Intersil Management Discusses Q3 2013 Results - Earnings Call Transcript

Oct.30.13 | About: Intersil Corporation (ISIL)

Intersil (NASDAQ:ISIL)

Q3 2013 Earnings Call

October 30, 2013 4:45 pm ET

Executives

Shannon Pleasant

Necip Sayiner - Chief Executive Officer, President and Director

Richard D. Crowley - Chief Financial Officer and Senior Vice President

Analysts

Cole Patterson - Crédit Suisse AG, Research Division

Ross Seymore - Deutsche Bank AG, Research Division

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

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

Michael C. Lucarelli - Evercore Partners Inc., Research Division

Atif Malik

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2013 Intersil Earnings Conference Call. My name is Jennida, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Ms. Shannon Pleasant, Vice President of Investor Relations. Please proceed.

Shannon Pleasant

Good afternoon, and thank you for joining us today. I'm here with Necip Sayiner, Intersil's President and Chief Executive Officer; and Rick Crowley, Intersil's Chief Financial Officer. We will discuss our quarterly financial performance and provide a summary of our outlook. After our prepared comments, we'll have a question-and-answer session.

Our earnings press release and the accompanying financial tables are available on the Investor Relations section of our website at ir.intersil.com. This call is also being webcasted, and a replay will be available through November 13.

Please note that the comments made during this conference call may contain forward-looking statements 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.

Also, the non-GAAP financial measurements that are discussed today are not intended to replace the presentation of Intersil's GAAP financial results. We are providing this information because it may enable investors to perform meaningful comparisons of operating results and more clearly highlight the results of core ongoing operation. Non-GAAP financial measures we reference during today's call can be found in the reconciliation of GAAP to non-GAAP results provided in today's earnings press release.

I will now turn the call over to Intersil's President and CEO, Necip Sayiner.

Necip Sayiner

Thank you, Shannon, and hello, everyone. We had a very good quarter, exceeding our expectations both on revenue and earnings. These financial results are meaningful to our turnaround efforts in 2 significant ways. First, this represents the first period in 10 quarters to show revenue improvement over the same quarter of the prior year. Year-over-year comparisons will be a key measure of our progress towards stabilizing top line performance as we work to change the complexion of the business over the next several quarters. Second, we achieved 20% operating income on a non-GAAP basis, which demonstrates our ability to run the business at an attractive profitability level while augmenting the design horsepower we need to rebuild for the future.

We have also made critical additions to our executive team, including Roger Wendelken, as the new Senior Vice President of Worldwide Sales; and Rick Crowley, as our new Chief Financial Officer. Rick has been onboard for a few weeks now and is already contributing to the new and improved Intersil.

I am going to turn the call over to him now to review the Q3 financial results. And I will then cover the business highlights and outlook.

Richard D. Crowley

Thank you, Necip, and it's great to be here on the team at Intersil. And I'm very excited about the prospects for the company given all the changes, operationally and strategic, that are currently underway. Clearly, we're making very visible strides towards improving the profitability of our business, and I expect the discipline and focus being applied will provide further opportunity for improvement as the top line stabilizes.

Turning now to our results. Third quarter revenue of $152.6 million improved compared to a year ago and was up by 5% sequentially on an absolute basis and 13% sequentially accounting for a 14-week quarter in Q2.

First, I'll summarize our GAAP results. GAAP gross margin was up slightly at 55.4%. GAAP operating expenses were up to $79.5 million, with R&D at $31.3 million and SG&A at $27.1 million. GAAP operating income was $5.1 million or 3.3% of sales. We reported a GAAP net loss for the quarter of $8.2 million or $0.06 per share. The Q3 GAAP tax rate was unusually high due to a year-to-date catch-up associated with increased 2013 profitability and onetime discrete items in the tax provision. Q3 GAAP results include the following: $9.1 million of restructuring charges associated primarily with the rebalancing announced in July, a $6 million charge related to an anticipated settlement for alleged export violations from 2005 through 2010, $6.1 million in amortization of acquisitions intangibles and $4.3 million in stock comp expense.

Excluding these charges, the non-GAAP results improved once again in Q3. Gross margin increased for the third consecutive quarter to 55.7%, which was primarily the result of higher revenue. We're anticipating another quarter of improvement in gross margin in Q4, resulting from favorable mix. Q3 non-GAAP operating expenses were $54.4 million, below our projections and a 15% decrease compared to the same period last year. Non-GAAP R&D investments of $29.6 million and SG&A expense of $24.8 million both declined sequentially as a result of the headcount reductions made in July. But as we drive towards our hiring goals to augment our technical teams, we expect to see the R&D expense rate begin to rise modestly in 2014. However, we're now expecting to operate in the lower half of our previously stated $55 million to $60 million band for 2014, with non-GAAP operating expenses projected to be between $55 million and $58 million on a quarterly basis.

Q3 non-GAAP operating income was $30.5 million, up from $22.1 million in Q2. The combination of higher revenue and lower expenses resulted in a 100% followthrough of incremental revenue to operating income for the quarter. Our non-GAAP operating margin improved to 20% in the September quarter, the highest level since 2010. Q3 other income was $223,000. The non-GAAP effective tax rate was about 16%, and we expect it to remain at this level in Q4.

Non-GAAP diluted shares outstanding were 130.6 million for the quarter. Non-GAAP net income of $25.8 million or $0.20 per diluted share was meaningfully better than expected. This outperformance demonstrates the leverage we can achieve with lower expense levels and modest improvements in gross margin, providing ample profitability as we continue to work on the top line.

We have good news on the balance sheet as well. Operating cash flow generation totaled $19.6 million during the quarter. Capital expenditures were $3.5 million, slightly lower than our expectations. Cash and investments increased to $166.8 million by quarter end. As has been mentioned before, this cash is largely accessible for domestic use without additional tax penalties, securing our very healthy dividend program.

Net inventory declined $8 million sequentially to $66.4 million or 94 days. We're comfortable with this inventory level and expect it to remain in this general range. Accounts receivable balances increased sequentially due to higher sales in the quarter, but day sales outstanding declined to 32 days. Going forward, we're going to continue to fine-tune the business to ensure we are operating as efficiently as possible, without limiting our ability to appropriately fund R&D or to respond to any demand upside.

Given that it will take some time for products currently in development to deliver meaningful revenue growth, our target profitability metric for the next 6 to 8 quarters will be a non-GAAP operating margin of 20%. The additional R&D investment we are committed to making will be supported by incremental gross margin improvement we are projecting during 2014 and 2015. We believe that this strong profit potential and our high-yielding dividend are critical components of the value Intersil offers to shareholders.

I will now turn it back to Necip.

Necip Sayiner

Thank you, Rick. Last quarter, I outlined the strategic framework that is guiding our investment decisions and enabling us to build the foundation for sustainable revenue growth. We established that Intersil is, first and foremost, a power management company. The $10 billion power management opportunity is one of the most complex and valuable segments of the analog IC market. And Intersil has a unique combination of core technologies in this area. We're leveraging the strong capability to focus on expanding our footprint in power management for infrastructure and industrial markets, establishing a meaningful presence in power management solutions for mobile devices and shoring up our leadership position in key target markets in automotive infotainment and aerospace.

While our development teams are geared up on a series of new product initiatives, our customer-facing teams are wasting no time marketing and selling the products in our portfolio today. We have been able to reverse some negative market share trends in key markets and are continuing to identify pockets of opportunity. Furthermore, we're introducing new products for our target markets that leverage our strong capability in power management. These include a recently introduced high-efficiency and small-footprint multiphase buck controller for mobile power and a switching regulator with integrated FETs that support a wide range of input voltages to serve communications, industrial and consumer applications. We're also preparing to launch a strategic digital power platform in the coming weeks that is central to growing our cloud computing revenue.

In terms of the quarterly results, Q3 was seasonally strong as anticipated, with meaningful growth in our consumer products. Consumer revenue was up again by 25% sequentially and represented 24% of company revenue. We shipped significant volume into a gaming console for a launch expected next month, which contributed to the sequential growth. We also benefited from the success of the Samsung Note 3 and Google Nexus 7 platforms, where we have wins with our power management products.

Our computing business was down only 1% sequentially and represented a lower percentage of our total revenue at 18% in Q3 compared to 22% a year ago. We stated last quarter that we expect computing will decline to about a $20 million run rate as the result of market share losses in Haswell platforms, and our view remains the same. This headwind, however, is largely a 2014 phenomenon. We're making the investments today to enable growth in mobile power that will more than make up for the declines in the traditional PC revenue, starting as early as the end of 2014 and into 2015.

Industrial was up slightly sequentially and represented 58% of company revenue. Demand remained healthy, and we saw improvement in automotive and aerospace. In automotive, we continue to have traction in back-up and around-view camera applications. Our Europe OEM business is gaining strength, and we are benefiting from a strong presence with aftermarket customers in Asia. A promising new area is our automotive power business, where we are seeing design win momentum as the electrification of cars continues. In aerospace, our new Rad-Hard precision products drove growth, along with the strength across a number of products, at a leading U.S. satellite developer. We are continuing to gain modest share in this market from traditional analog competitors.

Now for the guidance. As we mentioned, back in July, we're expecting a sequential decline in the fourth quarter as the ramps ahead of the holiday season wind down and our consumer business slows, reflecting customers' typical year-end inventory management. We're projecting stable demand in both industrial and computing. We, therefore, expect revenue to be in the range of $142 million to $148 million. We believe positive mix will allow us to deliver a modest improvement to gross margin percentage while operating expenses are expected to be roughly flat in dollar terms. We anticipate GAAP earnings of breakeven to $0.01 per share. Earnings per share on a non-GAAP basis are expected to be $0.16 to $0.18.

With that, we're ready for your questions.

Shannon Pleasant

Thank you, Necip. We'd now like to open the call for your questions. Operator, please review the Q&A instructions with the call participants.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of John Pitzer with Crédit Suisse.

Cole Patterson - Crédit Suisse AG, Research Division

This is Cole Patterson dialing in for John. I want to ask around some of your comments regarding your auto business. I know you guys don't break out how big that business is for you. But this quarter, we've seen kind of a number of companies in that space speak to how strong that business has been. So if you guys could give any more color on that, that'd be great.

Necip Sayiner

Our auto business is slightly south of 10% of total revenues for the company, and we've been seeing strength all throughout the year in this business, driven primarily by our video for infotainment business. But increasingly, we are gaining content in power as well, as I mentioned, at our European OEM customers, as well as some aftermarket customers in Asia.

Cole Patterson - Crédit Suisse AG, Research Division

All right. That's great. And then just one other question I had for you guys is -- I think it was last quarter, you said the right way to think about OpEx moving forward is potentially $55 million to $60 million, and you guys keep doing extremely well in that line. Is that still the right way to think about it? Or it could potentially go lower from here?

Richard D. Crowley

Yes. I think, as we said in the prepared remarks, we actually expect to operate in the lower half of that range, $55 million to $58 million going forward, relative to our target of 20% op margin.

Operator

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

Ross Seymore - Deutsche Bank AG, Research Division

I want to follow up on the question on OpEx. I know it was mentioned that you expect to operate in the lower half of that $55 million to $60 million range. Does that imply that the engineering talent that was mentioned this past quarter would come on maybe a little bit later than expected? I know that OpEx was guided to a little bit of a slight increase in the first half of '14. But any color when that new engineering talent is going to come on will be greatly appreciate it.

Necip Sayiner

No, there is really no change in plans in terms of our recruiting. Once all the rebalancing efforts settle down, we took a closer look at our expenses and came to the realization that we can execute on our plans for all of 2014, while staying in the narrower band of $55 million to $58 million. In terms of recruiting activity, we are proceeding along fine. Thus far, we have been able to fill 20% to 25% of our open requisitions. And now that the pipeline is full, we should be able to fill a large majority of these openings by the end of first quarter of 2014.

Ross Seymore - Deutsche Bank AG, Research Division

Okay. And then a different vein, computing put up an extremely solid result of that down 1% sequentially. When is -- I know it's been mentioned that, that business is expected to decline to about $20 million per quarter. If you could give an outlook of the trajectory of when we should expect it to fall to that $20 million. Anything would be helpful there.

Necip Sayiner

The $20 million run rate number was given to suggest the extent of the decline we expect in the computing business when Haswell fully ramped, and we still expect that to be the case. Our current view would call for this to happen by mid next year. The ramp of Haswell has been slower than we originally forecasted, so our current results, both in Q3 and the guidance we provided for Q4 in computing, has been pleasantly surprising as a result.

Operator

Your next question comes from the line of Craig Ellis with B. Riley.

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

Rick, I wanted to focus in on gross margins. They were very strong in the third quarter despite what, on the surface, looks like adverse mix. So was there some intersegment dynamics that were played that helped gross margins increase despite what was a big surge in consumer sequentially?

Richard D. Crowley

Okay. We are focused on trying to improve the mix of the existing portfolio, as well as reducing our expenses both in cost of goods sold and operating expenses. So that, I think, began to show some fruit and should continue to help us as we move into 2014.

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

And as a follow-up, going back to your comments on the target model, which I think you framed as a 20% operating margin over the next 6 to 8 quarters. Clearly, as we look beyond the next 2 or 3 quarters, the company is thinking about some rising operating expense to fund future product growth. But is there anything else we should be thinking about as potential headwind as we think about 20% for 6 to 8 quarters? And obviously, if the business grows, then you'll have volume as a tailwind. So why not in the 6 to 8 quarter op period, would be -- wouldn't we be looking at better operating margins, given that you just posted something that's right near that target?

Richard D. Crowley

Yes. I think we're -- it depends on revenue, really, right? The main variable there is probably going to be revenue. We've established, I think, a very healthy operating expense level that we're comfortable with to be able to deploy the resources that we think we need to grow. But as we've mentioned, we think that may take some time for those new products to come in and help us grow. But in the meantime, the 20% helps us guide our investment, as well as gives the investment community a view of how we're trying to operate the business and our operational model. So we're comfortable with the current expense level, and the gross margin uplift that we expect going forward should be able to allow us to fund that incremental R&D.

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

Okay. And then the last one...

Necip Sayiner

I'll just add to that. I've said, since I joined the company, that it would take a while to fully turn around the business. In the near term, for the next 4, 6, 8 quarters, we're really focusing on stabilizing the revenue and do so at more attractive profitability levels than the company had just a couple of quarters ago. And I think, the quarter we just posted is a proof point for that. Our revenues for Q3 was almost identical to what we've had Q3 of '12, but at a much more significant level of profitability, and that just adds to the security of the dividend through 2014 as we complete our work.

Operator

Your next question comes from the line of Tore Svanberg with Stifel, Nicolaus.

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

It's Tore here. My first question is on your consumer business. Obviously, you're ramping into some new platforms. I was just wondering if you could comment a little bit on the tail of those. How many sort of multiple quarters are we going to see here? And as those slow down, what can we expect the consumer business to do after that?

Necip Sayiner

Well, the revenue we're enjoying in the second half has come from design wins that we won earlier in the year. And I think we still had pockets of opportunity to repeat that for 2014 business in many of the short-product-cycle end applications, so we'll continue to pursue those. In the near term, I don't see anything other than seasonally typical for Q4 and Q1. We've enjoyed a large uptick in consumer revenue and a similar magnitude decline in Q4 expected in that business. This is accentuated by the large ramp into the gaming console I mentioned. Other than that, I don't see anything atypical. I think we've done a little better than most, as far as the second half is concerned, for Intersil.

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

Very good. And Necip, you mentioned you're now starting to get some traction in power for automotive. Could you elaborate a little bit on that? I mean is that primarily for battery management? Or would this even include things like power steering and other things within the car?

Necip Sayiner

So what we've been doing there for the last couple of years is to take our power management devices that were originally designed for industrial end applications and take them to the automotive coral [ph] and sell it around the infotainment platform we have to increase our content with our customers. And that's been quite successful. As a matter of fact, if you look at what we are projecting for Q4 for our industrial business and compare it to where the overall business was last year, same time, you see automotive being one of the larger growth drivers. And inside it, automotive power is an element of growth for us. So that strategy has been working, and that happens to be an area that we are making further investments right now.

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

Just one last follow-up. Can you just comment a little bit on how business has been so far this quarter? Just trying to understand your relative visibility for Q4.

Necip Sayiner

Okay. As far as the backlog is concerned, it is at a very healthy level, especially compared to prior 4Qs. The bookings all throughout Q3 have been quite strong. Towards the end of Q3 and early Q4, there's a bit of a soft patch, where the level of bookings declined, but since then, it has picked up again. And as -- the guidance, I think, we provided is very consistent with where we are, and we are very comfortable with the backlog coverage to date.

Operator

Your next question come from the line of Patrick Wang with Evercore.

Michael C. Lucarelli - Evercore Partners Inc., Research Division

This is Mike on for Patrick. Sticking to the revenue guidance, what are some of the puts and takes that will take you guys to the high end or low end of your range?

Necip Sayiner

Well, the range is a day's worth of revenue. So the puts and takes would be the level of demand for our products going into consumer applications. Depending on how this holiday season goes and how some of the platforms we are on are successful in the marketplace could move the needle one way or the other. I think other than that, we have a pretty good visibility into all the segments and quite comfortable with where the backlog is. As I said, computing has been doing a little better than expected and that could be another segment of variability. But I should note that in spite of the near-term success that we see in computing, that doesn't really change the trajectory of that segment into 2014. We still expect those revenues to decline into Q1 and Q2.

Michael C. Lucarelli - Evercore Partners Inc., Research Division

Got you. And then maybe -- you guys continue to generate solid cash flow. But from a strategic standpoint, is there any discussion around the sale of the Palm Bay fab?

Necip Sayiner

No, there isn't.

Michael C. Lucarelli - Evercore Partners Inc., Research Division

No, okay. I guess maybe what are some of the benefits of owning this fab for you guys?

Necip Sayiner

It is part of -- an important part of our business, in Rad-Hard in particular, and we have no consideration of sale of that fab at the moment.

Operator

Your next question comes from the line of Terence Whalen with Citigroup.

Atif Malik

This is Atif for Terrence. You talked about a 20% non-GAAP operating margin goal for the next 6 to 8 quarters. Can you talk about the operating margin profile for the computing versus the non-computing segments?

Necip Sayiner

No, we're not going to break that out, no. We don't intend to break the different segments out from a profitability point of view.

Atif Malik

Okay. But with the recent restructuring, is it fair to assume that the computing segment is more in line with the corporate average?

Necip Sayiner

I think from a gross margin point of view, we have said that it's lower than the corporate average.

Atif Malik

Okay. And then the second question you mentioned that the bookings have picked up recently after being soft in the first part of the December quarter. Can you talk about any particular regions or markets where the bookings are looking better than expected or strong?

Necip Sayiner

Well, when I say it's picked up, it's picked up to the level they've been running at or close to it. The bookings weakness, per se, for those 3, 4 weeks I mentioned, were relatively broad. It didn't point to any geography or product line. But it's back up to the desirable levels right now.

Operator

[Operator Instructions] And at this time, I'm showing we have no further questions. I would now like to turn the call back over to Ms. Shannon Pleasant for any closing remarks.

Shannon Pleasant

Thank you very much for joining us today. We appreciate it. This now concludes our Q3 earnings call.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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Intersil (ISIL): Q3 EPS of $0.20 beats by $0.03. Revenue of $152.6M (+0.01% Y/Y) beats by $3.46M. (PR)