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Executives

Mercedes Johnson - Interim Chief Financial Officer, Independent Director, Member of Audit Committee and Member of Compensation Committee

Necip Sayiner - Chief Executive Officer, President and Director

Analysts

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Ross Seymore - Deutsche Bank AG, Research Division

Craig A. Ellis - B. Riley Caris, Research Division

Sameer Kalucha - JP Morgan Chase & Co, Research Division

Mark Delaney - Goldman Sachs Group Inc., Research Division

Patrick Wang - Evercore Partners Inc., Research Division

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

Harsh N. Kumar - Stephens Inc., Research Division

Steven Eliscu - UBS Investment Bank, Research Division

Intersil (ISIL) Q1 2013 Earnings Call April 24, 2013 4:40 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2013 Intersil Corporation Earnings Conference Call. My name is Regina, and I'll be your conference operator for today. [Operator Instructions] As a reminder, today's event is being recorded for replay purposes. I would now like to turn the conference over to Intersil's management team. Please go ahead.

Unknown Executive

Thanks, Regina. Good afternoon, and thank you for joining us today for Intersil's First Quarter Fiscal Year 2013 Earnings Conference Call. With me today is Necip Sayiner, our President and Chief Executive Officer; and Mercedes Johnson, acting Chief Financial Officer, who will deliver remarks on our first quarter financial performance and provide a summary of our second quarter 2013 business outlook. After our prepared comments, we will open the line up for questions.

We completed our first quarter on March 29, 2013. An earnings press release was issued today at 1:05 p.m. Pacific time. The press release is available on the Investor Relations section of our website at ir.intersil.com. This call is also being webcast live over the Internet, and a replay will be available for the next 2 weeks.

Please note that some comments made during this conference call may contain forward-looking statements. 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 the Generally Accepted Accounting Principles. We sometimes use these measures because we believe they provide useful information about the performance of our business and should be considered by investors in conjunction with GAAP measures reported. I will now turn the call over to Mercedes Johnson.

Mercedes Johnson

Thank you, Debbie. Good afternoon, everyone, and thank you for joining us today. Before we begin reviewing the financial release, I wanted to introduce myself. I have been a member of Intersil's Board of Directors and its Audit Committee since 2005. Starting 3 weeks ago, I have assumed temporary responsibility for the CFO role of the company and will remain in that capacity until a permanent replacement is in place. We have already launched a search to hire this person and anticipate to successfully conclude it in a few months.

Let's move now to the topic of the call. My agenda for this session will cover highlights of our quarterly results, and then I'll have a few comments on the status of our balance sheet and asset management ratios at the end of March.

For Q1, our revenues reached $131.7 million, a 4% sequential decline as it is typical in our industry due to seasonality. Overall, sales met the low end of our expectations as we experienced headwinds in the consumer end market, partially offset by relative strength in computing. The industrial and infrastructure segments continue to account for a significant portion of our revenues, reflecting our continued emphasis in strengthening our product offerings in this area.

Gross margin as a percentage of sales was roughly in line with our anticipated performance at 53.8% on a GAAP basis and 54.1% excluding stock compensation costs. Revenue mix remained relatively stable versus the previous quarter, thus, it did not generate significant fluctuation in this ratio. Ongoing operating expenses include the impact of our February downsizing actions, and therefore, were below our original guidance for Q1. When compared to the previous quarter, however, the decline is less noticeable as Q4 typically runs lower than normal due to temporary savings from holidays and shutdowns.

R&D expenses were $37 million during Q1 and excluding stock compensation, they ran at $35 million, essentially flat quarter-on-quarter in both cases. In the surface, SG&A costs of $30.4 million were higher than expectation, but they include about $500,000 of deferred compensation costs, which are being offset by gains on investment in the other income category of the P&L as it is dictated by accounting rules. In addition, higher legal and other statutory required costs mostly offset the savings achieved from the restructuring actions. Excluding stock compensation, SG&A reached $27.7 million, down from Q4.

Restructuring expenses approximated what we announced last February. Of the total $16.8 million we recorded in Q1, about $13 million were related to severance costs, and the remaining $3.8 million were asset write-offs associated with discontinued programs, as well as rent expenses for vacated space. We have not yet fully exited some of our targeted facilities, so additional restructuring expenses tied to these closures are planned for Q2. The forecasted savings resulting from these difficult activities amount to about $7 million a quarter before we add back variable compensation and annual merit increases. Interest expenses declined sequentially as our long-term debt was fully repaid last December, and no borrowings against our credit line were executed during Q1.

Let me elaborate a bit now on the tax benefit we recorded for the quarter. In January, the R&D tax credit was reinstated, retroactive to 2012. That benefit for us amounted to $5.7 million. In addition, and as you probably know, GAAP requires that the company estimate the full year tax provision and apply this annual estimate tax rate to the quarterly results, irrespective of fluctuations across quarters between profits and losses. Following that guidance, we have projected an annual effective tax rate of approximately 90% for 2013, excluding discrete items. This rate estimate is based on projected losses in low-tax jurisdictions and forecasted income in high-tax jurisdictions. It is important to note that the overall tax benefit recorded during Q1 will be reversed in future quarters as income at sufficient levels is achieved throughout the year. The tax benefit of $22.8 million recorded in Q1 slung the bottom line to a GAAP net income of $2.5 million or $0.02 per diluted share.

Let's review now the results on a non-GAAP basis. We present information in this fashion because we believe it is helpful to investors in better understanding the results of our ongoing operation. To arrive at non-GAAP measurement for Q1, we excluded the following significant items: equity compensation expenses of $5.4 million; restructuring costs of $16.8 million; amortization of intangibles of $6.5 million; and the related impact on income taxes of these elements, as well as certain discrete tax items, which amounted to a benefit of $24 million. Non-GAAP operating income was $9.1 million or 6.9% of revenue, while non-GAAP net income reached $7.2 million or $0.06 per diluted share. The reconciliation between GAAP and non-GAAP measures can be found on Pages 8 and 9 of today's press release.

Next, I have a few comments on our balance sheet and some asset management metrics. Cash and short-term investments of just over $161 million remained at stable levels from Q4. Positive cash flow from operations of $16 million and proceeds from the Employee Stock Purchase Plan were offset by dividend payment of $15 million and capital expenditures of $5 million. There were approximately $5 million of severance payments during Q1, with similar levels of these obligations to be settled during Q2 and the rest in Q3. Accounts receivable days of sales outstanding at 37 days, as well as inventory days on hand at 110 days, improved slightly when compared to the prior quarter. Inventories are down to $72.6 million at the end of March, mostly in finished goods. Other accrued items increased slightly, reflecting the unpaid portion of our restructuring activity, and there were no stock repurchases during the first quarter.

With that, I now turn the call over to Necip who will comment on priorities for the company in the coming months and provide guidance for our June quarter.

Necip Sayiner

Thank you, Mercedes, and good afternoon, everyone. I've had the pleasure to work with many of you already and look forward to getting to know those of you I haven't met yet. I'd like to start by telling you about my background because I see a number of parallels between my experience and the challenges Intersil faces today.

I was, most recently, the President and CEO of Silicon Labs where I led a major transformation of the business that changed the profile of the company from non-sustainable businesses to defensible and long-term growth areas. Prior to Silicon Labs, I held various leadership positions at Agere Systems, where I contributed to developing a number of profitable growth businesses in very competitive market.

Looking ahead, I'm energized by the opportunity to position Intersil on a path to sustainable success. And while I've only been with the company for just a few weeks, there are a number of clear strategic imperatives that I'd like to articulate. My near-term priorities are centered on a thorough assessment of all of our product lines. It is clear that we have some work to do in order to put the business on a solid foundation strategically. I began to conduct a critical review of our current investments and roadmaps, as well as to develop an in-depth appreciation of our core competencies. This is an important first step as we chart that sustainable path to success I mentioned.

Through the reductions implemented recently, we have achieved an acceptable level of expenses relative to our current level of revenues. We must now achieve strategic alignment of the resources available to the business. We will take steps to reposition the portfolio, to emphasize investments where we can sustain our differentiation for the long haul. As we focus resources and management attention on achieving organic growth, it will be imperative that we reinvigorate our innovation engine. Accordingly, our product roadmaps will evolve to higher-value and higher-integration offerings that are well supported by our core competencies. I believe we possess the core technologies and capabilities in order to execute on that premise.

One of the guiding principles for investing our scarce resources will be the quality of the revenue we can generate, including the long-term growth potential and contribution margin. This focus and a rigorous investment discipline, will allow us to meaningfully enhance the return on our investment. I consider this to be one of my primary mandates from the Intersil Board of Directors. We do recognize that the results of our investment decisions will take time to materialize, and we offer investors a renewed sense of purpose and discipline, and importantly, a reliable dividend during this period of transformation.

Through the actions we have taken recently, our cash flow has improved to sustain our dividend. We can now focus on achieving growth through new product introductions rather than deploying our cash on acquisition. While there are several near-term challenges facing the business, I also feel that the company possesses many of the ingredients you'd want in a successful enterprise. There is differentiated IT and technical competency in power management and select analog mixed-signal technologies. We have a highly capable and dedicated workforce. It is the proper stewardship of these assets that is required to achieve sustainable commercial success in our targeted market.

Now let me give you an overview of our results and outlook for the different end markets we compete in. I should remind everyone that our second quarter will be a 14-week period, so when I provide you with a forecast in each end market, I will do so on both absolute and run-rate basis adjusted for the extra week.

Personal computing is an area where our business faces the most severe headwind. Even though our revenue from the end market has increased by 8% sequentially in Q1, we anticipate that it will decline, both on an absolute and run-rate basis in Q2. This is largely due to secular trends in the traditional PC industry currently, but will be exacerbated by further declines starting in second half of 2013 and through 2014, stemming from share losses that took place in 2012 on next-generation Intel platform.

Our revenue from industrial and infrastructure markets declined by 1% in Q1. While there were a number of puts and takes sequentially, one area that is worth mentioning is the video surveillance market where ASP erosions continue to outpace unit growth. While we don't see that dynamic changing near term, we anticipate sequential growth in other product areas serving broad-based markets to more than offset that headwind. In Q2, we expect our revenue from industrial and infrastructure to be up on an absolute basis and flat to slightly up on a relative basis.

The consumer end market declined by 23% sequentially in Q1, which I consider to be measurably weaker than seasonal. This variance stemmed from a weaker than anticipated demand from a large customer on one of their platforms, as well as revenue from our display products continuing to attrite. We anticipate Q2 will be up sequentially both on absolute and run-rate basis.

In total, we're expecting our revenues to be in the range of $135 million to $142 million in the second quarter. Our gross margin will be flat to up 50 basis points. Our R&D investments on a non-GAAP basis, excluding the stock compensation and amortization of intangibles, will be down by $1 million or 3% sequentially to approximately $34 million. Our SG&A expenses will be down by $1 million or 4% sequentially to approximately $26 million. We therefore expect our non-GAAP earnings per share to be $0.07 to $0.10. GAAP EPS, including stock compensation, amortization of intangibles and a residual restructuring cost, will be a loss of $0.02 to $0.03.

With that, I would now like to open the call to questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question today comes from the line of Tore Svanberg with Stifel, Nicolaus.

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

First question. Necip, I know you've only been there a few weeks, but are there certain product lines at this point that are still strategic to Intersil? Or will there potentially be some changes?

Necip Sayiner

Well, we will certainly make changes in the way we deploy our investment dollars, Tore, and I am open to parting with some of our product lines, if necessary. But even in the absence of such moves, I do see significant opportunity to redeploy our investments and focus them on areas where we can maintain and sustain some long-term differentiation.

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Very good. And you seem pretty confident that the whole question on dividend is now behind you. I mean you're generating enough cash flow to cover it. So as we look at the business going forward, and especially with the PC business continuing to decline second half, can you comment a little bit on how you see cash flow to continue to cover that dividend?

Necip Sayiner

Well, I am not going to be able to give a revenue guidance for the second half, but I can tell you some of the trends we'll see in various end markets. As I alluded to in my prepared remarks, we're going to see some headwinds in our computing business. On the other hand, we will see seasonally up consumer business, and there are some bright spots for us in that business due to some design wins kicking in, in the second half. So I think that if you focused on our non-GAAP operating income, Q1 will likely define the bottom in terms of profitability due to the actions that were taken back in February to rightsize the expenses to current revenue level.

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Very good. Just one last question. The consumer business was down quite a bit in Q1. You're expecting it to grow in Q2. I get the decline in Q1 was associated with 1 large customer. I mean, what's going on in Q2? My sense is that, that large customer still is going through a product transition, so is there some new customers you're penetrating there, some share gains? Help me explain why you expect growth in Q2 from consumer.

Necip Sayiner

Yes, we do see -- we do anticipate a measurable growth sequentially in Q2. Some of the temporary weakness in demand we've seen from a customer has abated. But importantly, we have some new design wins kicking in both on power management side with a significant customer, as well as some wins in the light sensor arena with some China smartphone customer.

Operator

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

Ross Seymore - Deutsche Bank AG, Research Division

Just a question strategically. As you're going through this transition period and looking at the current product lines, how do you see the growth of the company overall? Do you think it has to shrink before it starts to grow? And kind of what's the timetable that you have before either the internal assets can be refocused to areas you want to focus on or some of the new product initiatives that have been in place before start to kick in?

Necip Sayiner

That's a very good question. This has been my primary job in the last 5, 6 weeks I've been here, had a series of deep dives with the product lines, almost through the first phase of those interactions, so I am developing opinions around where our core competencies lie. The strategy we are going to put in place here shortly is a strategy that we will stick to for many, many years. So there's, on one hand, a sense of urgency to get to that point so we can deploy our resources appropriately. On the other hand, I do not want us to make decisions in haste without considering all the different elements. So over the next weeks and months, we will hone in as to where we are going as a company, and I look forward to providing you updates in future calls.

Ross Seymore - Deutsche Bank AG, Research Division

Okay. And I guess, as my follow-up question, switching over to the OpEx side of things. I think everybody, especially for covering the dividend purposes, is pleased by some of the trimming, as difficult as it may have been that you announced back in February before you joined. But even after that, if I look at your OpEx as a percentage of sales, it's still in the 40% to 45% of sales range. That's at least 10 points higher than the peer group. Is the general idea that you're going to grow into that? Or do you see some opportunities to actually trim further as part of the strategic review of the company, exiting product lines, et cetera?

Necip Sayiner

As I mentioned, the level of operating income, while not satisfactory, is acceptable at this point. And if you'll look at our non-GAAP operating expenses of $60 million, it's comparable to other companies in our industry with similar size and scope. I think, at this juncture, what we are really focusing on is the best way to deploy that investment. That's where my focus is. I think that will be the key to success for the company, appropriate deployment of those. So in the near term, we are looking at various things internally, how to move resources around and choose some of the focus areas. But I do think that currently, the level of profitability after the changes made in February are acceptable.

Ross Seymore - Deutsche Bank AG, Research Division

Good. One quick last housekeeping one. Mercedes, you gave a great description of all the tax puts and takes in the first quarter. Could we just boil it down to from a pro forma basis going forward, what sort of tax rate should we expect?

Mercedes Johnson

As I mentioned during my prepared remarks, the tax rate that we expect on a GAAP basis is 90%, and that, of course, excludes discrete items, which can add a little bit more to the tax provision on given quarters. That is, of course, GAAP. If you are trying to use non-GAAP measures, then the number obviously gets smaller than 90% in terms of the rate. And it's difficult to predict what it might be, but you can use what historically the company has suggested in terms of non-GAAP tax rate in the mid-20s.

Operator

Your next question is from the line of Craig Ellis with B. Riley & Company.

Craig A. Ellis - B. Riley Caris, Research Division

Necip, you mentioned in your prepared remarks, high-value and high-quality revenues. So I'm wondering, as you're looking at the business, if there's a margin level that you think is reasonable as you try to drive Intersil forward. Not a precise number, but more a broad range. Whether that's mid-50s, high 50s, low 60s, what do you think is the right margin level to get a good return on the assets that Intersil has?

Necip Sayiner

This is certainty a matter of internal debate at the moment, Craig. I'm not prepared to yet define a financial model that defines this gross margin target. But what I am insisting on is that we deploy our scarce resources from this point on, on product areas that we can achieve some sustainable success. And with sustainable success comes, I think, an attractive gross margin profile. We always need to balance our investments across the company between shorter-term products, short product cycle and long product cycle areas to balance the growth and the margin. But we are going to make sure that from this point on, we will be very disciplined in how we deploy our scarce resources.

Craig A. Ellis - B. Riley Caris, Research Division

That's really helpful. And then as a follow-up, you mentioned you're going through fairly intensive product line and business reviews. As we put the company's try to evolve all their models over time in the analog space, one of the issues that determines how quickly they can move forward is the pace at which they get the right people in the right seat for the growth strategies that they have. So as you assess the staff from the management team that you have on down, do you feel like you have the resources that you need to deliver growth? Or is that going to be part of the journey as you think about how you evolve the business?

Necip Sayiner

I think that, as I mentioned in my remarks, I have found a capable and dedicated workforce here at the company, and I'm looking forward to working with the team. There are some specific skill sets and high-impact individuals that I will be augmenting our team with, so stay tuned on that front, Craig.

Operator

Your next question is from the line of Christopher Danely with JPMorgan.

Sameer Kalucha - JP Morgan Chase & Co, Research Division

This is Sameer Kalucha, calling in for Chris Danely. Could you please remind us how much of your cash balance is onshore versus offshore? And in the time of scarce resources, do you think you'll need to repatriate and would there be any tax impact?

Mercedes Johnson

Well, as I'm sure you are aware, we have a tax structure that typically generates most of the cash flow outside of the U.S., but we transfer money between legal entities in order to manage the business and assure liquidity appropriately in different parts of the world. So when we need to, we will be bringing money back into the U.S. We don't anticipate having to pay dividends associated with those repatriation of funds because they will be cash flows associated with payments, inter-company payments that do not generate dividend deductions. So we will continue to manage the balance sheet prudently, so we will have the appropriate liquidity going forward in the right jurisdiction.

Sameer Kalucha - JP Morgan Chase & Co, Research Division

And how much cash is offshore right now? Just as a percent. Just like a ballpark number.

Mercedes Johnson

It's a little bit over -- it's a little bit under 10%. Sorry, what is in the U.S. is a bit under 10%.

Sameer Kalucha - JP Morgan Chase & Co, Research Division

Got it. And then just again kind of looking forward into the remainder of the year, are you anticipating seasonal trends in, say, second quarter or beyond? Or you think there are going to be some end market or company-specific dynamics that could impact trends to differ?

Necip Sayiner

Well, I gave a qualitative outlook for the remainder of the year in the different end markets. So I'll reiterate, we're going to continue to see headwinds in computing in second half. Consumer will be up both due to seasonality and some design wins kicking in for us in the second half. But I should also point out that currently, the visibility that we are getting from our customers continues to be limited. In particular, our ODMs in consumer and computing segments claim very limited visibility from their OEM customers. That makes forecasting the trends a little bit more difficult. I should also point out that we have seen some strengthening of bookings in the month of April, a very significant change from the month of March where we've seen very poor bookings in our business across the board.

Sameer Kalucha - JP Morgan Chase & Co, Research Division

So that would imply Q1 book-to-bill is below 1 and Q2 tracking above tracking above 1?

Necip Sayiner

Well, we ended the quarter with a book-to-bill right around 1.

Operator

Your next question is from the line of Tim Schneider with Goldman Sachs.

Mark Delaney - Goldman Sachs Group Inc., Research Division

This is Mark Delaney calling on behalf of Tim Schneider. Maybe first, if you could elaborate a little bit more on your comment in the prior question on the improved orders in April. Is there any area that you'd call out specifically, that you've seen the improved order bookings?

Necip Sayiner

Not really. It is consistent with the run rate guidance I provided. Computing continues to be weaker compared to prior quarter, but we're seeing very strong bookings both on consumer and industrial and infrastructure, month-to-date.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Understood. That's helpful. For my follow-up, when you think about entering markets that give Intersil an opportunity to differentiate over a longer-term time frame, do you think the computing market can fit in with that strategy?

Necip Sayiner

Well, just to be clear, I am not, at this juncture, talking about entering new markets. We are talking about focusing further down in what we do. So not looking to open up new fronts at this juncture, but pick and choose all the things we are currently doing where we would emphasize.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Okay. Understood. And then just lastly, can you quantify what your market share is on the Haswell platform relative to prior generations?

Necip Sayiner

No, I won't be able to do that.

Operator

[Operator Instructions] Your next question is from the line of Patrick Wang with Evercore Partners.

Patrick Wang - Evercore Partners Inc., Research Division

My first question, I wanted to go back to PC. I was hoping you could elaborate on some of the things that's happening on Haswell. I know you don't want to quantify the market share, but can you help us understand the magnitude of the decline in the second half? And then also, if and when you can turn things around?

Necip Sayiner

No, I'm going to refrain from doing that, Patrick. I specifically suggested that we did incur share losses in 2012 that will affect the Haswell platform. But for competitive reasons, I'm going to evade that question.

Patrick Wang - Evercore Partners Inc., Research Division

Okay. But is it fair to say that Q2 will be the bottom for Intersil's PC revenues, and then it just kind of influx in the back half or should we not come to that conclusion?

Necip Sayiner

Nothing I said suggests that Q2 would be the bottom for the computing business. We are going to continue to see headwinds into second half in 2014. So I guess I'm saying just the opposite to you. You should expect further declines in that revenue base from computing.

Patrick Wang - Evercore Partners Inc., Research Division

All right. That's fair, and then just for my follow-up, I guess, maybe on to the bright side of things. In the weeks that you've now been in your new role here, I'm curious what are some of the things you've learned that maybe you're pleasantly surprised about, because I think we focus on a lot of the bad things. You could talk about some of the good things, that'd be helpful.

Necip Sayiner

Well, of course, that's what I'm drawn to. That's what I feel like I'm here to contribute to. But the ingredients that will support a turnaround in the business lie with the people in the business and the technology that they have developed. That is what I looked for as I accepted this assignment. And through the first several weeks I've interacted with people and learned more about the technology, I have seen nothing that would change that perception. We do have valuable assets in our intellectual property. We have good capabilities across-the-board. We have good people. So we have the assets to be able to turn the business around. It will take some time, and as I alluded to, I think we offer a stable dividend throughout the transformation period.

Operator

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

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

I was hoping you could talk a little bit about Q3. And I know you gave some color on the back half. I'm just trying to figure out how we should think about this 14-week quarter in June? And do we just assume seasonality going forward? Or should we assume that there's another sort of step-down, just based on the fact that there's an extra week in June?

Necip Sayiner

Yes, so that's what I have chosen to give you a run-rate guidance as well, basically adjusting for the extra week going from Q1 to Q2. On that basis, computing is down, industrial is flat to up, and consumer is up. And what we expect to see is a stronger second half with consumer. And how that will balance out with the weakness we anticipate with computing, I think it's too early to quantify, but that's the trend you are looking for.

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

Okay, great. And then just in terms of resetting the model and making final decisions on where you would like to be. Is that a decision that you'll make yourself, Necip? Or do you wait for a new full-time CFO before you come to those conclusions?

Necip Sayiner

Well, I have the benefit of working with Mercedes and benefit from her experience. So we clearly don't need to wait for a new CFO to make the decisions we need to make in the next 3 months. We have more work to do to get to that point and as much as I can, I will, in appropriate forums, give updates on where we're headed, as long as the competitive dynamics will allow me to do so.

Operator

Your next question is from the line of Harsh Kumar with Stephens.

Harsh N. Kumar - Stephens Inc., Research Division

Necip, listening to your commentary, it's April 2013 and you are already writing off PC gains or growth for 2014. Should we think of that, therefore, as an area that you are either not going to invest or massively under-invest in?

Necip Sayiner

I am not at a point where I can make statements of that magnitude. We are clearly looking at our business, and particularly, our capabilities in power management. I look at the notebooks, Ultrabooks, tablets, smartphones, as one large continuum of opportunities where we can apply our technology and power management. How we will apportion our investments going forward, that remains to be seen. I'm not prepared to make any comments on this just yet.

Harsh N. Kumar - Stephens Inc., Research Division

That's very fair because it's still early in the game. And then, Necip, as a follow-up, I wanted to ask you, if you've seen any low-hanging fruit opportunities in the areas that you're in, and if you're willing to talk about at this time, with product lines, or just subsegments within the segments that you play in.

Necip Sayiner

Well, there are certainly some bright spots and investments that have been made in prior years starting to show some fruits. Digital power is one of them, albeit at small revenue levels. Now this is a business that is gaining some traction with the customer base, and I think we're going to benefit from the trend in the infrastructure space to switch to digital power. Another example I can provide has to do with power modules, providing solutions to customers in ways that are easy to adopt and use in their systems is a big plus. And there are many other areas that are tucked in, in the product lines that I'm finding that are encouraging. I've chosen to state some of the challenges that the company faces to provide you a balanced view at this juncture. But I do see a lot of opportunity for us to lean on as we put the business on a better footing.

Operator

Your next question is from the line of Steven Eliscu with UBS.

Steven Eliscu - UBS Investment Bank, Research Division

First question is around the dividend. Can you help us understand especially with the losses on Haswell, what type of stress tests or scenario analyses that you've run internally that can give investors confidence that you'll be able to maintain the dividend even if things end up being a little bit worse that you expect, especially in the economy where it can certainly surprise on the downside?

Mercedes Johnson

Well, let me give you my view, 3 weeks into the job. First of all, we have a substantial level of cash, $161 million is a significant amount of cash. Secondly, we manage our balance sheet in such a way that working capital requirement typically do not consume cash on a given quarter. Sometimes it does, but it's typically in very small numbers. And on top of all that, we have a substantial line of credit, which we have not tapped into. So when you add all those data points together, I think you can gain a significant amount of confidence that we are able to finance and have the liquidity necessary for us to pay the dividend for several quarters forward, even if the environment becomes difficult.

Steven Eliscu - UBS Investment Bank, Research Division

Okay, that's helpful. And as my follow-up question, we've obviously been hearing, Necip, from your predecessor about top 10 growth drivers. This is the last time I'll mention that. But I do, at least, want to get a sense if that is our starting point here, how you're thinking about just what is the right number of areas to focus on? Without necessarily getting into the specifics of where you're going to focus, just roughly how do you see the reorientation, the strategy in terms of the number of directions the company focuses around?

Necip Sayiner

I'm not looking at the business through that lens. I suppose I have brought my own eyeglasses to the job. And what I'm really after is to gain a better in-depth understanding of our core capabilities that we can sustain with our competitors over many years, and I want us to rebuild our business around those core capabilities for the long haul. So I don't have a set number in mind, Steve, as to how many that will be, but I can tell you that a company of our size and scale can probably, realistically, focus on just a handful of initiatives.

Operator

You have a follow-up question from the line of Tore Svanberg with Stifel, Nicolaus.

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Yes, just 2 quick follow-ups for Mercedes. You mentioned earlier to a question about cash internationally, you said 10% is in the U.S. I assume that's your cash generation, right? Because you did repatriate quite a bit of cash already last year as part of an SEC settlement -- or I mean, an IRS settlement?

Mercedes Johnson

You're correct. We've repatriated a significant amount of money last year in the December time frame, but we also read repaid completely our long-term debt. So that was the usage of that amount of money that was repatriated. So what we have at the moment is just shy of 10% of the cash in the U.S. But as I was talking about earlier, we constantly settle in a company activity, on debits and credits, et cetera, so when there is a need for money to come to the U.S., our expectation is that we will be able to do so without having to pay taxes on it, U.S. tax.

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Very good. The second question was on operating expenses. So your guidance for the June quarter -- the June quarter's a 14-week quarter, so should we assume that the expenses would actually decline in the following quarter?

Mercedes Johnson

Yes, you can assume that, safely. May I remind you, some expenses are fixed on a monthly basis. We don't pay more rent or we don't pay certain things differently if we have an extra week in the quarter, but salaries, of course, in the U.S, particularly are driven by the number of weeks that the quarter holds. So you should expect to see a small decline in operating expenses in both categories, SG&A and R&D, as we move into third quarter.

Operator

You have a follow-up question from the line of Steve Smigie with Raymond James.

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

I was hoping you could touch a little bit more on your optical sensor comments, it sounded like hat was okay. Could you use more detail on what's going on in that business? And also any traction in the Thunderbolt business?

Necip Sayiner

Well, what I alluded to is some uptick in revenue in Q2 in -- due to some design wins that we won in China with our ambient light sensors. And I think that is all I have to say on that. What is the specific question about it?

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

I just wanted to get some sense of what the growth opportunity is there and it seems to be a lot of sensors being adopted in a whole bunch of areas out there. So it seems it should be a good growth market. Just curious how is that growth opportunity for you and how you see ourselves competitively positioned at this point?

Necip Sayiner

Well, I'll defer that question until I can give a more comprehensive view of our future direction rather than trying to handle it one-off. In the near term, we do have opportunities. We will benefit from those design wins in the near term. How it fits our long-term portfolio, how it supports our strategy, that question I will defer.

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

Okay. And then just a housekeeping item. Sorry if I missed it, but did you talk about what inventory was in the channel?

Mercedes Johnson

Actually, we did not. It is not appreciably different than it has been.

Necip Sayiner

All right. If there are no more questions, I would like to thank you for your participation and look forward to talking with all of you soon.

Operator

Ladies and gentlemen, thank you so much for your participation today. This does conclude the presentation and you may now disconnect. Have a great day.

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