Intersil Corporation Q4 2009 Earnings Call Transcript

Jan.27.10 | About: Intersil Corporation (ISIL)

Intersil Corporation (NASDAQ:ISIL)

Q409 Earnings Call

January 27, 2010 04:45 PM ET

Executives

David Bell - President and CEO

Jonathan Kennedy - Senior Vice President and CFO

Brendan Lahiff - Senior Investor Relations Manager

Analysts

Ross Seymore - Deutsche Bank

Joanne Feeney - FTN Equity

Ian Eigenbrod - Goldman Sachs

Doug Freedman - Broadpoint

Rick Schafer - Oppenheimer

Mahesh Sanganeria - RBC Capital Markets

Tore Svanberg - Thomas Weisel Partners

Craig Ellis - Caris & Company

Ashish Shah [ph] - Credit Suisse

Terence Whalen - Citi

David Wu - GC Research Ltd.

Steve Smigie - Raymond James

Harsh Kumar - Morgan, Keegan & Company, Inc.

Blayne Curtis - Jefferies

Operator

Ladies and gentlemen, welcome to the Fourth Quarter and Year-end 2009 Intersil Corporation Earnings conference call. I will be your coordinator for today.

I would now like to turn the presentation over to your host for today’s call, Mr. Brendan Lahiff, Senior Investor Relations Manager of Intersil. Mr. Lahiff, please proceed.

Brendan Lahiff

Thanks, Chris. Good afternoon. Thank you for joining us today for Intersil’s fourth quarter and year end 2009 earnings conference call. Today, with me is David Bell, Intersil’s President and Chief Executive Officer and Jonathan Kennedy, Intersil’s Senior Vice President and Chief Financial Officer.

David will deliver remarks on our fourth quarter and year-end 2009 and provide a summary of our business outlook. After our prepared comments, we will open the lines for questions.

We completed our fourth quarter on January 1st 2010 and an earnings press release was issued today at approximately 1:05 pm Pacific time. A copy of the press release is available on the investor relations section of our website at intersil.com.

In addition, this call is being webcast live over the Internet and may also be accessed via the investor relations section of our website. A replay of the conference call and webcast will be available for 2 weeks through February 10th.

Please note that some comments made during this conference call may contain forward-looking statements. I would like to remind you that while these statements reflect our best current judgment, they are subject to risks 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 measures, because they provide useful information about the performance of our business and should be considered by investors in conjunction with GAAP measures that are reported.

Our agenda for the call today is as follows: Dave Bell will discuss key highlights from the quarter and year and Jonathan Kennedy will review the quarter from a financial perspective. They will then follow up with additional commentary on each of our four key markets as well as our forward-looking guidance. Q&A session will follow.

For those of you interested in learning more about Intersil, we will be presenting during the first quarter, at the Goldman Sachs Technology and Internet Conference in San Francisco on February 25th.

I will now turn the call over to Dave Bell, President and CEO of Intersil.

David Bell

Thanks, Brendan. Good afternoon and thank you for joining us today for Intersil's fourth quarter and 2009 year-end earnings conference call. I would like to start the call by recapping our accomplishments in 2009 and our progress with the strategies we put in place at the beginning of the year.

Nearly a year ago, during last year's Analyst Day, we committed to some aggressive goals. I put a stake in the ground and made it clear that we were focused on achieving $1 billion run rate, 58% gross margin and 26% operating margin by the end of 2011. Despite much skepticism in the investment community, I'm proud to say that we are on track to accomplish those goals.

As revenue continued to fall in the first quarter to a low of $118.2 million, few would have believed that we could achieve revenue as high as $177.7 million in the fourth quarter, a 50% increase from the first to the fourth quarter. We promised significant revenue growth during 2009 and the following years and it's happening just as we said.

Much of our growth during 2009 and in the years to come is due to our strategic choices. We made the decision to actually grow R&D investment during 2009 recognizing that this may impact our evaluation in the near term but reward patient investors in the years to come. As Jack Welch says, “Shareholder value is a result, not a strategy.”

We’ve made careful choices about how to spend our R&D dollars, terminating investment in some areas or focusing even more investment in products that are essential for profitable long-term growth.

We are also investing in several new process technologies that we are confident will give Intersil unique capabilities in the next several years. I believe it’s very important to understand that over 40% of our present R&D spending is going into product areas for which we have little or no revenue today.

This means two things. First, it means that we can easily boost our earnings if we made the shortsighted move to only invest in our presently successful product families. Second and even more important, it means that we are creating huge revenue growth opportunities because of the investments we’re making in new technologies and products.

At the Analyst Day, we committed to creating a better balance between our four markets. Growth in recent years has been too reliant on the PC business, so we’ve deliberately invested heavily in new products aimed at the industrial and communications markets. Those markets are now growing rapidly and already creating a better balance.

During the fourth quarter, the industrial market accounted for 21% of revenues, while the communications market accounted for 23% and this is during a seasonally low period for those markets.

Our guidance for growth in Q1 underscores how this mix-shift is changing Intersil’s historically down first quarter. We promised a mix change and it’s happening just as we said.

One of the benefits of this mix-shift is increasing gross margins. Our gross margin has increased steadily since the second quarter and is expected to continue growing during 2010 as we march toward our 58% goal.

A number of permanent cost reductions and utilization improvements will continue contributing to margin improvement. We promised gross margin improvement and it's happening just as we said. Continued revenue growth combined with increasing gross margin and OpEx controls will result in significant earnings leverage during the coming year.

We expect OpEx to increase only modestly from Q1 levels during 2010 and this should result in significant increase in earnings per share. This EPS growth is the result of our long-term strategy and structural improvements not short-term cost cutting and will result in real sustainable increases in shareholder value.

During the downturn, our asset-light manufacturing structure allowed us to quickly reduce production volume and limit the amount of inventory growth. Even so because of the steep revenue collapse, we ended 2008 with over 180 days of inventory.

Again, there was a great deal of skepticism when we announced our goal to reach 100 days of inventory by the end of 2009. But we did what we said with a year-end inventory of only 99 days. Jonathan will provide details on how we plan to reduce inventory even further during 2010.

Our asset-light model also enables us to quickly ramp our capacity to meet rising customer demand. Unlike some of our competitors this kept our quarter lead times low and allowed us to meet almost all customer delivery needs.

Finally, we've continued to grow both organically and through strategic acquisitions just as we promised. We announced five acquisitions during the last six quarters including two during 2009.

This included the most recent acquisition of Rock Semiconductor, our first Chinese acquisition and the Quellan acquisition made in August. Both acquisitions fit our criteria for developing unique high-performance analog semiconductor solutions and we're confident that both will contribute to our growth in 2010.

Let me now quickly go over the fourth quarter highlights. For the fourth quarter of 2009, we achieved net revenues of $177.7 million above the high end of our guidance range of 170 to 177 million and an increase of 6% over the third quarter.

Our GAAP earnings per share were $0.18, also exceeding our expectations and demonstrating the leverage in our operating model. Jonathan will review the financial details in just a few minutes.

The upside to our guidance primarily comes from strength in the industrial and communications markets which increased by 15% and 29% respectively. Recovery in these markets was expected, but the magnitude was more than predicted, it was based on both overall market dynamics and customer acceptance of our products.

We expect growth in the industrial and communications end markets to continue throughout 2010 driving margin improvement and driving us towards the market balance that we seek by the end of 2011.

During the fourth quarter, we generated over $44 million in free cash flow. For the year, we generated over $118 million in free cash flow during one of the most challenging periods in our industries history.

We are committed to returning shareholder value and as a result the board of directors has authorized a quarterly dividend of $0.12 per share of common stock. The strong bookings during Q4 and a quarter end book-to-bill ratio well above 1. We are confident that our business will continue to grow in the first quarter and throughout 2010.

We made enormous progress during 2009. Revenue grew by 50% over Q1. We increased gross margins steadily since the second quarter and positioned the company for even stronger margins in 2010.

We invested heavily in R&D while carefully monitoring and controlling operating expenses. We’ve begun to alter the mix of our business and we reduced inventory to less than 100 days. In summary, we are right on course to achieve our financial goals by the end of 2011.

At this time, I’d like to turn the call over to Jonathan Kennedy who will provide us financial summary. I’ll then discuss results from each of our core end markets and finally provide comments on our first quarter 2010 outlook.

Jonathan Kennedy

Thanks, Dave. Let me begin with the results of operations. As Dave stated we reported a $177.7 million in net revenue for the fourth quarter of 2009, a 36% increase from the same quarter last year and 6% sequential improvement from the third quarter and slightly above our fourth quarter guidance of $177 million.

For 2009, we ended with revenues of $611.4 million, a decrease of 21% from 2008. Order rates were steady throughout the fourth quarter with the industrial and communications end markets providing a bulk of the increase from our previous revenue guidance.

Sales in the computing and consumer end markets exhibited seasonal trends with sales waning towards the end of December and coming right in at the midpoint of our expectations.

However order trends for all markets going into Q1 remains stronger than anticipated and we ended the quarter with a book-to-bill greater than one. Throughout the quarter our asset-light production model kept pace with demand and we ended the quarter with normal lead times.

Fourth quarter turns were about 31% and we expect Q1 turns rate to be about the same. Our internal utilization during Q4 was about 60%. Our internal fab utilization is expected to remain at this level through the first half of 2010 as we consume the inventory buffers we put in place prior to our fab consolidation.

Fourth quarter gross margins increased by 70 basis points to 55.2% on a GAAP basis. The sequential increase in gross margins were driven primarily by favorable changes and product mix as growth in the higher margin industrial and communications end markets began to outpace the growth in the lower margin consumer and computing markets.

Looking ahead, we expect Q1 2010 gross margins to continue to increase slightly driven primarily from a more favorable product mix, higher volumes, and reduced manufacturing cost. In addition we expect a gradual and continued expansion of gross margin over the next few quarters as we grow our industrial and communications product portfolios, realize the benefits for internal fabs consolidation and execute on our ongoing cost reduction programs.

In the fourth quarter, R&D expenses were $36.8 million or 21% of revenue, slightly below our expectations and lower on a percentage of sales basis than third quarter. We expect first quarter R&D spending to increase to approximately $41 million due to less vacation days in Q1 versus Q4, higher incentive accruals, and the additional R&D expenses associated with Rock Semiconductor.

SG&A expenses were $33.1 million or 19% of sales in the fourth quarter, in line with our expectations and roughly flat as a percentage of sales with the third quarter. The slight increase from the third quarter is due to acquisition cost, increased incentive accruals, and increased selling expense driven by the higher revenue. SG&A expenses are expected to be down slightly in Q1 at approximately $31 million.

Amortization of intangible decreased by $0.2 million during the fourth quarter as some intangibles were fully amortized during the quarter and first quarter amortization is expected to be approximately $2.8 million. Interest income was $1 million for the fourth quarter as interest rates remained very low, and we expect interest income to remain in this range actually for the foreseeable future.

The effective tax rate for the fourth quarter was 15%, and we expect our effective tax rate in the first quarter to remain at 15% as we continue to benefit from the strength of our international business. For the full year 2010, our effective tax rate should remain low in the mid teens depending on the relative level of domestic sales, which carry higher effective tax rate.

Net income from continuing operations was $22.4 million or $0.18 per diluted share for the fourth quarter. For 2009, net income was $43.3 million or $0.35 per diluted share, compared to a net loss of about a $1 billion or $8.39 per diluted share in fiscal 2008, which included a $1 billion goodwill impairment.

Before I move to the balance sheet, I'd like to give you additional details on our equity compensation expectations. For the first quarter, we expect approximately $0.6 million of equity compensation in cost of sale, $2.9 million in R&D, and about $4 million in SG&A.

Now to the balance sheet. For the fourth quarter, we generated $44.2 million of free cash flow and paid out about $15 million in dividend. Cash and short-term investments increased by $31.6 million during the quarter, and we exited the quarter with over $361.2 million in cash, short-term investments and no debt.

Day sales outstanding was 37 days, down 1 day from last quarter. Net inventory decreased by $10.6 million from the third quarter to $81.2 million, and we achieved our year-end target of 99 days in inventory, a net reduction of over 80 days from Q4 2008.

Looking ahead, we expect to continue to reduce days in inventory targeting about 90 days for 2010. Q4 ending worldwide distributor inventory dollars were up $1.6 million compared to Q3, while days in distributor inventory fell 2 days to 56.

Q4 depreciation was flat at $5.1 million and CapEx was slightly higher than expected at $5 million. We expect Q1 CapEx to be approximately $5 million.

Our weighted average share count was 122.7 million shares in the fourth quarter and we expect first quarter weighted average shares to be approximately flat to that amount.

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

David Bell

Thanks, Jonathan. I will now address our business in each of our four end-markets beginning with high-end consumer. Revenue in the high-end consumer market represented approximately 24.9% of fourth quarter revenue.

During the fourth quarter, we announced the acquisition of Rock Semiconductor, the fifth in the series of strategic acquisitions we made during the last 18 months. Rock joins Intersil as our 13th and 14th design centers and our first in China.

Rock adds approximately 30 employees to our team based both in Wuhan and Shanghai. Approximately 50% of Intersil's products presently ship into China, but only a small percentage of demand creation occurs there. We believe this will change rapidly in the coming years with more and more products being designed in China.

The Rock acquisition will immediately give Intersil a greatly expanded presence in the local Chinese market and allow us to better serve a rapidly growing number of Chinese customers.

Rock augments our consumer power strategy with ASSPs for smart phones, notebooks, portable navigation, e-books, and many other portable consumer electronics. Rock has demonstrated unique expertise in integrating both power management and audio processing onto a single chip.

I would now like to comment on some key products that are driving growth in the consumer end market. Our ambient light sensor and proximity sensor business has continued to grow at double-digit rates.

Shipments to Tier-1 customers have increased steadily and new customers are being added as Intersil becomes the product of choice for smart phone light and proximity sensing. These sensors have also been great door openers for Intersil. Many high volume smart phone customers are now designing in other Intersil products because of relationships developed with sensors.

The recent consumer electronics show highlighted the explosive growth in flat panel TVs with a focus on very thin displays, 3D and energy conservation. These new TVs drive demand for a growing range of Intersil products, including display buffers, digitally controlled potentiometers, LED back light drivers, power management, ambient light sensors and audio amplifiers. Consequently, we expect TVs to be an area of growth during 2010.

Also at CES, we received excellent reviews on our new family of D2 audio single-chip audio amplifiers. These new Class-D amplifiers provide a highly integrated and cost effective audio solution for flat panel TVs, PC multimedia speakers, I-Pod docking stations and many other high volume consumer products.

Gaming is a relatively new area for Intersil that now represents more than 10% of our consumer revenue. Gaming is clearly a growing category with revenues expected to increase in the first quarter and ramp steadily in 2010 based on design wins in both tethered and hand-held products.

Looking ahead, we expect sales into the consumer market to exhibit normal seasonality with moderately decreased sales from fourth quarter levels.

Now let's look at our computing business. Revenue in the computing market represented approximately 31.3% of fourth quarter revenue. We continue to develop the industry's highest performance power management solutions.

Our strategy is to gradually reduce our reliance on the PC market by simultaneously growing market share in a broader range of performance-intensive computing applications such as servers and network attached storage.

Despite stiff competition, we remain committed to PCs and believe we’ve maintained a market leading position with over 50% share of notebook VCORE power management. During the fourth quarter, we secured additional wins in CULV based notebooks including several models at Tier 1 ODMs.

We've also added to our leadership share in AMD based notebooks. Our sales efforts were boosted by the fact that we again had no serious capacity related issues and our lead-times remains short.

While competition has been fierce, the reason customers come back to Intersil time and time again is simple. We've built the reputation as the supplier with the highest performance and the best customer service in the industry.

Because of our strategy, we expect sales in the PC market to be stable during 2010. However, we are investing increased R&D into new power management products aimed at the server market. These new products contain innovative architectures that will surpass today's products in both size and performance and many will begin sampling during 2010.

Looking ahead, our backlog in shipment trends showed the computing market performing better than seasonal in the first quarter, with revenues expected to increase slightly from Q4 levels.

Moving now to the industrial market. Revenue in the industrial market represented approximately 20.7% of fourth quarter revenue and increase 15% sequentially for the second quarter in a row. We believe our increased industrial sales are due to a combination of economic recovery and market share gains.

The industrial market is perhaps the most difficult to understand and track due to the diversity of applications and the vast number of customers. I would also like to reiterate that the industrial market remains our highest margin business and will have the largest impact in gross margin expansion in the future.

The industrial end market is one of the areas where we are winning designs based on competitor’s delivery problems. Customers are motivated to explore alternate solutions and have been pleased with the product performance and on-time delivery they receive from Intersil.

During the quarter, our ISL22317 Digitally Controlled Potentiometer was selected by Electronic Products Magazine as its product of the year in the analog and mixed signal category. This is the industry’s first low voltage DCP with better than 1% resistor tolerance, that’s roughly 20 times better than conventional parts.

This ultra low tolerance allows the DCP to be used as a true variable resistor, a key feature in a very wide range of precision industrial applications. An example of the new family products coming from organic R&D is our Mega Q [ph] video amplifier.

This impressive new product allows video transmission over a mile of standard Cat5 cable without any observable degradation in image quality. Applications for this technology include large security camera systems, airport monitors, KVM multiplexers and many other video distribution products.

Although just recently available, we’ve seen a high level of interest from customers and several million dollars worth of opportunities have already been identified. We haven't spoken much about the automotive market for several quarters, so I'd like to give a brief update. We continued to invest in this area with the aim of being one of the leading IC suppliers for hybrid and electric vehicles.

Our development of multi-cell lithium-ion balancing technology has not gone unnoticed and many automotive companies are now working with us on this critical application. We expect significant sales in this product category as lithium-ion powered cars become popular during the next several years.

In the near term, we're seeing growing number of design wins for power management, light sensors, video amplifiers and D2Audio amplifiers. As a result, we expect to see some growth in our automotive sales during 2010.

Looking ahead, we expect sales into the industrial market to be seasonally strong in the first quarter as economic recovery continues and recent design wins go to production.

We will continue to invest R&D at a higher than average percentage of revenue in 2010 to expand our portfolio both general purpose and application specific products aimed at the industrial market.

And finally moving to the communications market, revenue through the communications market represented approximately 23.1% of fourth quarter revenue and increased by 29% sequentially.

The communications market has been the slowest to regain traction; however, we're pleased with this market contributed the lions share of our revenue side in the fourth quarter. Much of this recovery came from our radiation hardened space products and power management for telecommunications infrastructure.

We released the ISL70001 rad-hard voltage regulator for satellites during the fourth quarter. This product is a quantum leap in rad-hard power management solutions and has it's already won numerous satellite designs around the world. Early customer interest is very strong and we plan to expand this platform design into a family of rad-hard devices during 2010.

Moving now to our Quellan acquisition, we are pleased to announce that we reached an important milestone during the quarter by moving Q:Active interconnect technology to production mass sets. This allows us to significantly reduce manufacturing costs and begin ramping sales volumes to our growing list of customers.

We have already booked a large order for 10 Gigabit active copper cables with a leading high performance computing provider and we’re forecasting strong growth for this product family during 2010.

Looking ahead to the first quarter, we expect the communications market to grow moderately as the market continues to recover and recent design wins go to production.

Now let's turn to our outlook for the first quarter. As mentioned earlier, we had strong bookings during Q4 and closed the year with a book-to-bill ratio of well above 1. Rapid changes in the semiconductor market make accurate forecasting difficult. However, we are confident that the first quarter will buck Intersil’s historical seasonal downturn in Q1 and deliver growth.

Based on our current outlook, we expect our first quarter revenue to be in the range of $180 million to $187 million, a 1% to 5% increase over the fourth quarter. This expected growth is due to two factors, continued recovery in the worldwide semiconductor markets and continued strong sales growth in our industrial, and communications markets.

The significant change in our normal seasonal pattern validates that the composition of our business is already moving in the right direction. Gross margin is expected to be up slightly again in the first quarter due to changes in product mix, reductions in manufacturing cost and higher manufacturing utilization.

We expect steady gross margin improvement throughout 2010 as these measures take their full effect. On a GAAP basis, we expect first quarter earnings per share in the range of $0.18 to $0.20.

Free cash flow is again expected to grow from fourth quarter levels. We are now seeing the leverage our operating model can provide as revenues continue to rise and our new product and investments bear fruit. As emphasized earlier we are on a trajectory to meet these financial goals we have targeted for the end of 2011.

Intersil is the only company in more than 25 years to successfully build a broad portfolio analog company product line by product line. During the last two years, we’ve been adding roughly one new product family per quarter as we grow a very diverse portfolio of products.

Building such a company takes patience and determination, but we’ll reward our investors as EPS leverage takes hold throughout the next two years. I’m also a firm believer that exceptional employees are essential to building a great company.

During the last two years, we’ve added dozens of top performers to our engineering and management ranks and the caliber of our overall team is now much higher. The innovation and can do attitude of this company is contagious and we are creating innovative new products that will fuel Intersil’s growth for many years to come.

I’d like to thank all of Intersil’s employees for their dedication during a very challenging year in positioning our company for outstanding growth.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ross Seymore - Deutsche Bank.

Ross Seymore - Deutsche Bank

Just a question on your comps in industrial businesses, they have snapped back nicely this quarter but in aggregate you're still kind of around $75 million or so between the two and I think if I look back a couple of years ago that was closer to 90 or slightly above that.

Can you just talk about why it's falling, where it is, and what would allow it or stop it from getting back to that same level that you were couple of years ago?

Jonathan Kennedy

Well, I don’t have the numbers in front of me, Ross, to compare it to couple of years ago but I think that the composition of our business that we are selling into some of those markets is different we're for instance we are seeing growth in precession amplifiers which really wasn’t a product category that we had in the past.

So that’s one example where we are seeing some growth. More power management products that are going into the infrastructure, communication, applications, and industrial.

So while the number may still not be back to where it was a couple of years ago and in fact that can be a said of our whole business, we are not back to where we were a couple of years ago but I think the nature of the business and the breadth of our industrial business is a lot of different.

One of the most diverse markets in the world is Japan and that’s probably illustrative. When I look at what our business looked like in Japan for instance going back maybe two or three years ago, something like 90% of our business in Japan were laser diode drivers for DVD writers . When I look at our business in Japan today, now it's very diverse.

We've got industrial applications, we are going into network products, we are going into base stations, we are in flat panel TVs, we are in digital, still cameras, very, very broad range of products and that piece of business although, it’s a consumer product, laser diode drivers for DVD writers is probably way down like 35% of our business as opposed to 90 where it was.

So I don’t think you should look just at the overall absolute numbers of the business but you also have to look under the hood at the diversity that's there.

Ross Seymore - Deutsche Bank

Great, and I guess a follow-up, just shifting gear to the computing side. You mentioned that you expect the PC part of computing to be relatively stable in 2010, does that mean kind of flat versus the number that you guided to in the first quarter or kind of give us any color you can on what stable means?

David Bell

Yeah, we’re reluctant to be terribly specific. Of course, beyond the first quarter, it's pretty hard to predict for the first quarter level on the whole year, but that’s pretty accurate. I think that our best guess is that probably our revenue into the PC business are going to be roughly flat with where they are in the first quarter, that would be our guess.

So what that means obviously is when we say we’re going to reduce our reliance on PCs, that does mean we’re pulling out of PCs. We’re going to continue investing in that at an appropriate level. We’re going to continue participating in new platforms and what not, it's just that other areas of the company are expected to grow substantially whereas the PC business overall revenues probably aren't going to grow substantially.

And part of that by the way is due to ASP decline as well. It's kind of moderating our market share to the high performance areas.

Operator

Your next question comes from Joanne Feeney - FTN Equity.

Joanne Feeney - FTN Equity

Since you have so many new products coming out and in development, can you perhaps give us your sense of the percentage of your revenues this year, that you expect to be driven by new products and perhaps in the future?

David Bell

I wish I had the numbers in front of you to tell you that. I guess what, I would go back on is look at the percentage of our R&D that during the last year had gone into new product areas, it's more than 40%. And you heard about some of those new product areas, all of the acquisitions obviously are new product areas for us.

But we have got new product areas that we are developing organically as well. Like this new line of long range video amplifiers, we have got linear regulators, we are doing precision A to D converters, on and on, there is many of them, but I don’t have a good number for you about what percentage of our revenues during the coming year would come from those.

Joanne Feeney - FTN Equity

I think you might have said this, but what was the percentage of R&D that you have devoted to comm and industrial?

Jonathan Kennedy

Well, we don’t disclose the numbers on a per-market basis for R&D, but what we have said is, it is higher than the corporate average. If you look at it, the overall average for the company on percent of revenues going into R&D, we are investing a much higher percentage into the comms and industrial areas in some cases, more than 2x our corporate average.

So, we are putting our money where our mouth is here and investing heavily in those areas and I think part of the message that hopefully you got in the prepared remarks was that, we are starting to see that making an impact or starting to see the communications and industrial markets really put down some nice sequential growth.

Joanne Feeney - FTN Equity

And it sounds like primarily because it is comm and industrial both tend to come with higher margins, but are the margins on the new products as far as you can tell likely to be higher than on your existing products in those sectors, comm and industrial?

David Bell

Yes, I believe that, that is the case on the whole. In fact, some of the new product categories that we are introducing have very, very nice margins, but I am confident in saying that, the choices that we are making strategically, Joanne, the gross margin for those product segments is one of the key criteria. So absolutely, the margins on the new stuff we are investing in, in general is going to be higher than our corporate average is today.

Operator

Our next question comes from Ian Eigenbrod - Goldman Sachs.

Ian Eigenbrod - Goldman Sachs

Thanks of taking the question. Could you drill down a little bit on the comm segment? I know you mentioned satellite and telecom infrastructure but could you give us a sense of the exposures maybe, is it access within telecom or base stations and just kind of how you see that trending through the rest of the year from a market standpoint?

David Bell

One of the things that we did mention that was very strong in the comms area was our rad-hard business. So rad-hard grew very nicely during Q4. So that was one of the biggest drivers. So that’s obviously going to satellites and the communications area.

We also had nice growth in our interface business. That’s pretty broad based and also in DCP switch going into a lot of industrial applications as well as consumer applications. So those are few areas where we saw some nice growth but the big driver, the thing that had the biggest influence is our rad-hard business.

Ian Eigenbrod - Goldman Sachs

And then just on the acquisition, you've obviously been prolific and talked about a number of new design wins. Could you give us any sense or maybe quantify for us the incremental revenues you expect maybe this year and next from those five collectively?

David Bell

Well, we aren't disclosing those numbers and breaking them out. What I will say is that all five of the companies were very early revenue start-up companies. In many respects I think that’s the right time to do it because they do have some products that are being evaluated by the customers but the revenue in general for all five of those companies was very, very low.

Some of the companies going to have a kind of a more rapid rise just because of the nature of the product. So as you might imagine, a company like D2Audio, with the nature of their products being going more into consumer products is going to rise much more rapidly and we expect to see some nice sales in that product line during 2010.

Whereas our Kenet acquisition of high speed A to D converters, just because of the nature of the markets those go into, going into communications infrastructure equipment and industrial, the gestation period is much longer, so it’s going to take longer to see some revenue on product areas like that.

Ian Eigenbrod - Goldman Sachs

Maybe I can ask it a little differently. When you put your billion dollar goal out there, did you have a sense of what you wanted acquisition related revenues to contribute to that billion dollars or a target in mind or any kind of quantification relative maybe to your goal if not per year?

Jonathan Kennedy

Ian, it’s Jonathan. Yeah, no doubt when we do our internal planning we look at what we expect to grow from current products, new products and then acquired products. As Dave said, the acquisitions don’t have really an immediate revenue today. But I would say if you are really looking for a category to put them in, then each one has the potential within the next two years to have anywhere in the low 10s to tens of million dollars of revenue.

So if you pile them all up in 2011 scenario. I would expect these to be contributing collectively anywhere from $20 million to $50 million in revenue. That’s a broad range, but just to give you an idea where these things could come out. It is also early on, it’s difficult to put a time frame on it, but if we kind of had a more longer-range horizon for expectation, that $20 million to $50 million is collectively is probably realistic.

David Bell

But one of the questions that I get asked from time-to-time is we don’t see how you guys are going to get your billion dollar goal without revenue from acquisitions and my answer that is, well, you are actually right, that’s part of the plan.

We plan to grow in part of the way we get to our billion dollar goal is the revenues from these acquisitions we've made and possibly some that we will get in the future that haven't been announced yet.

Operator

(Operator Instructions). Our next question comes from Doug Freedman - Broadpoint.

Doug Freedman - Broadpoint

Could you talk a little bit about the concerns over sort of inventory builds out there, where your customers are and getting back to running at what we might call more normal and if you could just give us a sense of what is comprising the inventory that is out there.

Some manufacturers have been able to talk about fast moving versus slow moving product and whether you're seeing push outs, expedite cancellations and how you measure all that stuff together.

David Bell

Well, it's interesting, there's a kind of diametrically-opposed opinions and what's happening with the inventory in the supply chain. I think probably the best guys in the industry to offer professional opinion on that is iSuppli.

ISuppli during the last week came out and indicated that they believe that inventory for semiconductor products in the supply chain is at historically low levels. I know there have been some reports from some analysts to the contrary but I believe that's true.

We believe that our inventory in the supply chain, what can see at our distributors, at our warehouses and so forth is at historically low levels, and that’s something they were watching carefully to make sure it doesn't go too low. But I don't really have any concerns about it being too high.

As far as the actual composition of that inventory it varies a little bit, when we're looking at general purpose products, we sometimes aim for a little bit low returns, more inventory on the shelf than with the fast moving ASSP products, but overall I feel very, very comfortable with inventory.

And in fact, if you look our international distribution inventory, it grew from Q3 to Q4 by less than $1 million. So on a percentage basis, it grew by, less than our sales went up. So days of inventory in the supply chain actually went down in Q4.

Jonathan Kennedy

It’s Jonathan. We have two types of distributors, one the broad based guys, Arrow and Avnet and then more Asian fulfillment type distributors and if you look at where inventory continues to be lean, its in the fulfillment type and the fulfillment type distributors is generally consumer and computing.

In North America and in Europe, the Arrow and Avnets and some of the smaller guys, their inventory has been relatively flat really for the last year. We started 2009 with maybe around $20 million in inventory in Europe and North America and as broad line distributors and ended the year about the same.

So inventory is not any different today on the general-purpose products. If you look at inventory in the supply chain for the more fulfillment high volume computer consumer pieces in Asia, that inventory is down from at the end of last year about $45 million down to around $25 million this year.

So for the pieces that we see, factual pieces that we do not see inventory building up anywhere, I would also say that just as from a business operations perspective, Intersil has been fairly proactive in working with our distributors to make sure that inventory is where it needs to be and when it needs to be and not too far in advance.

So maybe unlike historical times where distributors would pile inventory up a little bit heavier than they needed to, today is a little more just in time. So from what we see on the distribution, absolutely no inventory building up.

From a contract manufacturer perspective most of larger contract manufacturers are in VMI. So it’s all just in time and their inventory would be on our books and not recorded in the sales.

So it’s unlikely that inventories of semiconductor components are building up at the contract manufacturers. So from our, where we see all the data points, we are looking at, we just don’t see inventory rebuilding and restocking as it is. We truly believe that this is in demand pulling the inventory through.

Doug Freedman - Broadpoint

If you could really brief comment on ASP trends and what you are seeing on that side of the business?

David Bell

Doug, we actually don’t track ASPs all that carefully. The ASPs actually did go up a little bit in Q4, but even though that might be regarded as a positive sign, we don’t track it very closely because just ASPs in and of themselves as you know aren’t representative. You have to know what the mix of the products is along with ASP to make that a meaningful metric.

So some of that ASP increase that we saw during Q4 was just a mixed chain, as we saw more growth in communications and industrial. But for those very reasons, because it’s really not a very meaningful metric in a lot of ways, we don’t track it carefully.

Doug Freedman - Broadpoint

I guess on a like-for-like basis could you offer whether you are seeing ASP pressure?

David Bell

I would say that we have seen a lot of ASP pressure during the last year in the computing business, I think some of that now is waning as we start seeing supply become a bigger concern of the ODMs right now than ASPs.

Operator

Your next question comes from Rick Schafer - Oppenheimer.

Rick Schafer - Oppenheimer

Just had a couple of questions. First one is going back to the PC question, just curious as you guys kind of step back from some of your more commoditized areas of PC, I mean how did gross margins trend within that segment. Can you give us any idea, maybe timing, or magnitude of any improvement within that group?

David Bell

Yes, you were saying within the PC segment?

Rick Schafer - Oppenheimer

Just within the other PC.

David Bell

I think its going to be fairly stable, there might be a little bit of downward pressure on gross margins but there is number of factors there . As you pointed out we are pulling out of some of the commodity areas where the gross margins are the worst, so that helps us.

We're making a lot of different cost reductions in our products, some of the newer products that have come into market, our (inaudible) micron process as you know, so that gives us some cost improvement there. Those factors are counter balanced by the fact that there has been a lot of ASP erosion during the last year.

But on the whole in the metal add stuff out, I would say that our gross margins in the PC business had been reasonably stable but maybe with a very slight downward trend.

Rick Schafer - Oppenheimer

Okay. And would that apply if you just computing as a whole too, just kind of the same.

David Bell

Yes, and the reason for that is the bulk of our computing business today is PCs. As you heard in my prepared remarks, that’s something we are planning and changing going forward as to get more and more server and storage business and so forth. But today the computing segment is largely affected by the PC business.

Rick Schafer - Oppenheimer

And just follow up on the OpEx ramp. You guys kind of briefly mentioned, I guess how big the revenues need to get before we start to see a meaningful increase in OpEx from 1Q levels here that we are looking for?

David Bell

I think we need to see revenue in the plus 2.20 type, 2.20, 2.50 before we start adding meaningful OpEx. The difference between Q4 and Q1 primarily is more labor days in Q1; Q4 has got Christmas, New Year, and Thanksgiving in it. So we end up with more vacation days in Q4.

Q1 looks like what would be a normal -- Q3 as well, Q3 of '09 was also relatively normal. Q1 is probably a good high watermark, if you will , for OpEx. It's going to be a while before I see that going up significantly from Q1 levels.

Operator

Your next question comes from Mahesh Sanganeria - RBC Capital Markets.

Mahesh Sanganeria - RBC Capital Markets

Another question on gross margins, so you guided slightly up but your mix is improving and plus internal utilization should be improving as you work with inventories. Can you give us little bit more color as to the guidance slightly up, and how does that trend throughout the year, what number can we expect by end of the year?

Jonathan Kennedy

In the comments, we also said that computing and consumer order trends were a little bit heavier coming out of the fourth quarter. So going into Q1, where we normally see a downward revenue, we’re actually going to see flat to up slightly.

So what I think is going to be a little bit different about this Q1 is we'll have a little higher percentage of consumer computing that will offset the margin strength you might normally see in Q1 driven by even more capable product mix.

As far as generally speaking gross margins, we do believe that we've got the right cost structure in place. We consolidated our two fabs early last year, we built an inventory to facilitate that transfer, that inventory is working its way through.

We continue to believe that that will be a back half of 2010 tail wind on gross margin. So if I had to kind of paint a gross margin picture, I would say going up slightly in Q1, Q2, Q3, Q4 again continues to just march its way up towards our goal of 58%. I don’t know that we will end the year at 58%, but certainly drawing a straight line between where we are today and the end of 2011 seems reasonable to get to 58%.

Mahesh Sanganeria - RBC Capital Markets

58%, it’s the 250 million of revenue run rate, right?

David Bell

That’s correct.

Jonathan Kennedy

That’s the goal we articulated and we feel quite comfortable in being able to achieve that goal at least by the end of 2011.

Mahesh Sanganeria - RBC Capital Markets

And with regard to that, you said that the acquisitions you did, that has the potential for anywhere between 22.50 kind of revenue. When does that revenue actually start to ramp? This could be like early 2011 that’s when we can start ramping incremental revenues from those acquisitions?

Jonathan Kennedy

Well, as I mentioned earlier, there is a lot of differences on how rapidly these revenues ramp at these start-up companies depending on the market that they are in. In a few of them, we are going to see some pretty sizable revenue ramps during 2010 and some others are just going to take longer.

But certainly, when you go out towards our $1 billion run rate goal at the end of 2011, the combination of the five acquisitions can be a fairly sizable number, but we are reluctant to obviously give you guys a whole lot of detail about exactly what our revenue forecast is by start-up companies, just like we don’t buy product lines. So, we are not going to give you too much clarity there.

Operator

Your next question comes from Tore Svanberg - Thomas Weisel Partners

Tore Svanberg - Thomas Weisel Partners

I had a question on the previous answer. I think you were saying the computing business should be stable this year. But in the last year you did 209 and you are already on a 60-65 million run rate. So was that answer more related to market share or you are actually expecting it to be flat this year, I mean it seems like it’s going to grow quite a bit this year?

David Bell

Well, and my answer was regarding dollars and sales not relating to market share and again I’m always reluctant when you guys start asking me questions that go beyond Q1, now we are giving you specific forecast for Q1, but kind of giving you some hand waving about what the rest of the year looks like.

Now with the caveat though, I think that roughly our expectation is that dollar sales into the PC market throughout 2010 are probably going to be fairly flat and what that means Tore is that obviously we are going to be growing the other markets in the company much faster in order to achieve our overall growth objectives.

And you are seeing that, you saw industrial grow 15% sequentially, you saw comms grow 29% sequentially, so I have confidence we’ll do that.

Tore Svanberg - Thomas Weisel Partners

And as a follow-up, maybe we could just get this inventory issue put to bed here. But I mean typically, if there is inventory you would start to see cancellations and I’m just wondering if you have seen any cancellations whatsoever or even any signs of cancellations whatsoever?

David Bell

Well, in any given quarter, there is a low level of cancellations, pull-ins, push-outs and so forth. And what I would say is, what we are seeing right now from our customer base is a lot of expedites as there is a surprising strength in the business, business across the board is growing faster than we or our customers anticipated.

But as far as answering the question, is there an unusual amount of push-outs and cancellations? No, I would say there is not, so from our vantage point, I always hesitate even to utter the words on one of these conference calls, but we don’t see any evidence whatsoever of double booking would result in push outs and cancellations, no evidence whatsoever.

Operator

(Operator Instructions). Our next question comes from Craig Ellis - Caris & Company.

Craig Ellis - Caris & Company

On the gross margins Dave, when you look at the target financials for the company and the three elements, are you equally confident in getting all three or confident in gross margins or the operating margins?

David Bell

Well, I think as you guys might guess, I think probably the biggest challenge is going to be hitting at $250 million Q4 2011 revenue number. We got our own internal trajectory mapped out. How we think we get there, it's not a cakewalk but we think we can do it. We're rolling up our sleeves and we think we can get there through a combination of organic growth and sensible strategic acquisitions.

So I think that categorically that's probably the one that takes the most effort. When you look at gross margins, I'm very confident that we can get there on a gross margin standpoint with the way we see the mix of our business shifting, the cost reductions, utilization improvements and so forth.

So again I don't want to lead you to believe that's a slam-dunk but I'm very confident that we can achieve our gross margin goals. And from an operating profit standpoint, that's probably the one that we have the best knob on because we can control OpEx. So if we're getting our revenue, if we're getting our gross profits just by controlling OpEx knob, we can make sure that we can hit that that operating profit percentage.

Craig Ellis - Caris & Company

Just on the deal activity, you mentioned a couple of times five deals in the last 18 months, is that the cadence we should be thinking about as we look ahead for Intersil?

Jonathan Kennedy

I don’t want you guys to be conditioned that we are going to do roughly one per quarter. It’s really hard to tell. I think there has been an opportune time during the last six quarters or so to really pick up some amazingly good startup companies, which is what we’ve done.

The market dynamics are beginning to change a little bit. I think there might be some more alternatives with some really good startup companies. So that might play a little bit of a factor. Also one thing, we have been somewhat public balanced, we are going to looking at companies that are maybe a little bit bigger on a scale, not just companies that are startup companies.

So I wouldn’t want you to believe that just because we’ve done on average roughly one per quarter that you should expect that. Some of these things are opportunistic too. We do have a shopping list of things that we would like to add. But some of the stuff that comes along, comes out of the blue. We look at it, heard me say that made sense, so hard to predict.

Operator

Our next question comes from John Pitzer - Credit Suisse.

Ashish Shah - Credit Suisse

This is Ashish Shah [ph] for John. For the last few months several semi companies have talked about back end capacity constraints, given that you’re almost 100% outsourced for your test and packaging needs, do you think this is impacting your lead times at all? And also as you look at that, do you think this could be a gating factor to meet demand over the next several quarters?

Jonathan Kennedy

If you look at the Intersil , we are one of the largest consumers of back end package and test business. We got reserve capacity at three of the major players out there. We own a significant amount of the test and package equipment. So I don’t think outside of some spots areas where we might be limited on capacity. Generally speaking, we’ve got the capacity and we have the ability to add capacity if necessary.

Operator

Our next question comes from Terence Whalen - Citi.

Terence Whalen - Citi

So it sounds like you’ll have very interesting operating margin leverage based on your expectation for flat OpEx from 1Q onward. But it sounds like some new information this call is that you expect computing to be flat in 2010.

And in that sort of an environment given the size of that business and your expectation for that to be flat, don’t you think it’s going to be difficult to grow at the rate of the market despite your expectation for some other areas to do pretty well?

David Bell

Well, it’s a good question Terence, but let me I guess clarify one thing, we expect the PC revenues to be probably flattish throughout 2010. But as I mentioned we are going to be investing and have been investing in new products that go into servers, things like network-attached attach storage and so forth, those we expect to grow.

So even though PC might be roughly flat throughout the year, that doesn’t mean the computing market segment in total needs to be flat. We expect to see growth in some of those others areas we’ve been investing into.

Terence Whalen - Citi

Then my next question is on acquisitions. I think that in your history as a company, as a public company, the cumulative dollar amount of acquisitions has been pretty significant with some large ones in the past. More recently you’ve done smaller ones, but as analysts if we don’t have the metrics to judge the revenue, it’s very difficult for us to determine whether these acquisitions are good pattern or not.

What are some of the milestones that we can specifically look towards this year to determine whether or not your acquisitions are indeed paying off and meeting your return expectations? Thank you.

David Bell

Yes, I suppose that’s a good question, maybe we have to kind of think about little bit how can we give you some idea about the performance of these acquisitions that we've made. As I'm sure you understand, I am a little bit reluctant to start giving you exact revenue information on an acquisition by acquisition basis and talk about a quarterly that would be kind of akin towards giving you that same information on each one of our product line.

So and it is just getting too detailed. Nevertheless I understand you guys want to understand how the acquisitions are doing being successful and we need to maybe come up with some way that we can do that for you.

Jonathan Kennedy

The other think I would point out to too, Terence, is that you mentioned how do we find out this year, and we look at this, the most of the business that we've acquired have very, very long horizon payouts on them.

So to measure them, six months out of the gate, a year out of the gate, two years out of gate is one way to look at but I think we look at it at a much longer timeframe on how we enter into these markets, take the Kenet acquisition for data converters, and Intersil is not going to own the data converter market overnight, it’s going to take years to get that to work but it’s a piece of the business that has a lot of pull through .

So as we go to customers and try to sell data converters we are also selling other pieces and so it's difficult to judge did that business come from the acquisition or that had come from having a door opener.

Zilker is the same thing with the dual power management. One could say the same about light sensors, an internally developed product, a huge door opener for many opportunities. It's very difficult to kind of pin revenue down just because of our product portfolio, it’s a very difficult measure, we struggle with it internally and it'd be more difficult for you guys to measure.

But I would say what you'll see is for these smaller acquisitions, you'll see our portfolio growing by increased revenue in the end markets that these acquisitions serve . And I think that’s probably the best way to look at, is that, are the markets growing, are we gaining traction in adjacent products to the acquisitions, are we gaining traction in the acquisition product line themselves, is a little bit difficult to determine.

Dave Bell

I'd like to underscore as Jonathan said, it's very, very true that just looking at the dollars from the start-up acquisitions themselves is not a complete measure. Just one example, if you take say a D2Audio amplifier that might go into a car audio system, it might bring along with that design win 10x the revenue in other power management products.

So some of these acquisitions are very strategic not just because of their own revenues but because of this product line that Jonathan talked about.

Operator

Your next question comes from David Wu - GC Research Ltd.

David Wu - GC Research Ltd.

Well, actually I have both a clarification and question, all related to the PC side. The biggest processor company Intel, I don’t know whether they’re too conservative or not, they’re guiding to be sequentially seasonal first quarter. And for ODMs to order power management stuff, is there an indication that actually the ODM seeing better than seasonal Q1?

And my follow-up actually is when I looked at your computing segment, it peaked about $79 million a quarter. From the way you're describing things, by the time you hit 250 in your quarterly revenues, that computing segment may not go back to the level of the $79 million. Do I read it correctly?

Jonathan Kennedy

Yes, my earlier comment to one of the other questions, so again don’t confuse or don’t believe that PCs are synonymous with computing. PCs represent the bulk of our computing business.

As we go forward, we are going to make the computing market segment more diverse with servers and storage products and things of that nature. So while PCs may be flattish, that doesn’t mean the computing segment is going to be flattish.

David Wu - GC Research Ltd

So when you say the first quarter is going to be up sequentially on the computing side I assume it's NAS and servers that are giving you the upside?

Jonathan Kennedy

Believe it or not, actually PCs are going to be up a little bit, which does beg the question you are alluding to is with Intel guiding down significantly for Q1, how do you rationalize that when we are actually seeing our PC business going up slightly in the first quarter.

David Wu - GC Research Ltd

Yes, I was wondering what it is, because Intel has been too conservative, because I don’t think the ODMs in Taiwan want excess inventory.

Jonathan Kennedy

Right. Now there is a difference in when the processors actually get purchased and put on the board, that happens very, very late. So there is a time shift there. It is a curious question.

The other element to it is, yes, we are gradually diversifying the computing portion but even so, David, the PC portion of the business, looks like we are believing that there is going to be some slight growth in it.

David Wu - GC Research Ltd

I guess it won't hurt you if you get to $250 million without the computing segment hitting $79 million again?

David Bell

Yes, I’m not going to give you any real specific numbers way out there in time, but just the general strategy here is that we’re going to try and hold our PC business roughly flattish and we’re going to grow the rest of the company around it. And the consequence is when you go out a couple of years from now, we're still going to be in the PC business, absolutely. We’re going to be somewhat more selective about it, but we are going to have a better balance between our businesses.

Jonathan Kennedy

Let me make one more comment too on the definition of flattish. If we look at flattish to 2009, Q1 2009 had a huge pothole in computing revenue. When we say flattish, we mean in the Q4, Q1 2010 sort of run rate flattish. We are not talking about just extrapolating 2009.

David Bell

Right, when I was talking Q1, I’m talking Q1 2010 not Q1 2009.

David Wu - GC Research Ltd

I see. So you got a $37 million pothole in Q1 of ’09.

David Bell

Right, that’s not a data point to using our flattish direction.

Jonathan Kennedy

We expected the kind of run rate we’re going to be at in Q1 with the PC business probably going to be flattish throughout 2010. I’m not referring back to Q1 of ’09.

David Wu - GC Research Ltd

So mathematically it will be up year-to-year anyway.

David Bell

That’s right.

Operator

(Operator Instructions). Our next question comes from Steve Smigie -Raymond James.

Steve Smigie - Raymond James

Obviously, you have a pretty nice balance sheet with decent cash flow. What’s the likelihood you take the opportunity to use a big chunk of that cash and maybe raise some debt and do a larger acquisition versus continue with the smaller acquisition strategy at some point?

David Bell

Right now it's not in the plans that we would do that. We have not also done any stock buybacks during the last year or so. So right now we're not planning on doing any real creative financial maneuvers like that although it isn't a very controversial topic I know in the industry.

Jonathan Kennedy

Steve, the acquisitions makes strategic sense and the way you finance it sometimes has to do with how you get the deal done whether or not an acquiree wants cash or stock or something. So I think that’s the tail wagging the dog, we wouldn't look at it, to come up with a financing strategy and then go find someone to buy, it's really the other way around.

David Bell

Right, so probably the only case, Steve, where we would consider debt would be as part of the large acquisition where it actually made sense in that context.

Steve Smigie - Raymond James

I mean what's the likelihood that you do do larger acquisition?

Jonathan Kennedy

Who knows (inaudible).

Steve Smigie - Raymond James

You're not specifically against large acquisitions?

Jonathan Kennedy

No, not specifically against anything.

Operator

Your next question comes from Harsh Kumar - Morgan, Keegan & Company, Inc.

Harsh Kumar - Morgan, Keegan & Company, Inc.

Couple of quick ones for Dave and Jonathan. First of all, how booked are you for the March guidance that you are giving at the midpoint?

Jonathan Kennedy

Well, I’ve got about 30% turns required to get there.

David Bell

At the start of the quarter.

Harsh Kumar - Morgan, Keegan & Company, Inc.

Then your recent acquisitions that you made, I believe five or six maybe, anyone contributed to any significant revenues in this December quarter?

Jonathan Kennedy

No, I don’t believe that any has contributed significantly during the current quarter. What I would say, again, without being specific is that, I think there is a couple of those that could actually contribute nicely to our 2010 revenues.

Harsh Kumar - Morgan, Keegan & Company, Inc.

I think you were talking about Quellan right?

David Bell

In the Quellan, we expect to grow nicely during 2010. So yes, it would be one of them that I think that could contribute.

Jonathan Kennedy

Just generally speaking the ones that have a consumer products orientation have that trait where they ramp quickly. So that’s things like D2Audio, Rock and the ones that are more industrial and comm. have a much slower ramp, Kenet, Zilker.

Quellan is kind of an in-between because of the type of application it’s going for, but generally, there is definite correlation between the type of products and how quickly it would ramp.

David Bell

Quellan is a little bit different as Jonathan was implying because although it is really kind of going into the infrastructure market, it’s going into cables, which is something that can be purchased and readily installed into an existing installation if you wish.

Harsh Kumar - Morgan, Keegan & Company, Inc.

Your PC commentary about flattish from the March 2010 quarter, is that the way you are choosing to manage the business to get to your goals or is there something that you are seeing in the industry which makes you feel that that’s going to be the case? Any kind of color would be very helpful.

David Bell

I think it’s largely the result of our clearly articulated strategy that we want to gradually reduce our reliance in our PC business. We want to focus on the higher performance, higher margin aspects of that business where we think we can really differentiate ourselves and at the same time invest a disproportionate amount in other areas that we think are taking us strategically where we want to go.

So it’s not something where it’s out of our control. It’s absolutely part of our strategy.

Operator

Our final question comes from Blayne Curtis - Jefferies.

Blayne Curtis - Jefferies

Jonathan, you have seen a big snap back in industry and communications, you are getting back to the 08 levels, utilization is still at 60%, you are working down that buffer inventory, I was wondering just trying to gauge the magnitude kind of the tail wind you’ll get in the back half, if you weren’t working down that buffer inventory, where would utilizations be and what kind of tail wind could we see ?

David Bell

Well, if we weren’t working our inventory we would probably be heading into this quarter at a high 80s, low 90s percent kind of a full utilization. Our internal fabs right now, they are pretty much limited by personnel, we continue to add people, limitation by tool sets happens a little farther down the line and then the facility itself can handle even more capacity.

In terms of how much margin tail wind that gives, I think it’s probably somewhere in the 50 to 90 basis points that we see coming into the back half that will happen as a result of filling that fab up to the mid 80s and low 90s utilization.

Blayne Curtis - Jefferies

Your ambient light, Dave, your ambient light sensor business has been a good business for you as far as, could you just give me a idea the sense of your design traction, what kind of magnitude of that consumer bucket is ambient light at this point and what kind of growth in 2010 in rough terms can we think about that?

David Bell

Yeah, I’m going to be a little bit evasive giving you an exact dollar number, but what I’ll tell you is it is becoming a very significant number. So the ambient light sensors are now going into basically any smart phone, are going into like almost anything with an LCD display for that matter.

Proximity sensors will be becoming important as well. So it’s becoming a sizable chunk of revenue plan and we expect sizable growth like we are talking about double digit growth quarter-over-quarter for sometime and probably going to see that continuing.

As far as our penetration in those markets, I would say that almost all of the top smart phone vendors have now designed us in into their smart phone products. So we are getting very, very good traction there.

What I will say is as well is kind of emphasizing the fact that we are being a lot more selective on how we apply our R&D and there are some areas we think are not strategic, where we’ve cut off R&D investment, ambient light sensors and proximity sensors, we know is just a rapidly growing area and we are piling on R&D there.

We are going to make sure that we maintain our leadership standpoint from our technology and involvement with our customers. So we are investing heavily in that area, so that’s going to be very important area, already very important, but even more important in years to come.

Blayne Curtis - Jefferies

Great. And then just finally in computing as you walk away from some of the more commoditized business servers, some of the longer design cycle, what stage of the process are you in getting those wins in getting revenue out in servers to get that business to grow again?

Jonathan Kennedy

Well, it’s a blend, there is some stuff that we are going to be seeing come along during this year that is a result of design wins that have happened in the past. We are getting new design wins based on relatively new products that have come to market.

And then as I kind of alluded to, we've got some pretty cool technologies we haven’t really discussed openly yet that I think are going to give us really good edge when it comes to server applications. We expect to start sampling some of those products later this year. So those obviously probably are going to be turning into real revenues until sometime in 2011.

Operator

That concludes the question-and-answer session of this call. I would now like to hand the call back over to Dave Bell.

David Bell

Very well, thank you for joining us today for Intersil's fourth quarter and year end 2009 earnings conference call. This management team remains committed to our long-term strategy as you can here and we are committed to achieving our billion dollar goal by the end of 2011.

This growth is being driven by new high-performance products, by expanding markets, and by strategic acquisitions and we're excited on tracking our progress with you in the coming quarters.

Intersil will be hosting its 2010 Analyst Day on May 14th in San Mateo, California. We have sent a save-the-date reminder to most analysts in the fourth quarter, and we'll be sending a full invitation with all the details during the first quarter. If you do not receive the invite, feel free to contact Brendan and he'll add you to the RSVP list.

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

Thank you for your participation. This concludes today's event. You may now disconnect. Have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!