that as well. There is an impact on productivity as well, obviously when we do a 10 day forced vacation for all employees that we did in Q1 that does have some impact on productivity, we try to minimize it. So we try and weigh the OpEx savings against hits on productivity as well. But as well I think that we are going to try and make sure that there is leverage as we go forward.

As the revenues continue up, you are not going to see this management team immediately take and spend all of the operating profit gains or gross margin gains. Gross margin gains on increasing our expenses. I think you are going to find us just like we reacted very quickly in Q4 to cut our expenses, we were very thoughtful there and cut deep, I think you are going to see us be very cautious and thoughtful as we add those things back end.

Unidentified Analyst

Just one revenue question, again going back to the consumer segment, prior to 4Q '08 for several quarters in a row you did revenues in the range of $50 million to $60 million. Is there any reason why you will not get there sometime during second half of this year especially after two or three quarters of inventory burn?

Do you think there was so much excess inventory that it may require more than three quarters to burn or there is any sort of loss of design that will sort of prevent you from getting to that $50 million to $60 million per quarter type of revenue number?

Dave Bell

Well, that would be a large growth from where we are today. I’m not going to make any specific projections of course about it, but I think that there is several factors going on. One of them certainly is the inventory burn. I’m hoping that most of the inventory burn occurs during the first half of the year.

We have also got the overall macroeconomic effects that are at play and they clearly having a big impact on consumer products today. How much better that is going to be in the second half of the year I don't know. But getting all the way back up to $50 million level is a lot of growth that would be great, but we are not willing to commit to that obviously.

Unidentified Analyst

Thank you.

Operator

Your next question will come from the line of Joanne Feeney with FTN Equity.

Joanne Feeney - FTN Equity

Yeah, thanks. Congrats on a nice quarter in a tough environment.

Jonathan Kennedy

Thanks Joanne.

Joanne Feeney - FTN Equity

I have a question about the server strategy. You've talked about trying to improve your presence there. Could you perhaps elaborate for us how you plan to do that? Is there a line of new products coming out that you can hit at or some other type of strategy that you plan to pursue?

Dave Bell

Well, there is a number of things there. We are expanding our general purpose product portfolio. Things that are often times called point of load regulators. We've been putting a lot of money into that and the infrastructure business, whether it would be networking infrastructure, communications infrastructure or servers all use a lot of point-of-load regulators. So, that's one example.

Another example would be our module family, which we announced late last year. We're putting a lot of effort there. We're going to be officially releasing our first model product coming up here in the next month or two. That's going to be another product family. We're going to expand a lot and I think that the server market as well as other infrastructure type of applications were good opportunities for that.

Joanne Feeney - FTN Equity

Does this helped by your Zilker acquisition?

Dave Bell

Absolutely, Zilker's primary market is going to be an infrastructure-kind of applications. Now again, we tend to launch servers in the computing business because they are computers, but they're very similar in their market needs and product needs to what you're trying in networking and communication infrastructure equipment. So, I should have mentioned that. Absolutely, that's where Zilker is targeted, and we're getting a lot of traction with all of those markets with the Zilker products.

Joanne Feeney - FTN Equity

Great, thank you.

Dave Bell

You're welcome.

Operator

(Operator Instructions)

Your next question will come from the line of Blayne Curtis with Jefferies.

Blayne Curtis - Jefferies

Thanks for squeezing me in guys. Just a follow up on the gross margin, you call out a mix shift to PC is the largest factor driving the decline in Q2. Do you also expect to see a mix shift to the low end notebook, desktop as you saw in Q1, and then I guess as it progresses through the year notebooks become a much more material part of revenue, how does that later in?

Dave Bell

Well, you're right. Notebooks are going to be going to a percentage of our sales. The total dollar content in a netbook is smaller than it is for notebook computer, just a simpler power system. So, that’s not a surprise. On the other hand from a margin perspective there's not a whole lot of difference. So, whether it's a notebook or netbook really doesn't have a significant impact on our margin profile.

Blayne Curtis - Jefferies

Okay. So, the impact in Q1 was mainly just to desktops, that was you referring to?

Dave Bell

Well, and one of the other comments I made is, at this point I don’t think it's a whole lot of difference on the whole between desktops and notebooks as well. So, it's all kind of in the same range from a margin perspective. We did see actually desktops pulls back, come back a little bit stronger in Q1. But our overall mix we think is, if you look at our top level, it's going to be clearly more notebooks and netbooks than it is desktop from a revenue standpoint.

Blayne Curtis - Jefferies

Then just on your consumer business that is down quite substantially year-over-year, you talked about growth drivers being gaming and proximity sensors is power management for handsets still, you didn't mention that, is that still a growth driver for that segment?

Dave Bell

Yes, absolutely it is. We continue to sell battery chargers. We've got DC to DC converters into that market. In fact, recently began shipping in fairly high volumes new DC to DC converter and handset application. Our PMIC products long and coming admittedly, while we think those were actually going to start contributing during this year as well.

So, yes, there are a lot of power management opportunities in consumer. You also look at things like LCD TVs. We put that in the consumer category too. So, a lot of products as you probably know in the display area. We've got gamma buffers. We have backlight products. We've got (inaudible) on and on. So, that's another area that I’d point to.

Blayne Curtis - Jefferies

Then real quickly Jonathan, the number of shutdown days in Q1 and then what you expect in Q2?

Jonathan Kennedy

Sure, we had ten days vacation in Q1 and another five days in Q2.

Blayne Curtis - Jefferies

Okay. Thanks, guys.

Dave Bell

You're welcome.

Operator

Your final question will come from the line of Patrick Wang with Wedbush Morgan Securities.

Patrick Wang - Wedbush Morgan Securities

Great, thanks so much. Just two quick ones here, can you give us the mix between general purpose and application specific revenues last quarter?

Jonathan Kennedy

Sure, Patrick. It's Jonathan. General purpose was just north of 40%.

Patrick Wang - Wedbush Morgan Securities

Okay. And then just on that note, I know you've been talking about improvement in industrial and services and such, but what are some of the milestones maybe a couple of milestones we should look for in terms of having you guys really start to expanding this side of your product portfolio.

Dave Bell

Well, I guess a few things. As you can look at the actual product introductions, I mentioned some of those in the prepared remarks about new amplifier families, new Voltage References, Real Time Clocks, and so forth. So that's one thing you can look at. When it comes to specific design wins, it's going to be much more difficult, because obviously in the gaming area or handset area we can talk about single design wins that represent millions of units.

It's not the nature of the industrial market. So it's going to be harder for to us to kind of ramble off design wins that are going to impress you in the industrial market, it's just not the nature of it. It's just a horizontal business with business one layer-upon-layer. I think one of the other thing though that we talked about earlier in a previous question, was why is the industrial market expected to go up moderately in Q2 when that market overall really is still seem to be softening and what I would point to is, we are getting traction.

What we are doing although I can't point out specific impressive design wins in industrial, we were starting to buck the trends with our industrial business because of those product introductions and because of a multitude of small and medium-size design wins.

Patrick Wang - Wedbush Morgan Securities

Okay. Great. And if I could just squeeze in one quick one. Can you talk about how the netbook margins compare with the notebook margins?

Dave Bell

Pretty much the same. I think, I mentioned that earlier that, notebooks used to be higher than desktop PCs. Now the notebooks are down in the same range as desktop PCs and not a whole lot of difference between notebook and netbooks either.

Dollar content there is a fairly sizeable difference, but from a margin perspective they are all in kind of the same ballpark. I wish that ballpark was a lot higher, but it's a very competitive market today.

Patrick Wang - Wedbush Morgan Securities

Okay. Thanks so much and thanks for squeezing me in, guys.

Dave Bell

You're welcome.

Operator

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

David Bell

Great. Thank you for joining us today for Intersil's first quarter 2009 earnings conference call. I'd like to reiterate that this management team is committed to executing at a long-term strategy while maintaining a careful balance with our expenses.

Despite the challenging environment Intersil's leadership is absolutely convinced that we are better positioned today than we were a year ago. A steady stream of new products, the expansion of our markets, and the key additions to our team, position Intersil for a rapid return to growth.

We wish you all a very good evening and we look forward to seeing you at one of our scheduled investment conferences later this quarter. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.

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Source: Intersil Corporation Q1 2009 Earnings Call Transcript
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