Intersil Q3 2006 Earnings Call Transcript

Oct.18.06 | About: Intersil Corporation (ISIL)

Intersil Corporation (NASDAQ:ISIL)

Q3 2006 Earnings Call

October 18, 2006 4:45 pm ET

Executives

David Zinsner - Vice President and Chief Financial Officer

Rich Beyer - Chief Executive Officer

Louis DiNardo - President and Chief Operating Officer

Analysts

Craig Hettenbach - Wachovia Securities

Craig Ellis – Citigroup

Douglas Freedman - American Technology Research

Muhammed Siraj - Credit Suisse

Ross Seymour - Deutsche Bank

Tore Svanberg - Piper Jaffray

Steve Smigie - Raymond James

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2006 Intersil Corporation’s Earnings Conference Call. My name is Schwana and I will be your coordinator for today. [Operator Instructions]

I would now like to turn the presentation over to your host for today’s call, Mr. Dave Zinsner, Vice President and Chief Financial Officer. Please proceed sir.

David Zinsner - Vice President and Chief Financial Officer

Thanks Schwana. Good afternoon and thank you for joining us today for Intersil’s Q3 2006 Earnings Conference Call. We completed our Q3 on September 29 2006. A press release was issued today at approximately 1:15 pm Pacific Time. A copy of the press release is available on the investor relations section of our website at www.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 two weeks through November 1st.

Joining me on today’s call are Rich Beyer, Intersil’s Chief Executive Officer, and Louis DiNardo, President and Chief Operating Officer. In a few moments, Rich, Louis and I will deliver remarks on the Q3 2006 and provide a summary of our business outlook. After our prepared comments, we will open the line for questions.

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 pro-forma or other financial measures that are not prepared according to Generally Accepted Accounting Principles. We use these non-GAAP measures because we believe they provide useful information about the performance of our business and should be considered by investors in conjunction with GAAP measures that we also provide. You can find a reconciliation of non-GAAP to comparable GAAP measures on the investor relations section of our website.

For those of you interested in learning more about Intersil at an upcoming investor event, we will be presenting at the JP Morgan Small and Mid Cap Boston Conference on November 13th, the Credit Suisse First Boston Technology Conference on November 29th in Phoenix Arizona, and the Lehman Global Technology Conference on December 6th in San Francisco.

I will now turn the call over to Rich.

Rich Beyer - Chief Executive Officer

Thanks Dave, good afternoon and thank you for joining us today for Intersil’s Q3 Earnings Conference Call. Q3 was another very successful quarter for the company.

Against the backdrop of many of our analog competitors being flat or down in the quarter just ended, we achieved record net revenues of $192.9 million, an increase of 22% from last year and 3% from Q2. Non-GAAP earnings per share were $0.33 per share this quarter, an increase of 57% from last year and 10% from Q2. By improving our mix of higher margin products in addition to several initiatives to reduce manufacturing costs our gross margins are now 58%, a record level. We are pleased that gross margins are now within our target model of 58% to 62%. Even more impressive our operating margins of 29.9%, also a record, have reached the high end of our target model of 27% to 30%. This represents the eighth consecutive quarter of successfully growing revenues, gross margins, operating margins and earnings on a non-GAAP basis.

Revenues into the computing, industrial and communication and markets all experienced healthy sequential growth. Revenue into the computing market grew 17% sequentially this quarter due to our increasing presence in notebook power management solutions, our continuing leadership in desktop power management and the seasonality normally experienced in the Q3 for computing related products.

As you know we have been investing significant research and development dollars to accelerate our introduction of general-purpose products. These investments continued to pay off as we again saw nice sequential growth in both the industrial and communication end market. We experienced a sequential decline in the high end consumer market mainly due to an innovation pause in the optical storage space, which will continue and until the ramp of next generation products Blue Ray and HD. These products are expected to ramp in the high volume production in 2007.

Louis will provide more detail about the results of each of our end markets after Dave summarizes the financials. I am please to report that the company generated over $59 million in free cash flow this quarter and we exited the quarter with approximately $716 million in cash and marketable securities and no debt. At this time I would like to turn the call back to Dave Zinsner, who will provide a financial summary, after that, Louis will discuss results from each of our end markets, and then I’ll provide some comments on our Q4 outlook, Dave.

David Zinsner

Thanks, Rich. Let me begin with the income statements. As Rich stated, we reported $192.9 million in net revenue for Q3 2006, an increase of 22% from the same quarter last year and an increase of 3% sequentially. We closed the quarter with a book to bill that which slightly below one this quarter. So based on the profile of our backlog, we require an order turns rate during Q4 of a bit above 40%. On a GAAP basis, net income for the quarter was $37.7 million or $0.27 per diluted share, up 39% from $27.1 million or $0.19 per share for the same quarter last year and down 12% from net income of $43 million or $0.30 per share for the Q2 2006. The 12% decline was caused by a significant one time tax benefit in Q2 related to several discreet tax events. Our GAAP tax rate was 25.2% for the Q3 and we expect our cash rate to be approximately 25% for the Q4.

On a non-GAAP basis, excluding the amortization of intangibles, stock-based compensation and other unusual items, net income for the quarter was $46.9 million or $0.33 per diluted share, up 52% from $30.8 or $0.21 per share for the same quarter last year and up 7% for net income of $43.7 million or $0.30 per share for the Q2 2006. We saw an increased in our non-GAAP gross margins this quarter from 57.8% to 58%. And are now within our target model of 58% to 62%, this 20 basis point improvement was driven by further reduction in manufacturing costs. We should continue to see cost reductions and mixed improvements over the next several years and expect gross margins to continue to improve over that time period.

As a percent of revenue Q3 R&D expenses excluding equity compensation are 15.1%, a 50 basis point increase from 14.6% in Q2. In absolute dollars R&D expenses were up $1.9 million from the prior quarter. This increase in R&D was due to new product development efforts in the hiring of additional engineers. In absolute dollars we expect Q4 R&D levels to be roughly flat with Q3 level. As a percent of revenue, Q3 SG&A expenses excluding equity compensation were 13%, a 260 basis point decrease from 15.6% in Q2. This is well below our stated target of 14% by years end as we took action to reduce SG&A expense when we saw inventory bills in the channel an indication of some market softness. But given our continued caution about the overall markets we will continue our controls on operating expenses. We expect Q4 SG&A expenses to be down slightly in absolute dollar terms. As a result of increased sales in our gross and operating margin leverage non-GAAP operating income for Q3 was 29.9% of revenue, up an impressive 220 basis points from Q2.

We successfully reached the high-end of our operating model of 27% to 30%. Our non-GAAP tax rate was 28% for Q3 up from 26% in Q2 as we adjusted our annual tax rates from 26% to 27%. We expect our Q4 tax rate to be approximately 27%. In summary, we have made tremendous progress and are now within our long-term financial model for both gross margins and operating margins. In the last two years we improved non-GAAP gross margin by 290 basis points, a non-GAAP operating profit by 200%. We expect to continue to improve both gross and operating margins throughout 2007.

Now moving to the balance sheet, for Q3 we generated over $59 million in free cash flow and exited the quarter with approximately $716 million in cash and marketable investment and no debt. We use that cash flow together with a small portion of our existing cash balance to substantially increase the rate of our stock repurchase program. This quarter we repurchased approximately $75 million or 3.2 million shares of our stock. We also increased our quarterly dividend next quarter from $0.05 a share to $0.06 a share. As a result of this share repurchase activity our weighted average share count decreased by approximately three million shares in Q3 versus Q2. For the upcoming quarter we expect fully diluted total shares to decline again by at least one million shares as we continue to be active in repurchases of our stock. On an absolute dollar basis inventory decreased by $400,000 from Q2 and our days of inventory decreased one day to 101 days. Day sales outstanding were 54 days compared with 52 days in Q2.

As you know our revenue expectations for this quarter were predicated on distributor inventory decreasing in Asia for where our bills had occurred in Q1 and Q2. I’m happy to report that inventory decrease by more than 10% in Asia and is now moving closer to healthy level. We currently have less than three months of inventory with our distribution channel partners worldwide and expect inventory levels at our partners to be at (audio gap) Intersil’s President and Chief Operating Officer.

Louis DiNardo - President and Chief Operating Officer

Thanks Dave. First let me make a few comments about our strategy in general. Our primary goal is to provide shareholder value to a profitable growth. As you know well our target is the high performance analog market. However, our strategy as one of the large pure play analog company’s is different. Our goal is to constantly balance our presence in the area of application specific solutions which address the requirements of high growth segment in the electronic industry and high performance general purpose products which address the requirements of a diverse step of end customers in many end markets and geographic regions. Serving the cell phone market which reinvents itself every nine months and provides virtually no lead time on manufacturing demand is substantially different than serving the industrial control market which develops products that last the life time when compared to forecast manufacturers.

We believe we developed a unique competency and simultaneously serving these divergent demands. Our strategy is working well. We demonstrated growth in excess of the overall analog markets for eight consecutive quarters and we continue to expand our gross margin and operating profits. Our investment in research and development is powerful and is in line with the strategy. Our deployment of sales and marketing resources is in line with the strategy and our entire company is committed to the strategy.

Our relationships with major customers and all of the exciting high growth markets has a great benefit helping us to find new product. Our seasoned analog design team, supported by talented group of applications, products and test engineers is the foundation of our new product development machine. Our unique strategy in the high performance analog business of developing our own processes in conjunction with world-class foundry partners gives our team a wide array of technology without the burden of capital expense.

Of these advantages our sales and marketing presence is expanding and we are driving Intersil’s products to significant new serve available market allowing us to perform well in both strong end and soft end market circumstances. Now let me discus the highlights of each of our end markets. First I’ll comment on the industrial market. Revenues into the industrial market represent at approximately 25% of Q3 revenue. On an absolute dollar basis revenues into the industrial market increased 24% year-over-year and 3% sequentially. In Q3 we have double-digit sequential growth with several of our products. Our voltage monitors, DCPs, military products and interface products all grew well in Q3 while some legacy product line in the industrial area overall growth in the segment. In the area of new product development we have now several new product families in Q3 targeting factory automation, security networks, power meters, medical instrumentation and video system. New products included isolated PWM controllers for AC to DC power supplies and high performance PWM controllers’ point of load applications.

In Q3 we continue to gain significant new design wins in the industrial market and we expect our design win momentum to continue in 2007. Consistent with the normal seasonality we expect in our industrial business expected to be down slightly in Q4. We are making a concerted effort to grow this area of our business since gross margins are well above the corporate average and product life cycles are very long. In 2007 we expect our industrial business to grow faster than the overall industrial markets as we continue to expand our served available market with new product offerings and increase the share gains. Now I’ll move on to the communications market. Revenue for the communications market represent a 25% of Q3 revenue. On an absolute dollar basis revenue into the communications market increased 29% year-over-year and 4% sequentially.

We have double digit sequential growth from several of our product families isolated power products, for communication satellites and inter phase products all shared revenue attraction from previously reported design wins. We continued to see design win moment in the communications market we registered over 90 design wins in Q3 and expects to see nice revenue gains from this design wins in 2007. We are investing significantly in power management and analog products for the communication applications.

Specific to DSL we saw another healthy quarter but seasonally strong demand but where some of that strength was driven by inventory at a few customers which cause the Q4 to be weaker than normal. We continue to be a leader in line drivers with major market share that we believe our investments are sound as an increase in ADSL 2 plus and the introduction of DDSL-2 will drive healthy growth in this important market. Looking ahead we accept the communications market end market to be down due to seasonality and softer demand in several of our communication end markets including DSL, wireless space stations and satellite applications. Turning to high end consumer, revenue into the high end consumer market represents at approximately 24% of Q3 revenue. Results in this market were mixed; in handhelds we experienced nice sequential growth.

Last quarter we highlighted our new ultra low distortion audio data switch which provides both audio and USB switching capabilities. In Q3 we secured a significant design win and a prominent MP3 player manufacturer had began shipping products for mass production. This quarter we announced two new light digital sensors that achieved peak sensitivity close to that of the human eye. These devices are a perfect fit in consumer, automotive and industrial applications where performance, flexibility and small size are critical but with over 400 handheld customers rapidly increasing silicon content and new applications we accept this business to be one of our fastest growing businesses in 2007. For business in LCD displays there is two dominant areas power and analog signal processing. We have sequential growth in our power management products for display applications, our display power products are more heavily rated to advanced or digital television applications where we continue to gain market shift.

We experience the decline in analog mix signal products for displays primarily in the LCD monitor area. Some of the products used in older designs have been turned to commodity products and as a result not meet our profit goals. However, as our strategy is to focus on innovation we continue to work closely with all tier one LCD TV makers developing key solutions for today’s market as well as future panel technologies. In advanced applications we once again led the market with solutions for programmable gamma buffers and other analog mix signal products to position us for growth in the expanding market for high quality displays in advanced television and multimedia monitor application.

As a final comment on the LCD business as many of you are aware the LCD industry built inventory in the first half of the year and customers as well as channel partners needed to work through the inventory built. At this point we feel the inventory levels are in good shape and we accept the LCD business to begin growing again and end user consumption as reflected in demand and new product designs can hit mass production.

Considering the LCD TV market the key drivers for Intersil in Q4 and 2007. In the optical storage business we experience the decrease in revenue in Q3, our 16x DVD recordable products have been in the marketplace for sometime and low cost solutions for laser diode driver applications have become more prevalent. We accept the environment to continue until the next generation of Blue Ray and HD products and to ramp in high volume production in late 2007 and in 2008. As we have indicated in the past, Intersil’s well positioned to benefit from both emerging technologies. In aggregate, revenues into the high end consumer market increased 6% year over year but decreased 9% sequentially. We expect that the Q4 2006 will be a growth quarter for high end consumer business and 2007 will be year of significant growth.

Earnings from computing, revenues into the computing market represented 26% of Q3 revenue. On an absolute dollar basis revenues into the computing market increased 34% year over year and 17% sequentially. In the area of desktop and servers we experienced double digit sequential growth in Q3, we are having great success with the transitions in the Intel broad water platform and continue to work with all of the major motherboard manufacturers. We still maintain major market share in desktop core power solutions with both Intel and AMD. This quarter we introduced a new family of controllers targeting both Intel and AMD, PPU core requirements that provide the most cost effective power solution by integrating the set drivers and controller on to a single chip. Looking ahead we expect to maintain our strong position in desktop power management and as next generation platforms are deployed.

In notebook computing we also had double digit sequential growth, we continue to win sockets for our core power solutions as well battery chargers and system regulator functions in Intel’s notebook platforms and major OEMs and ODMs. This quarter we introduced a new family of core controllers with Intel’s Core Duo mobile platform. These controllers provide superior transit response and excellent load efficiency in notebook design. Looking ahead the notebook market is poised for 10% to 15% growth in 2007. We expect that the excellent strength in our notebook business as we capture sockets in Intel and AMD based products. We see the notebook market as a key driver for Intersil in 2007. Now I would like to turn to the call back over to Rich.

Rich Beyer

Thanks Lou, lets turn to our outlook. For the Q4 we expect the computing and consumer end markets to be up modestly, which is less than normal seasonal growth as we expect our distribution channel partners to further reduce inventories. By the end of Q4 we expect inventory levels in these end markets to be back to normal levels. We expect the industrial end market to be down slightly. We expect revenues into the communication end market to be down due to normal seasonality, a softening in demand and modest customer inventory bills related to several of our communications markets as Lou outlined. In total, we anticipate Intersil revenues to be down 3% to 5% from Q3 revenues of $192.9 million, but up 4% to 7% from the Q4 of 2005. We expect GAAP earnings per diluted share of approximately $0.24 to $0.25 and non-GAAP earnings per share of approximately $0.31 to $0.32. Before we open up for he questions I would like to summarize with these key points.

This was one again a very good quarter for Intersil Corp. We successfully grew revenues in the quarter, the eighth consecutive quarter. We improved gross margins and are now within our target model of 58% to 62%. We increased our operating margins by 220 basis points to 29.9%. We grow our earnings per share to $0.33, an all time high. And we did this while we reduced inventory in the channel as we committed and reduced our own inventories as we committed. We also reduced equity compensation by 10% below Q2 levels. We generated $59 million in free cash flow from operations another record and we reduced our fully diluted shares in the quarter by over three million shares.

Finally year to date we have grown our revenues 31% over the same nine month timeframe in 2005 and our non-GAAP operating income has increased 100% over this time period. Clearly we are continuing to deliver superior results, with that Lou, Dave and I are happy to answer your questions, operator.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Craig Hettenbach with Wachovia, please proceed.

Craig Hettenbach - Wachovia Securities

Yes thank you. Outside of some of the inventory correction today in the markets, it looks like you guys in the last couple of months have put out increasing number of press releases on new products. Can you just talk about some of the new product development you have going on and then from a design win perspective why you have the best momentum be a technology application or end market for new products?

Louis DiNardo

Craig, this is Louis DiNardo, it’s a difficult question and we have tremendous strengthen in our new product development effort. It is across all five of our internal businesses and across all four of the end markets that we report. So it’s difficult to highlight any in particular, but clearly in the computing business I think we have done a fantastic job in introducing products in a timely fashion for the broad water transition, likewise for the Core Duo transition, in the communications market we continue to address the point of load requirements in networking and telecom infrastructure applications as well as satellite opportunities where we have strength. Marketplace by marketplace we’ve got a nice machine going, we’ve got disciplined process for selecting new products, defining the requirements and executing in a timely fashion as we possibly can. So on the new product development front you’ll continue to see that rate of new product introduction via press releases and we don’t announce all new products via press releases. Relative to design wins you know we don’t publish numbers; we don’t talk specifically about numbers, but internally its clear to us that we have gained significant momentum. We have significantly more design wins in the first half of this year than we did in the entire 2005 timeframe. So we are continuing to drive the design win process, we’ve added strength to our sales team, we’ve added strength to our FAE or Field Applications Engineering core and we’ve got a very strong factory applications group that supports everyone in the background, design wins are good, new product introductions are good and its across all five of our businesses and for end markets.

Craig Hettenbach - Wachovia Securities

Great thanks and then specifically focusing on the optical market when Blue Ray comes out, previously you discussed that you know the PC is in all likelihood going to be the major driver of adoption there. Is that sort of the case that you expect in ‘07 and to ‘08 PCs, maybe little color on that versus standalone DVD devices?

Louis DiNardo

Well, I think from the standpoint of what will end up been the recordable part of the business certainly, the attach rate we expect in the PC market, but for the read only devices it could be gaming applications and it could be you know, a wide variety of read only platforms. We don’t expect significant Blue Ray or HD content material revenue in the context of a couple of hundred million dollars a quarter for that really to occur into late 2007 and 2008, it’s just one of those slow gestation periods for adopting a new technology.

Craig Hettenbach - Wachovia Securities

Great, thank you.

Operator

Your next question comes from the line of Craig Ellis with Citigroup, please proceed.

Craig Ellis - Citigroup

Thanks, good afternoon guys. Really a longer term question here, you have clearly made significant progress in both your gross margin targets and your operating margin targets over the last year. As we look out into late 2007, is it possible given the product momentum you have right now but we can be looking at the same magnitude of gross margin improvement and operating and margin improvement that we’ve seen last year.

Rich Beyer

Craig, this is Rich. We have made steady improvements over the last eight quarters in gross margin and operating margin. Our model is structured to be the model that we believe we can operate in good times as well as in soft periods. We feel confident that we can operate in the 58% to 62% range and clearly we’re demonstrating we can operate in the 27% to 30% range. Where exactly we are going to come out in 2007 that we are putting all plans together, we need to see what's going to transpire in the overall analog market so we don’t want to be predicting exactly what our margin gross or operating margin is going to look like in -- by the end of 2007. So suffice to say we have a lot of efforts underway, product mix as well as cost reductions to continue to expand gross margins and we’ve demonstrated that we get additional leverage from both revenue growth and gross margins on our operating margins and we will continue to drive the company that way.

Craig Ellis - Citigroup

Okay and then just as we think about gross margins, given the inherencies now in the industrial and communications end markets, Rich, is it fair to think about gross margin improvement, offer --mix still being more first half oriented and then with the PC business being seasonally stronger in the second half but it’s a little bit harder to see margin expansion in second-half given those dynamics.

Rich Beyer

One might argue at a very high level that’s true but I have to tell that we are really pleased with the performance of our computing business this year. It is growing very nicely and we can run the numbers but also our gross margins will continue to expand in that business similarly and some of our consumer businesses we’ve seen very nice expansion in gross margin. So, from a logical standpoint the industrial infrastructure are higher margin markets, they tend to be a bit stronger in the first half of the year and the consumer and the computing are lower than those gross margins. So one could argue that ought to be the case but the fact of matter is this year we appear to be continue to expand gross margins despite that seasonality and I had to take a guess whether or not we are going to be able to continue to steadily increase gross margins next year but that’s certainly our desire.

Craig Ellis - Citigroup

Okay, well good for you guys and good luck, thanks Rich.

Operator

Your next question comes from the line of Doug Freedman with AmTech Research, please proceed.

Douglas Freedman - American Technology Research

Hi guys, thank you. If you could talk a little bit about -- a little bit more color on what you are seeing from the end customer. I mean we are hearing that sort of high end consumer and computing is a little bit lighter than expected. Can you go in to sort of like segments you are seeing that hold back?

Louis DiNardo

Doug this is Louis frankly we may in that sense not be a good parameter. Our customer demand in the computing business is quite strong. In fact we were able to grow nicely this quarter and bring down channel inventories. As I said in the consumer business, a bit of mixed bag, we have some products that, you know, frankly have just become commodity products and no longer fit our model. But in other areas, power management for display application and advanced TV we’re see healthy and strong demand. So we may not be categorized or bounded by this, the nature of your question.

Douglas Freedman - AmTech Research

I mean -- okay, I guess looking out a little further, we are starting to see or there is clear trends that high performance analog doesn’t offer the robust 20% or greater year-over-year growth rates just looking over the last five and ten year windows. Can you discuss what you think might be driving that and if you guys -- what your outlook is and what do you think are reasonable expectation for long-term growth that this industry is and if the landscape is changing in regards to foreign competition that’s more quickly commoditize some of these products?

Rich Beyer

Doug its rich, we think the idea of 20% growth is the feasible. We are certainly expecting to deliver that if we can achieve the results that we provided in our guidance for Q4. We are going to grow somewhere in the 23%, 24%, 25% range this year, that clearly is higher than the rest of our peer group. I think there are more competitors in this market place today that are focus on it and they were years ago. So there is clearly more competition for various high volume stockiest and that can have a dampening effect on the individual performances of company. But I think again the background there are still healthy growth in the analog market. There is still clear differentiation available in the analog market and we believe that we can continue to compete in this marketplace. You have asked about foreign competition, this clearly are players that are coming into some of the niches of high performance analog and performing, but smaller players entering the analog market is not a phenomenon, its brand new and some of the companies that have been the finest performing analog companies for the past 25 years have been able to continue to operate successfully. We don’t have any doubt that despite the entrance of some of these, you know fine small companies in issues that we are going to continue to find opportunities to grow our revenue by committing 20% per year revenue no I’m not, but the matter is, it certainly looks like this year is going to be that kind of growth for us and again significantly higher than rest of our peer group.

Douglas Freedman - AmTech Research

And lastly if you could have -- you could focus in a little on the SG&A expense controls and where they came from and how long-term are they, so we think of those expense controls continuing into 2007?

Louis DiNardo

Well, we have a history of really-really managing carefully G&A in particular. We have feel that we need, as we make investments, we need to make investment in areas that it generate revenue growth, which is sales and applications, in design engineers and math and product test engineers and so forth. And that’s where we put the emphasis and that’s why we continue to add people. When we see any kind of softness or potential softness, we get a little bit more careful about our expenditures. We are not changing our overall target model at this point and time although we are operating below that model in R&D even though we continue to expand our investments in R&D steadily. We are operating below that model in SG&A at the moment. So we are not prepared to quite change the model at this point in time, but clearly we are operating at the high-end of the model. And whereas we grow at rates like 20 plus percent, it is really not practical to add resources that fast. So we continue to grow hefty clip next year which we hope, we think that in probably both R&D in the SG&A will continue to operate below the target model level not because we are not investing, but simply because we can’t identify and add the resources that we want fast enough to that revenue growth.

Douglas Freedman - AmTech Research

All right, thank you

Operator

Your next question comes from the line of Mr. Michael Masdea with Credit Suisse. Please proceed.

Muhammed Siraj - Credit Suisse

Yes, good afternoon this is Muhammed Siraj calling in for Michael Masdea. Could you just discuss a little more near term. What are you seeing in terms of overall customer mentality as we enter the holiday season and then as a follow up, could you also discuss, is there any one of your four major end market that your are seeing softer than expected going into Q4?

Rich Beyer

I will answer the second, its Rich and then Louis going to answer the first. We have indicated that communication is softer than any of the other markets. DSL which is historically, unfortunately a bit of a lumpy business because it’s very much project driven, we can have strong demands in a giving quarter and then slowdown in the next quarter and that’s exactly what is transpiring in Q4. But also some of the other areas that we mentioned, some wireless base station business that we have, some communication satellite that we have. So the communication’s market is the one that’s exhibiting slower growth than the other or actual decline relative to Q3. The industrial market is very board based and it seems to be a bit softer for us in the quarter nothing significant and the other two markets so we anticipate growing.

Muhammed Siraj - Credit Suisse

Okay.

Louis DiNardo

I think to answer your question on customer’s sentiment, it’s probably more targeted. I’m sure computing and consumer -- computing customers in general, seen that whole lot less anxiety. We have move to the transition from what we know is VR10.1 to VR11 where they put to Broadwater platforms. This time last quarter there were certainly great deal of hesitation, a great deal of anxiety to have there rollout would occur. We knew we are positioned well for either whether it’s you know Lake Worth maintaining its team or Broadwater taking off. I think that has been settled and Broadwater certainly had been a successful launch and Core Duo has been successful launch. So I think the anxiety is dissipated in the computing space and for the most part even in the consumer space where, you know, a great deal of focus is put on handheld we put MP3 players as well as cell phones and handheld devices. The breath of our product into that space is increased dramatically, we do video drivers, we do audio data switches, we do display drivers, we do battery charging, we do switching regulation battery safety circuits, and sentiment there is for the most part -- I think whole lot less tense or anxious at point in this quarter than it was this point last quarter.

Muhammed Siraj - Credit Suisse

Okay and with the lower revenue rate for the December quarter, is there -- can you comment and how we should may be think about gross margin. Do you expect gross margins continue to the whole flat and continue to supply as much or should we think about growth margins may be point back in mind when the revenue decline?

David Zinsner

Muhammed this is Dave Zinsner, we expect gross margins to be relatively consistent with Q3. If you look at where we were, when we were in a kind of $125 million it’s a kind of level in terms of revenue. We were in kind of a low 57% but we have made a number of cost production improvements since that time. We expect to be you know relatively in Q3.

Muhammed Siraj - Credit Suisse

Got it and just one final follow up. Did you comment -- have you seen any changes in your lead time?

David Zinsner

No lead times have remain relatively constant.

Muhammed Siraj - Credit Suisse

Great, thanks a lot.

Operator

Your next question come from the line of Ross Seymour with Deutsche Bank, please proceed.

Ross Seymour - Deutsche Bank

Hi guys, just a question on a comment, I think it was Rich made earlier about the gross margin within each segment improving nicely specifically within the computing and consumer side of the equation. Can you talk a little bit about the roadmap of further improvement there whether be through manufacturing design are what not?

Rich Beyer

Yeah, Ross we are working on gross margin improvement through really two major trust, one is product mix continuing to enhance product portfolio in all of our businesses to deliver better gross margins, and secondly a whole series of operational trust more of our wafers being produce by our two major partners more of our back end assembly and test activity going to our tier one partners, depreciation, reduction in depreciation in our own fabs and so forth. Both of those trusts are continuing to help us and they all help us in all of the product areas. Computing, we can have one generation of parts that are 0.6 micron, in the next generation of parts where we deliver more functionality, we can deliver those solutions with 0.25 micron technology giving us lower dye cost and lower package size and therefore cost and so forth. So all of these efforts are really applied quite universally across all the product line and that’s why we are seeing pretty much well certainly in each of the four markets are continue to the expand in gross margin.

Ross Seymour - Deutsche Bank

With all those factors occurring sounds like -- each are contributing a little bit over time. Is there any discrete timing to when one kicks in such as a big transfer over to 0.25 micron or anything that we need to be aware of?

Rich Beyer

No, Ross its not. These are gradually things we are designing, for example, new products in various products family into the partner foundries. What we are not doing is a flash – an obsolete bunch of parts in older fabs or non strategic partner fabs and targeting the new ones. So this is going to be very study drumbeat as opposed to a step function change.

Ross Seymour - Deutsche Bank

Okay and one quick follow up on the computing side of things. If I remember right back in July your guidance for that segment with generally a lot more conservative than what ended up happening. Can you just walk us through the quarter and what was really the thing that turn down to allow that business to grow or strongly?

Rich Beyer

That’s a great question. I think that really -- Ross what happened was a very nice and healthy transition with customers where we have long an intimate relationships from VR10.1 or the Lake Worth chipset to the Broadwater platform as well as from Centrino to Core Duo. We made a lot of progress in the last 18 months with design and development of the right products with Core Duo platform in the market at the right time. This was from my standpoint just darn good execution of our computing business, from the GM of that business all the way down to the product engineering team, products were in the market at the right time and there was a nice transition all bit a little later in the quarter then we all would have like, you know, just certainly would feel a lot more comfortable at the earnings call 90 days ago and had been clear that the Broadwater transition would unfold nicely and that the Core Duo transition would unfold nicely. In hindsight, they both did and we had the products in the market at the right time, innovative production circling back to the gross margin question that’s been asked a few times. Computing business is a healthy business because we pick our shots carefully all computing power management ICs are not created equally. There are multitude of different sockets within plus the notebook as well, the desktop and server environment. We pick our shots carefully, we design with a tabloid strategy that allows us to use the best technology to suit the purposes and we have a long-long history of intimate relationship with customers to give us guidance on providing the right solutions. It all came together nicely, maybe a month later in the quarter then expected.

Ross Seymour - Deutsche Bank

Keeps you guys on your toes I guess congrats on the result, thanks.

Operator

Your next question come from the line of Tore Svanberg with Piper Jaffray, please proceed.

Tore Svanberg - Piper Jaffray

Yes thank you good afternoon. First of all, could you talk a little bit more about your optical storage business, looks like its going to go through a transition here, I’m just you know trying to understand how that transition is going to play up the next couple of quarters and also if there is any risk of inventories in that business?

Louis DiNardo

I’ll take that Tore. First of all, the risk of inventory not really, what’s happening today is 16X drives are the mainstay of the market, the ability to delivery those speeds is such today that it can -- company can use the very complex solution that developed or a more simple solution and there are price differences between those. And some of our customers are switching from the more complex part to the less complex part, which has an impact on our revenue stream. But we work very, very carefully with our partners such that we build within a reasonable range of what they require, the optical business is not a business that even they typically have significant inventory issues nor do we. Now, of course, after Christmas somebody built a little bit more and somebody built a little bit less than was necessary and sometimes there is a little perturbation, but nothing on a particular note. What’s really going to happen is that this business in our judgment is going to be relatively flat for us, for at least a couple of more quarters. The Blue-ray and HD are very small parts of our business at the moment. It is growing, but the numbers are so small that its not moving the needle yet, but it will grow steadily through the course of 2007 and certainly by second half of the year we believe component cost will come down, laser shortages will be stall and we think by the second half next year it will start to have an impact and will start see that business for us going again.

Tore Svanberg - Piper Jaffray

Great thanks and also you have been outperform in the market now for two years and your competitors seems to be rally struggling to find gross areas, have your traditional competitors become a little bit more aggressive lately or do you think the landscape is still moving in, in your direction?

Louis DiNardo

Landscapes are still moving in our direction but the competitors clearly know that we are in this marketplace and as this healthy competition going on typically where people see high volume opportunities but this is the lightening shows and I think we are demonstrating that the ray would compete and we seem to be growing faster than others but it doesn’t mean we are winning every soft and every market that we won (inaudible) we have formidable really, really fine competitors sometimes they bring out products that are equal to or better than ours and they win. It seems to be a little bit more frequently over the last two years we are bringing our products that we are winning more than our fair share. So it’s a competitive environment and I think it’s -- we all have to accept, that’s the way it’s going to be for the foreseeable future.

Tore Svanberg - Piper Jaffray

Dave, just last question, it looks like the analog market overall is going to be down sequentially in the December quarter and some of your peers suggest maybe it’s not back in March, what's your opinion on that?

David Zinsner

We talked about this a great deal around here, now March quarter is still far off and we are going to fight our battle here in Q4 and we don’t keep guidance out two quarters. The first quarter is traditionally strong industrial and communications business environment. We spent an awful lot of time and energy building out our portfolio and garnering design wings. So we hope that will certainly help the cost in what is traditionally a softer seasonal demands for PCs and consumer -- overall it’s Q4 we are focused on now and then developing internally the products and strategies to make sure Q1 is best position as possible for Intersil.

Tore Svanberg - Piper Jaffray

Okay I know, thank you very much.

Operator

Your next question comes from the line of Mr. Steve Smigie with Raymond James, please proceed.

Steve Smigie - Raymond James

All right thank you. I was wondering if you could talk a little bit more about Broadwater firm, it’s my understanding of what Intel was saying about that. It did seem like it actually ruled out a little bit more slowly than they anticipated and that the ramp will continue pretty nicely maybe into Q4 and even more soon into ’07. I’m just wondering how that looks for you and maybe rafting a little bit of the question I just asked, how substantially could that ramp be in terms of how it will help you to enter into Q1, I know you comment is in Q1 but would it fair to say that will continue ramp up to that time period?

Louis DiNardo

This is Louis, I think what's clear is we have a very, very nice Q3 now well excess in fact of what Intel published their growth of quarter-to-quarter. And that’s not a typical, maybe somewhat typical, the power management IC vendors particularly in motherboards based and now significantly in notebooks based products are brought in a little bit ahead of time and you know, the processors and chipset may follow with expected returns and lead times that the channel partners do Intel and AMD provide. But we had very, very healthy Q3. We expect as is typical for us that Q4 will be a growth quarter, somewhat less as usually the case in Q3. Now Q1 is out over the horizon but we certainly do have a far greater presence in the notebooks based today and we did in Q1 of last year or the you know, Q1 in 2004, more content more silicon content, higher ASP, overall in aggregate. We work hard to grow every quarter but Q1 is a long way of in computing business.

Steve Smigie - Raymond James

Okay, and I guess one thing, my understanding – my understanding was that it was a little bit slow for them which -- and there were some leading person in the graphics portion. And that’s what they perceived to be an important element, (inaudible) graphic portion of that.

Louis DiNardo

No, Intel, I mean we got a very solid position with the graphic cards maybe in video but we do not supplies specific chips its port Intel when it’s an integrated solution from Intel. So that wouldn’t really affect us in any ways.

Steve Smigie - Raymond James

Okay, great, thank you.

Operator

Your next question comes from the line of Mr. David Wu with Global Crown Capital, please proceed.

David Wu - Global Crown Capital

Hi, good afternoon. Let me ask you a clarification and then a question. When I looked at the numbers for Q3, the computer business must have exceeded your expectation when you gave guidance earlier. So I assume that it must be the consumers that was disappointing so the overall numbers came into a low end of the guidance range, did I get it correctly?

Rich Beyer

You did, David, of course, you know, the center of the guidance was 195 and we came into a 193 so there wasn’t a massive differences. It’s all explained by the consumers, particular optical storage.

David Wu - Global Crown Capital

The optical storage was the culprit in this whole thing?

Rich Beyer

It was.

David Wu - Global Crown Capital

Okay, is optical storage half your business or two thirds of the consumer --?

Louis DiNardo

We don’t get into that level of the details, David.

David Wu - Global Crown Capital

Okay, fine. In terms of Q4, when you talk about the distributors cutting their inventory, I didn’t -- when I look at the numbers from (inaudible) arrow they don’t look that bad. Are there other distributors that you deal with on a worldwide basis that has too much inventory that needs to come down and you know, are those inventory -- those distributors concentrated in computing and consumer segment or they are pretty much right across the board?

Louis DiNardo

Let me take that -- let me take that in pieces. Yes, there are other distributors and Adnet nor Arrow really dominate in our Asian marketplace and so it’s a wide variety of distributors in Asia. You know, too much inventory -- I don’t think we categorize too much inventory at this point. We’ve worked off a healthy year in Q3. And we expect that there will be some additional working off of inventory during Q4. I think it’s clear if we kind of back-up some of the other questions. The transition of Lake Worth to Broadwater and Centrino to Core Duo. It means that over some period of time one, three, five, six, seven, eight quarters that those all the platforms will diminish further and further and further. The idea is that we continue to draw down those inventories such that when they become less material or immaterial as pieces of our revenue, our distributors are stuck with a lingering piece of inventory for a marketplace that no longer exist. I think that’s probably where we are. The access of inventory that may have existed in some channel partners coming in for either consumer or computing by and large we took a good chunk out of that here in Q3 while we grow or computing business, while we had a healthy quarter and we were able to expand gross margin as we brought down our inventory as well as our channel partners. But there is a mix going on. A shift in mix going on in the platforms in the end markets and that’s something that we help reconcile with our distributors.

David Wu - Global Crown Capital

How confident are you that you achieve targeted levels by the end of Christmas?

Louis DiNardo

Pretty confident, we’ve got forecast of what our partners are going to shift to their end customers. And we have obviously built in what we anticipate shipping for them. So obviously we came perfect about what the demand profile is. But we think we got an accurate picture, David, of what levels of inventory we’d like to have, what they anticipate shipping and we what we anticipate shipping for them and that’s the basis of our guidance.

David Wu - Global Crown Capital

I see. Okay, well I was just looking at Q3 and Q4. It seems to be that Q3 was because of optical and Q4 was because of the major product transition that don’t happen very often business. That’s our microprocessor business that linger on into Q4, did I get them right, I mean there was really not a lot of science and inventory building in the first half of this calendar year?

Louis DiNardo

We indicated, I think you got it largely right, but we did indicate in the July conference call that there was more inventory in the hands of our distributors in Asia in particular to support the computing in consumer market. And we said that it was higher than we were comfortable with, all of reasons what Louis said we don’t want these guys, this stock with too much product it might be diminishing overtime. And so we’ve helped them work that inventory down in the most recent quarter and we will continue to help them this quarter. And we think in terms of -- it should be fine by the end of December.

David Wu - Global Crown Capital

Great, thank you very much. Have a good day.

Operator

Okay, your next question comes from the line of Mr. Bill Lewis - JP Morgan, please proceed.

Bill Lewis - JP Morgan

Thanks, I guess my question is really as you kind of look at ’07, given what you learned in the last quarter. You know, is it read to kind of rank order the four business is around, what do you think by you know, deliver the fastest growth in particular I mentioned the high-end consumer because I have think you know that has been a significant area of growth. Now into the December quarter it looks likes it’s going to be down on year-on-your basis. So can you maybe talk about how much of that you think is temporary versus persisting enough into ‘07 that it really you know, knocks it down in the growth rank order, thanks?

Louis DiNardo

Well, you know, what we’ve indicated is that we expect high-end consumer to grow sequentially. We expect computing to grow sequentially and both of them are going to be effected by the burn off of some inventories. The industrial will be down modestly, communication is down significantly. We think we are making the right investments in high-end consumer. Remember that high-end consumer is associated with our Intel business, very broadly defined, cell phones, digital still cameras, MP3 players, etc it’s our display business, which includes digital displays, monitors an0d so forth. And it includes our optical business. There is no question that the optical business is down. It’s down sequentially; it’s down year-on-year. The other businesses are continuing to perform well obviate with this inventory correction statement place. We believe that next year all three of those businesses are going to represent nice growth opportunities as we proceed 6with you. And we think -- we are going to be fine in those areas. And so this is all -- we don’t speculate externally pushed you know, we planed at a very detailed level internally. It’s something we are not going to comment on what's going to grow fastest in 2007 as we look at 2006 of the four market segments that we report you know, normally 20%-plus growth in every market. That’s pretty darn strong. And some are stronger than others but nominally 20% plus which take our guidance and what you know of happened during the first three quarters. Computing overachieved, I think this time last year you --computing we do a year-to-year, no one here would have venture to guess that the results of what were well planed products, well executed in design and development, and well driven through an excellent sales and marketing team. Right place, right time, right products, and the computing business is really overachieved. But our plan is for all four of our end markets to grow healthy in 2007. And we like a horse race between businesses. It’s a healthy, competitive sprit.

Bill Lewis - JP Morgan

All Right, okay thanks. And one last question if I could just actually on, Louis, on that computing business where you did enjoy or have thus far enjoyed a great year this year. How would you characterize the competitive environment today as compared to a year or two ago in computing specifically, is it likely to get increasingly more competitive from here -- from a pricing standpoint or you kind of already you know, living in that sort of aggressive pressing environment today?

Louis DiNardo

You know, it’s an interesting thing about the computing business. A year, 18 months ago everybody was running from this business as I’ve said like their hair was on fire, like it was a bad place to be in. Today everybody wants to attach themselves to it. We’ve stayed tried and true to our -- commitment to our computing customers, large OEMs, large ODMs. And that’s paid off, of course. We have fully intimate relationships, we get a very, very nice look at what do that they need, what do they need put value on versus those things that they don’t put value on. We have integrated a great deal into our integrated circuits to save build up material cost and we share some. But customer, we keep a bit for ourselves and as a result we got a better profit profile on our computing business. The last year for pricing, I don’t think it’s any different. I mean there are spots here and there. Customers or stock is here or there where specific competitors may get overly aggressive or overly assertive. We typically have more than one IC designed into a box. We’ve got five or ten years of relationships built into those accounts and it is a people business. So I don’t think pricing is any anything that’s anything out of the normal for a competitive environment that has enough volume and enough critical mess to attract some of the most worthy competitors.

Bill Lewis - JP Morgan

Great, thank you

Operator

Okay, your next question comes from the line of Ms. Simona Jankowski with Goldman Sachs, please proceed.

Simona Jankowski - Goldman Sachs

Hi, thank you. I think the first question is that the client in your business this time around seems to be much more moderate than it was back in 2004 and that was not the case for some of your competitors. So there is just a little bit of a different read on this how this inventory correction for the industry compares to all four. And I was just wondering for your opinion you know, is this the function of Intersil’s company’s specific positioning this year of being much better than four producing that maybe the industry like correction is not as bad as it was in ‘04?

Louis DiNardo

I think Simona, in general this correction this year is not quite as severe but I will say that I think that Intersil today is significantly better positioned than we were two years ago. In the later part of ‘04 we actually saw our revenue declined second half of the year versus first half of the year. This year if you bake in our guidance for Q4 with our actual results for Q3, you will see that it looks likes we are going to grow on the order of three plus percent second half over first half of the analog competitors that have announced over the last 30 or 45 days. I think the comparison with them would suggest that our second half is going to be stronger than their second half. I think that points to a very robust set of product families, very good execution across all the dimensions that Lou talked about. I think we are simply much-much better position this year than we were two years ago and I believe that strength promises to carry forward in 2007.

Simona Jankowski - Goldman Sachs

Thank you and just a second quick question if I may. So with your operating margin at the high end of the range and a couple of more points of up sight, so your gross margin relative to your targets, would you be expecting to accelerate your R&D next year or will that just be a bounce back in the SG&A line that we saw pull back your last quarter and the related to that if you can comment on the tightness in the labor market right now and if you are seeing the competition tightening for talent out there.

Louis DiNardo

I will answer the second part of the question, maybe for the first. I think it’s a very competitive landscape for talent, but I think it’s recognized by this small counter culture we call the high performance analog business that Intersil is performing well and we have got plans and that we ask execute to our plans. Those with the kinds of things that perspective employees really like about the process of getting to know Intersil as we interview people and we recruit, well structured about what it is that we do, how we do it? Everyone seems to be on the same page, during that process and so while it’s competitive, I think that we have done a fine job. We have the recruiting staff that has done a wonderful job in helping us bring on a large number of new designers this year, product engineers, test engineers, and applications engineers all of which who, if any are listening and they would like to call, they should feel free to but the competitive landscape is difficult but we are doing very well relative to whether it would be a bounce back in SG&A or incremental R&D, we’ve got our internal plans, we’ll let Dave address that.

David Zinsner

I guess -- I just say that you know our target for R&D is to be between 16% to 18% or slightly bellow that, but yes, I think on a longer term basis we are going to cover in between that range. SG&A -- the other range is 14% to 15% again. We are slightly bellow that, but we do expect to hover in that range on a long-term basis as well.

Simona Jankowski - Goldman Sachs

Great, thank you.

Operator

Your next question comes from the line of Mr. Louis Gerhardy with Morgan Stanley please proceed.

Louis Gerhardy - Morgan Stanley

Hey, good afternoon, I wanted to reconcile your comments about channel inventory starting to move in the right direction with the deferred revenues at I think were up at about 20% sequentially or so. I am thinking that maybe that’s a sub segment of the category or you just elaborate on that.

Rich Beyer

That distributor or deferred revenue or deferred income is just our North American distributors. When we are talking about inventory moving in a right direction we are obviously referring to worldwide. Although, I would say that North America was a bit low relative to where it normally operate. So it would increasing was not a concern of ours.

Louis Gerhardy - Morgan Stanley

Okay, and then I am just trying to understand the SG&A change their a little bit better. You know what -- where the type of items where you were able to cutback and was there any sort of headcount reduction or what’s you know, expenses reallocated or a change in the way you pay people just a little more color on why you saw that 14% you know, sequential drop when revenues where up 3%.

David Zinsner

While they are sometimes the SG&A can be lumpy and we had at least about a million and half of expense in Q2 that was somewhat one time oriented, which I think we mentioned in the prior call and SG&A has a bit of variable spending in it and in more different areas and you know, we modulate that variable spending depending on the conditions associated with revenue.

Rich Beyer

An example Louis, its rich, an example is once every other year we have a worldwide sales meeting. We bring our sales people in, we bring our partners in from all over the North America as well as around the world for a week long meeting, its pretty sizeable cost associated with what our hundreds of people including all the product line people and application patient people left with the training and so forth. Now that’s a pretty hefty number in the past we used to be able to say that this benefit is going to be spread over in a significant period of time and therefore you could spread that out of over the course of the year. Today’s accounting rule say you incurred in Q2 you observe all of it in the Q2. It’s the kind of thing than can be it be a bit lumpy and it did in fact happened in Q2 and then of course not replicated in Q3. We didn’t have any layoffs, we haven’t had any layoffs now for quite a number of years and as I said earlier when we gets -- when we pull in the reins on expenses we look for saving money in any area that is not revenue generating and again revenue generating is marketing and its sales and its applications people and design engineers, product engineers, engineers, master designers. So now we keep adding in all of those areas including in this most recent quarter, we just really get tough on ourselves about all the kinds of what may considered be non-mandatory expenditures.

David Zinsner

We didn’t reallocate any spending between --

Louis Gerhardy - Morgan Stanley

Great, well thank you for that answer and then if I can just follow up, I got your terns guidance for Q4. But what was the actual number for Q3 what did it end up at?

Rich Beyer

It was about 40%.

Louis Gerhardy - Morgan Stanley

All right, thank you.

Operator

I would now like to turn the call back over to Mr. Rich Beyer, Chief Executive Officer for closing remarks.

Rich Beyer - Chief Executive Officer

Thanks everybody for participating on the call. I would like to sum up with just a couple of statements. We are very pleased with Q3. We delivered revenues within the guidance that we gave in July. Our operating margins, net income, earnings per share were all above the guidance that we gave in July. We are not immune to overall market conditions and dynamics and some of the softness that you have heard about from our competitors over the past 45 days. Nevertheless, based upon the guidance that we have provided as well as the guidance that others in the analog space who have announced, I have provided. Its certainly appears as we said just a little bit earlier in the call that we will continue in the second half of the year to grow the business despite the softness relative to the first half of the year, grow it quite significantly relative to second half of the last year and its certainly appears to us that we are growing in the second half of the year at a rate that is higher than our competitors. So we believe the model that we have is working, we believe that this quarter was the eighth quarter in a row of very-very successful performance and we are very proud of that and the team that delivered on it and we think 2007 is going to be a very-very healthy year for us as well. Thanks very much, we will see you either in a conference or in 90 days on our next conference call. Thanks operator.

Operator

Thank you for your participation in today's conference. This concludes the presentation; you may now disconnect and have a good day.

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