Intersil Q4 2006 Earnings Call Transcript

Jan.24.07 | About: Intersil Corporation (ISIL)
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Intersil Corporation (NASDAQ:ISIL)

Q4 2006 Earnings Call

January 24, 2007 4:45 pm ET

Executives

Sanjay Arora - Director of Corporate Finance and IR

Rich Beyer - CEO

Dave Zinsner - VP and CFO

Analysts

Craig Ellis - Citigroup

Ross Seymore - Deutsche Bank

Craig Hettenbach - Wachovia

Tore Svanberg - Piper Jaffray

Doug Freedman - AmTech Research

Steve Smigie - Raymond James

Michael Masdea - Credit Suisse

Romit Shah - Lehman Brothers

Louis Gerhardy - Morgan Stanley

Simona Jankowski - Goldman Sachs

Bill Lewis - JP Morgan

Chris Caso - Friedman, Billings, Ramsey

Eric Ghernati - Banc of America Securities

Hun Lee - Global Crown Capital

Krishna Shankar - JMP Securities

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2006 Intersil Corporation Earnings Call. My name is Melanie and I will be your coordinator today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session at the end of this conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Mr. Sanjay Arora, Director of Corporate Finance and Investor Relations. Please go ahead, sir.

Sanjay Arora

Thanks, Melanie. Good afternoon and thank you for joining us today for Intersil's fourth quarter 2006 earnings conference call. Today with me are Rich Beyer, Intersil's Chief Executive Officer and Dave Zinsner, Vice President and Chief Financial Officer.

In a few moments, Rich and Dave will deliver remarks on the fourth quarter of 2006 and provide a summary of our business outlook. After our prepared comments, we will open the line for questions.

We completed our fourth quarter on December 29, 2006. A press release was issued today at approximately 1:30 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 website. A replay of the conference call and webcast will be available for two weeks through February 7th.

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 judgment, they are subject to risks and uncertainties that could cause results to vary. These risk factors are discussed in detail in our filings with 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 in the CIBC Semiconductor Summit February 22, in Vail, Colorado; the Goldman Sachs Technology Investment Symposium on March 1, in Las Vegas; the Raymond James Institutional Investors Conference on March 5 in Orlando, Florida; and the Morgan Stanley Conference also on March 5 in San Francisco. Additionally, our 6th Annual Intersil Analyst Day is taking place on February 8 in Burlingame, California. A webcast of the Analyst Day presentation will be available on the Investor Relations section of our website.

I will now turn the call over to Rich.

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Rich Beyer

Thanks, Sanjay. Good afternoon and thank you for joining us today for Intersil's fourth quarter 2006 earnings conference call. 2006 was our third full year as a pure high performance analog company. There is no question 2006 was a very good year for Intersil.

We achieved record net revenue of $740.6 million for the year, an increase of 23%. Non-GAAP operating margins increased 750 basis points year-over-year and net income grew an impressive 65%. Our strategy of creating a balance between application-specific standard products and general purpose proprietary products is working well. Year-over-year, our ASSP product revenues grew 20% while our general purpose products grew 28%.

This year we introduced more than 250 new products and added about five new product families, significantly increasing Intersil's served available market. All four of our end-markets grew in double digits in 2006. Products sold into the communications end markets grew the fastest, 27%, followed by computing at 26%, high-end consumer at 22% and industrial at 19%. We also generated over $200 million in free cash flow for the year, which enabled us to reinvest in the business and to provide higher returns to our shareholders.

Now let's turn to our results for fourth quarter. In the fourth quarter, Intersil and our industry experienced broad-based softness in the market. We achieved net revenues of $180.1 million, an increase of 3% from last year and a decrease of 6% from Q3. Non-GAAP earnings were $0.34 per share this quarter, an increase of 26% from last year and 3% from Q3. Revenue into the high-end consumer market experienced excellent growth this quarter due to increased market acceptance of our products and seasonality normally experienced in the fourth quarter.

We saw a sequential decline in the computing market due primarily to excessive inventory with contract manufacturers in Asia. The industrial and communications end markets were also down sequentially due to normal seasonality, excessive inventory in the channel and some weakness in certain communication related product families. I will provide more detail about the end markets after Dave summarizes the financials.

At this time, I would like to turn the call over to Dave Zinsner, who will provide a financial summary. After that I will discuss results from each of our end market and then provide some comments on our first quarter 2007 outlook. Dave?

Dave Zinsner

Thanks, Rich. Let me begin with the income statement. As Rich stated, we reported $181.1 million in net revenue for the fourth quarter of 2006, an increase of 3% from the same quarter last year and a decrease of 6% sequentially. We closed the quarter with the book-to-bill below one. As a result, based on the profile of our backlog we require an order turns rate during the first quarter of slightly more than 45%.

On a GAAP basis, net income for the quarter was $38.8 million or $0.28 per diluted share, up 35% from $28.7 million or $0.20 per share for the same quarter last year, and up 3% from net income of $37.7 million or $0.27 per share for the third quarter of 2006.

Our GAAP tax rate was 16.6% for the fourth quarter, down from 25.2% in the third quarter due to the R&D tax credit passed by congress in December 2006. We expect our first quarter tax rate to be approximately 23.5%.

On a non-GAAP basis, excluding the amortization of intangibles and stock-based compensation, net income for the quarter was $48.2 million or $0.34 per diluted share, up 23% from $39.3 million or $0.27 per share for the same quarter last year, and up 3% from net income of $46.9 million or $0.33 per share for the third quarter of 2006.

We saw an increase in our non-GAAP gross margins this quarter from 58% to 58.2%. This 20 basic point improvement was driven by better mix and further reductions in manufacturing costs offset partially by less favorable overhead absorption on lower sales. We should continue to see cost reductions and mix improvements over the next couple of years and expect gross margins to improve over that time period.

As a percent of revenue, fourth quarter R&D expenses excluding equity compensation were 15.2%, a 10 basic point increase from 15.1% in Q3. In absolute dollars R&D expenses were down $1.7 million from the prior quarter on lower material spending. As a percent of revenue fourth quarter SG&A expenses excluding equity compensation were 15%, a 200 basis point increase from 13% in Q3. In absolute dollars, SG&A expenses increased $2.1 million. $500,000 of the increase was due to a change in accounting in pension costs, which were offset by a corresponding gain in investments of $500,000. Another $700,000 of the increase was related to executive severance costs incurred in the fourth quarter and the remaining $800,000 was additional expenses associated with commissions and mark ups. We expect non-GAAP operating expenses to be approximately $51 million to $52 million in the first quarter.

Our non-GAAP tax rate was 19% for the fourth quarter, down from 28.2% in the third quarter, as we adjusted our annual non-GAAP tax rate from 26.8% to 24.9%. As previously stated, this was due to the R&D tax credit passed by Congress in December 2006. We expect our first quarter non-GAAP tax rate to be 24.5%. Equity compensation was $11.4 million or 6% of revenue, down $1.1 million from last quarter. For the first quarter, we expect equity compensation to be down approximately $1 million from the fourth quarter.

In summary, 2006 was an excellent year for Intersil. We grew net revenue 23%. Gross margins increased to 190 basis points and operating margins increased an impressive 750 basis points year-over-year. As a result, we succeeded in reaching our target gross margin and operating margin model this year.

Now moving to the balance sheet. For the fourth quarter, we generated $64 million in free cash flow and exited the quarter with approximately $703 million in cash and marketable investments and no debt. We used the 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 $100 million or 4.1 million shares of our stock. As a result of this share repurchase activity, our weighted average share count decreased by approximately 1.5 million shares in the fourth quarter versus the third quarter.

For the upcoming quarter, we expect fully diluted total shares to decline again by at least 2 million shares, as we continue to be active in repurchases of our stock. We also increased our dividend last quarter from $0.05 to $0.06 per share. This quarter's dividend will be discussed at our upcoming board meeting during the first week of February.

On an absolute dollars basis inventory increased by $1.8 million from the third quarter and our days of inventory increased 8 days to 109 days. Days sales outstanding was 54 days, no change from the third quarter. Inventory at our distribution partners was down slightly from the prior quarter.

Capital spending was $3.4 million and depreciation was $5.3 million for the fourth quarter. We expect depreciation to be $5.2 million and capital spending to be approximately $5 million in the first quarter.

Now, I'd like to turn the call back over to Rich who will provide highlights into each of our four end markets.

Rich Beyer

Thanks Dave. First, I'll start with comments about high-end consumer. Revenue into the high-end consumer market represented approximately 29% of fourth quarter revenue. On an absolute dollar basis, revenues into the high-end consumer market increased 3% year-over-year and increased 13% sequentially. We saw solid demand for our three major product areas, handhelds, LCD displays and optical storage.

In handhelds, we experienced single-digit sequential growth in Q4. In particular, we saw very strong demand from two Tier 1 handset customers for our battery charger and over voltage over current protection ICs. Our design momentum continues as we secured several significant design wins related to these products.

Our new product introductions were strong as well. We released the Lithium ion/Lithium polymer battery charger that accepts two power sources for the cradle and USB, offering customers cost and board savings, space savings. These chargers are ideal for smart handheld devices, cell phones, PDAs, MP3 players, digital still cameras, and handheld test equipment. We secured a design-win for this device with one of our Tier 1 customers for a cell phone and are already shipping this product. We are currently engaged in numerous additional opportunities for this device.

We introduced a power management IC solution that provides fast and flexible battery authentication. This device is suitable for protection against unapproved third-party products for a wide variety of applications. We also introduced enhanced analog switches that are housed in tiny packages that save board space. We have already secured design-wins with several of our handset customers and began shipping in Q4. This device represents a good example of how we work to upgrade existing Intersil solutions to carry forward our success through multiple generations of our customers' systems.

2006 was indeed a superb year in handhelds for Intersil. Numerous new products, a solid stream of design wins, market share gains and 400 handheld customers with increasing product penetration have all contributed to our success in the handheld market in 2006. We expect 2007 to be another successful year for Intersil in the handheld market.

In LCD displays, we had double-digit sequential growth in both our power management and analog mix signal product lines in the fourth quarter. We continue to work with all Tier-1 LCD TV makers leading this market with our programmable gamma buffers, analog front ends, light sensors and DC to DC converters. For example, our programmable buffers, already a popular device among several panel vendors, were adopted into additional panel vendors during the quarter. Also during the quarter, we shipped first production volumes of our light sensor family into TV sets, where they are used to detect the ambient light level in the room, so the picture can be adjusted automatically. We expect nice revenue growth in 2007 from both of these product families.

In the area of new products, we released our 10-bit analog front ends in Q4. This product increases the functionality, accuracy and color integrity of our existing 8-bit product family and is used to digitize analog signals for digital display technologies like LCD and plasma TVs. The first design wins have been won and many opportunities have been identified for this product. Similar to our success in handheld, our product proliferation, consistent stream of design wins and increasing customer penetration have contributed to a successful 2006 in displays. We anticipate the display market to be a significant growth driver for Intersil in 2007.

In the optical storage business, we experienced double-digit sequential growth in Q4. This was due to better than expected demand in Q4, as inventory had been substantially worked down in Q3. We maintain our leadership position in the laser diode driver market for 16X DVD. However, the optical storage market continues to be under pressure because of the innovation gap between 16X Red DVDs and Blue Ray and HT technology.

Nevertheless, we have developed several key products for Blu-Ray and HD technology. During the quarter, we shipped first samples of a highly-programmable triple oscillator targeted at Blu-Ray and HD DVD players. Depending upon the number of Intersil products utilized by our customers, our dollar contents could increase from between 3X to 7X when Blu-Ray and HD systems begin ramping in volume, which we expect to happen in the second half of 2007. We are well positioned in this exciting market with our laser diode drivers, power management ICs and photo detector ICs.

In summary, 2006 was a solid year for Intersil in the high-end consumer market. Revenue in this market increased in 2006 by an impressive 22% year-over-year. Looking ahead, Q1 is a seasonally down quarter for high-end consumer. However, we do expect this segment to pick up nicely for the remainder of the year due to increasing market share, dollar content and customer penetration.

Now let's look at our computing business. Revenue into the computing market represented approximately 22% of fourth quarter revenue. On an absolute dollar basis, revenues into the computing market decreased 15% year-over-year and 22% sequentially. The desktop, server and notebook areas all experienced the sequential decline. Several of the platforms in which Intersil had high content had weaker than expected demand in the fourth quarter. GE-Intersil customers saw shipments drop by as much as 30% sequentially. This weakness was compounded by a shortage of AMD and low-end Intel CPUs through part of the core, the lack of processors, constraint production of motherboards in the channel segment and resulted in falling demand at the component level.

In desktops and servers, we continue to lead the market with a bit less than 50% of the core controller share in the desktop and server space. In Q3, we introduced the new family of controllers targeting both Intel VR11 and AMD CPU core solutions. These controllers provide the most cost effective core power solution by integrating MOSFET drivers and controller onto a single chip. We have won sockets at all of the major motherboard manufactures with these products. To date, we have shipped over 15 million units and are experiencing continued strong demand. We are still having great success with notebook core power. It has enabled us to secure new sockets outside of core power, such as battery charger and peripheral ICs.

In addition, we have been able to leverage our Intel successes into several design wins for our new AMD controller products. Our fab light technology roadmap provides cost competitiveness and we are making investments to enable continued innovation and portfolio expansion in this growing market.

During the quarter, we introduced the only controller that supports three major power functions in notebook computing, that is the system regulator, the graphics regulator and the memory regulator. This device reduces our customer's engineering efforts by allowing designers to qualify one part for any or all of these power functions within the architecture of a notebook computer. This part fills out our product portfolio and enhances our position to offer a complete power solution. We anticipate strong growth in these products throughout the year.

We also introduced our next generation single-phase IMVP-6 core controller. This device which uses Intersil's patented R3 technology, reduces power consumption and enhances the performances of graphics processing units, core graphics course for Intel Santa Rosa computing products. With the family of core controllers that we have introduced in the last two quarters, Intersil now has complete power solutions for both CPUs and GPUs on Santa Rosa as well as Napa platforms.

In summary, 2006 was indeed a strong year for Intersil in notebooks. Our revenue increased 26% year-over-year, our fastest growing market segment. We had excellent success in expanding our product portfolio in the notebook market. A few years ago, we offered core power and DDR power alone. Today, we have an expanded product offering that also includes battery chargers, system regulators, graphics regulators, and white-LED backlighting. We have increased our market share and are now expanding our AMD solutions in the notebook market. In the area of desktops and servers, we continue to be a leader with about 50% share. Looking ahead to Q1, we expect the computing market to be down due to seasonality.

Now let's discuss the industrial market. Revenue into the industrial market represented approximately 25% of fourth quarter revenue. On an absolute dollar basis, revenue into the industrial market increased 10% year-over-year and decreased 5% sequentially as expected due to seasonality and inventory in the channel.

In Q4, we experienced seasonal softness for several of our products in this market. However several product families bucked the seasonal trend in growth. These families included interface, our video ICs, pin drivers, and DCPs. We continue to win bridge driver sockets in next generation uninterruptible power supply in several emerging market. We expect UPS sales in these markets to be strong throughout 2007.

In addition, we released both the half-bridge and the full-bridge driver to augment our existing bridge driver product portfolio. These cost effective solutions are positioned to address the lower voltage market such as motor drives. We saw double-digit sequential growth in our video ICs. This quarter, we announced a new multiplexer that enables switching between four different video input signals, making an ideal for next generation video electronics. This device provides 500 megahertz bandwidth to meet the high resolution requirements of monitors and projectors as well as the KVM market.

In the fourth quarter, Intersil demonstrated its entrance into automotive market by participating in Convergence 2006, an international automotive conference held in Detroit. We have developed industry leading expertise in a broad range of analog technologies critical to next generation automotive application. Intersil's automotive strategy is an exciting growth area for us and we'll provide more details at our upcoming Analyst Day in early February.

In summary, 2006 was a very successful year for Intersil in this market segment. We added numerous new general purpose product families and extended other families into new sub-segments. We also succeeded in increasing our market share in our general purpose product families. Revenue in aggregate from the industrial market increased 19% year-over-year, significantly faster than the overall industrial analog market. We expect our industrial business to grow faster than the overall industrial market in 2007, as we continue to expand our served available market with new product offerings and increased share gains. Looking ahead to Q1, we expect the industrial market segment to be down sequentially, due to the continuation of inventory issues currently affecting this end market.

Finally let's look at the communications market. Revenues into the communications market represented 24% of third quarter revenue. On an absolute dollar basis revenues into the communications market increased 18% year-over-year, but decreased 10% sequentially, as expected, due to seasonality and softness in several market segments. We did experience solid growth in several product families including sequencing, radiation-hardened ICs, our wired products, and high reliability ICs.

In the area of space, our radiation-hardened space product line experienced double-digit sequential growth and increased 60% year-over-year. The number of satellite programs substantially increased in 2006. These programs use multiple Intersil parts per satellite. Intersil is very well positioned to take advantage of this area of growth in the communications market.

During the quarter, we sampled the first of a family of wide [V in-switch] regulators. We have received extremely high interest in these products from a range of customers. Target applications for these products include switches, routers, base stations, DSLAMs, gateways, hubs, and optical network systems. We are very excited about this area, as it will increase our served available market by more than $250 million.

During the quarter, Intersil announced a new high efficiency Dual Buck regulator, with its ease of configurability, high integration and advanced monitoring and protection features, this product represents a complete and compact power solution for today's small-form-factor application. Early customer interest has been extremely high and we are seeing numerous opportunities in this area.

In the area of DSL, we experienced a sequential decline in Q4, as expected. In Q3, we experienced seasonally strong demand in this area, with some of that strength driven by inventory build at a few customers. Because of this build, we had anticipated a weaker than normal Q4.

For the full year, however, revenue from DSL grew in the high-double digits. We continue to lead the market with our line drivers. We expect 2007 to be another strong year in DSL with the increase in ADSL 2 plus and the proliferation of VDSL. We continue to see significant design win momentum in the communications market. We secured significant design wins in Q4 and expect to see nice revenue gains from these in 2007. We continue to invest significantly in both power management and analog products for the communications market.

In summary, our focus in strategic investments in the communications infrastructure market paid off handsomely this year. This market was the fastest growing of the four. Revenue in aggregate increased an impressive 27% year-over-year. Looking ahead 2007 is poised to be another year of growth in the communications market for Intersil. While Q1 is typically seasonably up for the communications market, we continue to see both inventory issues and some lingering softness affecting this market as well. Therefore, we expect Q1 to be down from the prior quarter.

With that now let me turn to our outlook. For Q1 of 2007, we believe that the excess inventory in the channel will continue to impact Intersil and the industry. As a result, we expect the industrial and communications markets to be down sequentially. As it usually is the case also, high-end consumer and computing markets are expected to be down due to seasonality.

In total, we anticipate Intersil's revenues to be between $162 million and $168 million down from fourth quarter revenues of $180.1 million. We expect GAAP earnings per diluted share of approximately $0.21 to $0.23 and non-GAAP earnings per share of approximately $0.27 to $0.29. We do expect, however, that Intersil should return to revenue growth in Q2 of this year.

Before we open it up for questions, I would like to summarize with these key points. Our long-term growth strategy remains on track. We expect solid growth across numerous product families, in handhelds, displays, optical storage, notebooks, video, industrial, automotive, and communications infrastructure. Despite a challenging market environment in the fourth quarter for Intersil and the industry, we saw a record fiscal 2006 sales of $740.6 million, a 23% increase over 2005. And our earnings per diluted share grew 81% over 2005.

On a non-GAAP basis, we successfully grew gross margins and earnings for the nine consecutive quarters. We achieved our target gross margin and operating margin model in 2006 and we have kept within that model in Q4, despite our revenue decline. In fact, we expanded our gross margins further in Q4.

In summary, we remain focused on developing and introducing industry leading products, growing revenue faster than the analog sector, and growing earnings faster than our revenue. We have world class processes and a fab like strategy that offer a competitive advantage relative to our peers. We remain focused on balancing our product portfolio with high growth, highly differentiated applications specific products and high quality, high margin general purpose products. We have a unique strategy and our strong financial results in 2006 are evidence that our strategy is clearly working.

With that, Dave and I would be happy to answer your questions. Operator?

Question-and-Answer Session

Operator

Yes, sir. Ladies and gentlemen, so that we can accommodate all callers, we ask that you please limit your questions to one question and one follow up. (Operator Instructions). And gentleman, your first question comes from the line of Craig Ellis with Citigroup. Go ahead.

Craig Ellis - Citigroup

Thanks, guys. Just wanted to follow up on the fourth quarter with a clarification. It looks like from at least from my model that computing would have been the biggest surprise in the quarter. Is that fair and then with computing do you expect the share gain is going to give you sequential share gain and just stability there is going to give you growth in the second quarter?

Rich Beyer

Craig, you are right. It's -- the computing sector for us was the one that was the most surprising and we do expect it to be down seasonally. We do anticipate that with the introduction of Santa Rosa that we will get back on to a healthy growth vector in the notebook space. That is currently anticipated to be at the very end of Q1 and into Q2. So, yeah, we anticipate notebooks will start getting back on track in the second quarter.

Craig Ellis - Citigroup

Okay. And then really more towards the balance sheet and some of the thinking around, how you use the cash on hand. You've got 400 million share buyback program, you use some of that in the fourth quarter. One, can you just provide some thinking on how you settled on that particular program versus other sources or other potential uses of cash? And then secondarily, how should we think about the intensity that you will be buying back stock as you go through the year?

Dave Zinsner

Okay. Craig, this is Dave. The way I came up with that number, we felt comfortable that we could lower the cash balance from the 700 million that we were at today. I think we are shooting for somewhere around 600 million by the end of next year. So, we thought that with $400 million program and utilizing that throughout the 2007 timeframe, that would be roughly in the ballpark of $600 million. The other obvious way to provide cash back to the shareholders is a dividend. We also talked to the Board about that in the fourth quarter and we increased -- and you saw we increased the dividend in the fourth quarter from $0.05 to $0.06 and we'll be talking to them again in February about the dividend for the first quarter.

Craig Ellis - Citigroup

Thanks, guys.

Operator

Our next question comes from the line of Ross Seymore. Go ahead.

Ross Seymore - Deutsche Bank

Thanks. Just looking at the inventory situation, you not unique in seeing it clearly. But I wondered, in your guidance are you expecting inventory both on your books and in the channel to drop or generally any color you can gives on kind of what inventory consequences there are to the revenue guidance that you have given us?

Dave Zinsner

Okay, Ross. The inventory in the fourth quarter went up modestly internally, largely in the computing area but we feel comfortable that it doesn’t represent the problem. Secondly, we did in fact bring the inventory of our distribution partners around the world down modestly. So, we indicated in Q3 that we would bring the inventory down and we did. We indicated, we will continue to try to do that and we did. We think there's still a little bit more inventory in the channel that we would like to work down. Our expectation in the guidance, that we've provided is that our own inventory internally would probably be flat this quarter relative for last quarter. And that we would bring down our distributors inventory world wide again modestly.

Ross Seymore - Deutsche Bank

When you say just, you include the EMS guidance, I assume?

Dave Zinsner

No. We don’t. It's our distribution partners. Those are the people who we have very, very precise information. We do believe that the EMS partners will also bring their inventories down in Q1 as well.

Ross Seymore - Deutsche Bank

Okay. And then I guess as a follow up back onto the computing of side of things. You talked about inventory being a primary cause of that but we have heard from one of your main competitors in the notebook space in particular that we think they are getting a little bit more aggressive on the price side of the equation. Are you seeing any bit of price pressure or is it exclusively the inventory side you cited earlier?

Dave Zinsner

No. It's not exclusively the inventory side. There are couple of points about the computing market. In the desktop market, there were a greater proportion of low-end PCs that were shipped in the quarter. We have high-end high performance solutions, some of the competition that has very different margin models than us have been willing to price very aggressively. They don’t have the same level of performance. And so we have chosen not to follow the pricing down in some of the platforms, particularly some of the platforms that are low-end platforms and, as I said, there were a number of those. So there was some share that we did intentionally not pursue in the quarter largely in the desktop. In the notebook space, it should be said that we introduced the first of our products concentrating on Intel platforms and we're having a great deal of success with those Intel platforms. We introduced our core solution for the AMD notebook platform towards the end of Q3, and so only began to have design wins in Q4. So we did not participate in the AMD notebook successes, the new notebook successes in Q4. So those things also influence the performance of Intersil in this space. We do believe that we continue to have very fine products for the desktop space, and we do believe with the continued growth in the notebook arena, the design win activity that is very broad on the Santa Rosa project for us as well as the significant design wins that we are getting now on the AMD platforms that as I indicated a little bit earlier in the call on our Q2, should be a return to nice healthy growth for us in notebooks.

Ross Seymore - Deutsche Bank

Great, thank you.

Operator

Gentlemen, our next question comes from the line of Craig Hettenbach with Wachovia. Go ahead.

Craig Hettenbach - Wachovia

Thank you. Dave, in terms of gross margin drivers for 2007, can you just talk about the split between product mix in any potential manufacturing savings in terms of -- what do you think will have a bigger impact to gross margins this year?

Dave Zinsner

I think the first thing that will have the most impact is it's going to be more on the cost side. We're still pretty much in the fifth, sixth inning of our move towards IDM and TSMC as our primary foundry partners. We are getting better wafer pricing there and so we expect to continue to see improvement throughout next year for that. We are still rationalizing the back end as well and we are going to continue to see improvement there as well. As I mentioned in the fourth quarter, our CapEx was only about $3.5 million, so obviously depreciation levels continue to decline. But we've talked about the arrears that we were excited about and a lot of those are at margins that are above the corporate average, so we obviously expect next to have an impact as well on gross margins.

Craig Hettenbach - Wachovia

And then just on the CapEx front, is there anything within the next year or two that you will need to see a bump up in CapEx, or should it be for the internal products that you are running should be pretty similar rates next year or two?

Dave Zinsner

In the internal side, we spend very little even today in capital. The capital spending, we saw in the fourth quarter and what we traditionally see is really test equipments that we buy on behalf our back-end partners and that will continue at a very similar pace. So I don’t expect any major change in capital spending

Craig Hettenbach - Wachovia

Great. And if I could follow-up on the consumer side, Rich, for LCD TVs, can you just talk about dollar content you are seeing today versus maybe a year ago? And then you speak about could [thrash] Tier 1 customers, do you expect that you'll penetrate Tier 2 customers as that market evolves or do you think you'll stick with more of the Tier 1 customers in the LCD TV market?

Rich Beyer

Okay. A year or so ago, I'd say the number of the content we had in a typical LCD TV might have been on the order of [1.50 amp] buffers and PCPs and DC-to-DC converters with the moved programmable buffers, with the ambient light sensors, with continued expansion of some of the power management ICs. We are seeing that move up -- it moves up slowly. It's not a step function, a step-up, but I envision that over the course of this year, we're probably at a point where we were above to somewhere between 2 and 2.50. And the fact of the matter is that much of our success has been with the majors to a certain extent the Tier 2 customers in Taiwan and China and so forth often follow some of the architectural decisions of the Tier 1 guy and therefore we do get sales into those, we do concentrate on those. So we don't concentrate solely on the Tier 1 customers, but there is no question when you look across the landscape and the major guys in Korea, the major guys in Japan, the major guys in Taiwan, they really do capture the overwhelming portion of that market particularly in things like the high-end TVs.

Craig Hettenbach - Wachovia

Great, thank you.

Operator

Our next question comes from the line of Tore Svanberg with Piper Jaffray. Go ahead.

Tore Svanberg - Piper Jaffray

Yes, thank you, and good afternoon. Two questions. First of all, Rich, you seem to imply you expect to grow for the year, it was starting the first quarter pretty low. So just for modeling purposes, will there be some pretty strong back-half growth, and if that’s the case, do you have the design visibility to get there?

Rich Beyer

Tore, I believe that we will begin growing again in Q2 and I believe we can sequentially grow in Q3 and Q4 against the backdrop of the guidance we've just given for Q1. It's pretty hefty growth rate to suggest aggregate growth year-on-year. So I am not modeling that. I am not giving any guidance for that. I am just saying we believe based upon design wins, based upon an analysis product family by product family about what’s going on in Q1 and what’s going on Q2 as well as just the fact that our business with the profile that we have which is reasonably consistent over the last three years has grown everyone of the last three years in Q2 relative to Q1. So those three factors lead us to be confident that Q2 will be grow and than of course we get the overall seasonality factor kicks in, as it has every year for the last three years when we've been a high performance analog company in the second half of the year, plus the design wins were very strong last year, up quite dramatically from previous year. So, yes, the sense of that we have as the team is that we are going to begin growing in Q2 and grow steadily throughout the course of the remainder of the year.

Tore Svanberg - Piper Jaffray

Okay, thanks for clarification. Also second question, you talked about inventories still being a little hide in certain areas, but you also talked about and in the case of optical storage functions where it's already cleared. What are some of the verticals or sub-segments? Do you think were there still more inventory then lets say perhaps one quarter?

Rich Beyer

Clearly the computing space is the one that's the best example. There a couple of isolated examples in the handheld domain that we can point to. But the major area has to do with the PC space that we think there is still a little bit of improvement available, certainly in our distributors and I believe that's one we know that at least some of the EMS guys or ODMs still have inventory in some cases that they would like to work out.

Tore Svanberg - Piper Jaffray

Okay. Thank you very much.

Operator

Our next question comes from the line of Doug Freedman with AmTech Research. Go ahead.

Doug Freedman - AmTech Research

Thank you. Hi, guys. Can you talk about the environment? I know there is a lot of concern on the investor side that the price environment and ASPs in the analog space are going to get aggressive as we are seeing this softness in inventory?

Rich Beyer

Okay, Doug. In the general purpose arena, we see very, very little in the way of price movements and I don’t expect that that’s going to change in any significant way. In some of our markets, price erosion is a natural part of the landscape. I alluded to the fact that in desktop pricing in some of the channel, PCs, some of the low-end PCs, there are players out there that are pricing their products aggressively. They have different models, be they domestic or international companies. And that's the natural part of the landscape. It's not anything new. We don’t elect to necessarily compete on all of those platforms. So, that's a market where clearly there is a price pressure, and I believe there will continue to be price pressure. In the notebook, it's less so. There's more opportunities for differentiation in the notebook space. So, I don’t think across the board, we are going to see a dramatic change in price pressure, but I think in some of the markets we will continue to see it, but I am not sure, it's abnormal.

Doug Freedman - AmTech Research

Is there a market to that you can point to where you feel like you've really been more successful than others in taking share?

Rich Beyer

Without giving any solace to competition, I think we've done very well in handheld, and I think we've done very well in the whole area of LCD monitors and TVs where we continue to expand our content, where we continue to engage with very, very large players in each of those two market. But we continue to increase our dollar content in numerous exciting kinds of products. So I would say those are the two areas that represent quite successful position and then the third one is notebooks. Again we had a core regulator and DDR memory regulators several years ago and they were having significant success with the system regulator, with the graphic regulator, with battery chargers. And so I'd say notebooks, LCDs and handhelds are areas where we are clearly succeeding, whether that means we are making dramatic share away from other people, based upon what they say, they do. But it's certainly -- it looks like we are growing faster than the overall market is growing.

Doug Freedman - AmTech Research

Alright. And then just one last one. Given that you basically told us you believe your grow in Q2. When do you think you'll start to see an up tick in the order turns? Is it that the orders are going to be very back-half loaded in Q1 or is it really going to take until Q2 before you actually see just a higher turns ratio that will allow you to grow in Q2?

Rich Beyer

Well, Doug our lead times have remained relatively consistent. They are five to six weeks and our business in the piece -- in the computing domain as well as our business largely in the consumer domain, in the case of where our customers give us forecasts. Their orders typically are not much more than four weeks into the future. So we will -- should not see any significant evidence of an upturn. If it's in the industrial space, if we see the industrial really picking up which by the way we are not banking on that being significant, but if the industrial picks up, we'll probably see that in -- indications in February. The consumer and the computing stuff we wouldn’t see until beginning in March.

Doug Freedman - AmTech Research

Alright, great. Thank you.

Operator

Our next question comes from the line of Steve Smigie with Raymond James. Go ahead.

Steve Smigie - Raymond James

Alright. Thank you. I assume if you could talk a little bit more about the opportunity on the Blu-Ray side. What your dollar content might be per box and talk a little bit about margins which I think is pretty high? Is it just as simple as taking that number and multiplying it by every box that's going to come out with Blu-Ray on it, since you have such high market share? And we get the -- because I think -- it seems like you get some pretty high number there? So, just hoping you could help us there?

Rich Beyer

Sure, Steve. In the Blu-Ray for HD recorded system, we will have the possibility of selling a triple laser diode driver into that product because that will support CD, DVD Red and DVD Blue. And so that's a much more complex part that's being shipped today in a DVD Red recorder. We will also have a power management IC and a photo detector IC. So, we'll have the potential for three products. I don’t want to give you the precise ASPs, but suffice it to say the laser diode driver is significantly higher priced as is always the beginning of next generation of system. So and we will have all three parts always designed into all of the systems. Having said that, the content will go from today less than $1 to certainly in excess of $3, if we had all of the parts in the system. So, fairly you can't just multiply the number of systems out there by a specific number because they will have a range of one part, two parts or three parts in the systems that we support.

Steve Smigie - Raymond James

Okay. But if I were to take an average of that, figure or whatever dollar content number I want to get that for you. Could I then just still multiply that numbers through? I mean, does it give the higher share and you -- if one of those boxes are shipped, does it have to have your product on it pretty much?

Rich Beyer

No. We have still 70%, 75% of the DVD Red market. We anticipate that we will probably maintain share something on that line as it moves into Blu or HD.

Steve Smigie - Raymond James

Okay. So, guys one another quick question here. On the EMS side, I have seen a certain popup with plenty of companies where that's become an inventory issue. Obviously, everybody spent a lot of time trying to figure out supply chain, made a much better effort to have it, to be more clean. Can you help me understand may be what's happened here, is it just demand but not what everybody anticipated across the board or that EMS not fixed up this as well as distribution has, just your general thoughts on that?

Rich Beyer

That’s a very tough question to put our finger on precisely. In some cases, middle of last year, in the PC space for example, I think there was an expectation that demands might be stronger that it was. And so people built up the inventory to build motherboards or entire systems, be their notebooks or desktops. And then there were product transitions from both AMD and Intel that were little bit slower than were anticipated and then when it happened the ramped happened quickly and so they were left with some of the inventory of the older products that had to be blurred off and so far. So, I think these customers are somewhat whipsawed by the changing end market demands which they only find out about through their end customers. Plus, I don’t think most of us from a semiconductor standpoint have the kind of insight into inventory across the board at EMS, the way we do with distributors. There is a well honed system of distributors keeping track of inventory and providing it to us. So, I can identify very clearly exactly what the inventory looks like and everyone of our distributors around the world. I have anecdotal evidence about inventory build up at OEMs and also have a best anecdotal and it covers a long word, I have partial knowledge about the inventory at the EMS customers.

Steve Smigie - Raymond James

That’s great. Thanks, I appreciate that.

Operator

And our next question comes from the line of Michael Masdea with Credit Suisse. Go ahead.

Michael Masdea - Credit Suisse

Yeah, you did a good job of holding possibility and if I really correct on it. I am not sure if I miss it, but looks like you are going to be fairly stable in terms of gross margin in a quarter, is that just -- is that because you are doing a better job with that managing the -- manufacturing fees or help us understand if there is any mix involve in that?

Rich Beyer

Well, certainly with computing being seasonally down that is going to help to drive a little bit of mix, but we are tightening the belt in spending, our goal when we put out this model was for gross margins to range between 58 and 62 and 58 would be in kind of the -- the worst of time, 62 in the best of time. We could safe to say that we've hit a trough which is we've taken of someone of the worst of time and we believe that we can maintain a 58% level despite the weakness in revenue.

Michael Masdea - Credit Suisse

Right, and then you mentioned lead times are kind of stable, but you are looking for higher terms this quarter, is there any particular area where you expect the terms, is there any kind of switch to that assumption given that -- where we are in the environment that we are in?

Rich Beyer

Yeah, Michael, -- the areas that we expect to see some positive things are some of the handheld areas, some of the LCD areas, we're already seeing a little bit of a positive. We have build into the guidance that we've just given, pretty clear understanding of where we're going to get the terms and why we should get those terms during the course of the quarter. So we feel reasonably comfortable that the turns are a bit higher than they were for the past several quarters, but they are clearly not at a whack with where we've been in numerous quarters over the last two year phase of the cycle. So we’ve been up as much as 50%. Now we are below that number and so we have a reasonable understanding where we have to get it and we’ve got some pluses and minuses that we've built into our thinking.

Michael Masdea - Credit Suisse

A quick follow up. Are those two areas where you expect to see some seasonality kind of weak, is that new programs ramping or something? It is okay. And then what was the actual turns you did last quarter?

Dave Zinsner

It was roughly 41%.

Michael Masdea - Credit Suisse

Thank you.

Dave Zinsner

Thanks Mike.

Operator

And our next question comes from Romit Shah with Lehman Brothers. Go ahead.

Romit Shah - Lehman Brothers

Thank you. Hey guys. Just a question on the fab loading strategy. I mean if I look back at the '01 and the '04 - '05 time period, when you guys went through a correction, you guys really took down your inventories, last quarter inventory was up a couple million and based on your expectations for Q1, we are looking at days approaching close to 120. And I guess my question is given the environment in a limited visibility, why aren’t you guys taking a more aggressive approach to reducing inventory.

Dave Zinsner

Well, we took steps Romit. We obviously have a lot of control over all wafers that are going through our internal fabs. However, the cycle times of our foundry partners are such that as we saw the softness that we could eliminate for the starts, but the wafers we had ordered were coming to us. So we did take pretty aggressive action in the quarter once it became parent to some of the parts were going to be much soft -- the demand for some of the parts was going to be much softer. So we took action as it relates to the internal production. We had a shut down in the fourth -- I am sorry in the last week of the month of December as well as in the first week of the month of January. So, we took the necessary steps, the steps that we were in the position to do shut off and stick it on a number of wafer starts, slowdown back-end production. But a lot of those wafers were in the line and our partners recommend we took them. Rest assure we are working the issue of the inventory very, very diligently and so I feel that the inventory won't grow this quarter, may be it could come down, but our expectation built into our guidance is that the inventory will be flattish and that we will see a further inventory reduction in our channel partners.

Romit Shah - Lehman Brothers

So you don’t necessarily feel compel to take down your inventories in Q1 based on -- I guess the view that you think you are going to see some snapback starting in Q2, it remains to be seen what sort of magnitude of snapback we see, but you guys are expecting business to improve in Q2 and that’s why you are not taking down your own inventories that hard in Q1?

Rich Beyer

The part of the issue Romit is some of these ASPs, we don’t have the finest forecast, as you can imagine from the customers. And again with the lead times at our partners and they are very responsive, but the lead times are not incredibly short. We fundamentally have to estimate what the parts are that our customers are going to require and so we take more significant risk that will [click] customers of the lying down situation. If we take a really aggressive stance on reducing the inventory, we could find a serious customer satisfaction problem. So this is a fine balancing act that we manage through. Again the internal fab, you can stop the way wafers and you can expedite the wafers. The external foundries, they are highly reluctant to let us start wafers and then just put them on hold and not take them and so forth. That’s not the way they want to run their fibs. So, I don’t want to suggest we are not taking the issue of inventory seriously, I am saying we're balancing the ability to supply in some of these higher growth -- somewhat less predictable forecasting segments of the market.

Romit Shah - Lehman Brothers

Okay. Someone asked a question about uses of cash, and you guys have a history of making acquisitions I think Xicor was done close to three years ago. Would you share with us what your appetite is for making another acquisition, is that a potential use of cash and are there any particular segments, whether its general purpose or particular applications where you see a whole at Intersil?

Rich Beyer

Sure. It is part of our overall strategy. We look at acquisition possibilities on a continuous basis. We always have a one or more that were sort of looking at from a product line extension standpoint or entry into a segment deeper than we are currently in. We would love to continue to acquire general purpose product families. There are not a lot of obvious opportunities to do that in the marketplace. So more of the opportunities available to us tend to be in some vertical markets at ASSPs. But we are looking at them and categorically, we will not rule off the possibility of an acquisition in the future to continue to augment our product families and market strategies.

Romit Shah - Lehman Brothers

Okay. And just last question on the tax rate. Dave, 23.5% from March, how should we model the tax rate for I guess beyond Q1?

Dave Zinsner

Yeah. So -- it's just unclear. The GAAP tax rate will be 23.5% and the non-GAAP will be 24.5%. There's a one percentage point difference because of the equity comp. And that's really should be modeled up for the whole year, that rate.

Romit Shah - Lehman Brothers

Okay. Thank you.

Operator

Our next question comes from the line of Louis Gerhardy with Morgan Stanley. Go ahead.

Louis Gerhardy - Morgan Stanley

Good afternoon. It sounds like the blue laser and Santa Rosa are a couple of important catalyst for your business, if not the industry. I was hoping that to get your sense may be if we look at your optical storage revenue in the second half of this year and may be your notebook revenue in the second half of the year, what percent of those two businesses would you expect at this stage to be blue laser driven or Santa Rosa driven respectively, just a ballpark idea?

Dave Zinsner

Yeah. Louis, the DVD Blu-Ray is probably going to continue even in the second half of this year to represent only a modest part of our overall revenue stream. I bet that it would be no more than 25%. I think the crossover point is 2008. In notebooks, Santa Rosa platform should start to take hold in Q2 and it will absolutely hit its stride at the end of Q3 and Q4, might it be 50% of our revenue by that time. That's probably the case.

Louis Gerhardy - Morgan Stanley

Okay. That's all I was looking for. Thanks for that and then you had mentioned in the comp, the supply side access, I think we are all aware of, but in terms of some of the areas where there was lackluster consumption, I didn’t hear you mention which verticals that was coming from, if you could comment?

Rich Beyer

Yeah. Sure. I mentioned that in the communications in particular, we saw a downturn in DSL. We saw softness in some of our parts that go into wireless space stations. We saw a little bit of softness in some of the voice-over-IP things that we do in the communications arena. Those are the three where we saw market softness.

Louis Gerhardy - Morgan Stanley

Okay. Thank you.

Rich Beyer

Sure.

Operator

Our next question comes from the line of Simona Jankowski with Goldman Sachs. Go ahead.

Simona Jankowski - Goldman Sachs

Hi. Thank you. You mentioned that you'd be likely increasing your share with the Santa Rosa platform. Can you also comment how your positioned with some of the other upcoming product cycles on the CPU and GPU side, such as for example, Quad-Core or private processors for Vista?

Rich Beyer

We think that in the desktop, on the high-end platforms that we continue to be the leading supplier of parts and we have a significant range of parts on the desktop platforms. And we think that it will continue. It will in all likelihood continue to be incursions by some of the other players at the lower end of the market. So in servers, we continue to be the largest provider in that market with about 50% of the market. We think we are very well positioned with Intel platforms. We are on the platforms at Sun, only to yesterday in their announcement with Intel. We have a very good position with Sun on their SPARC workstations as well. So, we think we are not only well positioned in the Santa Rosa platform but also in the other platforms that will represent significant opportunities, where like it's an area of growth for us that will start in Q2. And continue on the reference design from Intel for the desktop platforms. So, we think somehow we are in very good position in most of the platforms that will represent the bulk of the shipments in the second half of the year.

Simona Jankowski - Goldman Sachs

Okay. So, may be when you look at 2007 as a whole, it sound like you will see pretty good both on the notebook side and there are likely to continue to be some pricing trends and slowing growth on the desktop and server side. So, kind of adding it all together, would you expect computing to the up for the year and would it be fair to say that that's likely to be the slowest of the four segments?

Rich Beyer

I don’t want to give guidance on the particular segments. I think however that it's likely to be the slowest of the segments this year.

Simona Jankowski - Goldman Sachs

Okay. And just lastly, again the computing segment for your Q1 guidance, it seems to be saw a seasonal decline but you also commented that there is still a little bit of excess inventory. So, can you -- may be just kind of explain some of the other assumptions of why the decline should be just seasonal?

Rich Beyer

Well, we didn’t give specific guidance as to what each of the segment is going to be. We think there are some things that are going to happen -- that are happening based upon design wins platforms that are going into production in Q1, some platforms going into higher volume in Q1, where we have more content. So, there are a number of moving pieces that lead us to believe that we might be able to move the inventory down modestly and I mean modestly and yet, suffer no more than seasonal downtick in our computing business.

Simona Jankowski - Goldman Sachs

Okay. Thank you very much.

Operator

Our next question comes from the line of Bill Lewis with JP Morgan. Go ahead.

Bill Lewis - JP Morgan

Great, thank you. Quick clarification, would you mind repeating your comment on gross margin for the first quarter?

Rich Beyer

We said that our goal is to have gross margins at or above the bottom-end of our models at 58% to 62%, roughly 58%.

Bill Lewis - JP Morgan

Okay. And then now that you know you're kind of calling a bottom here in this downturn in your first quarter versus improvement in the second quarter. Can you kind of make some comparisons of this cycle, is on a way down to prior downturns, now that it seem to have not been credit localized to couple of markets certainly has broadened and just any observations you guys have made. Kind of tracking us around inventories lead time etc?

Rich Beyer

Yeah, let me try that Bill. In the previous downturn, we acquired Xicor right during the downturn. If we exclude Xicor from the numbers for an apple-to-apple comparison, the effect of the downturn, which impacted out some Q3 in 2004, was greater in percentage terms in Q3 and in Q4. And we began coming back in Q1 of that year. This year, some of our competitors began to see the downturn in Q3. We actually grew the business as you know in Q3. So, we saw that first of the downturn in Q4. We've indicated we'll see the second quarter effect this quarter. So, we think this one is short-lived. For us, it will represent two quarters just like the last one represented for us two quarters, and that this one is less dramatic downturn for us than the previous one. We also think that our earnings are holding up really, really nicely throughout this downturns, both because the fab-like model, because of aggressive actions we've taken to keep OpEx under control, actually bring it down and intend to bring it down again. So, we think this one is a little bit less severe for Intersil than the last one.

Bill Lewis - JP Morgan

Okay, thanks Rich.

Operator

Our next question comes from the line of Chris Caso with Friedman, Billings, Ramsey. Go ahead.

Chris Caso - Friedman, Billings, Ramsey

Yes, thanks. Rich, I wonder if you just clarify some of the comments you made earlier with respect to the sequential growth for Q1 and I know you don’t want to give specific guidance on specific segments, but did you mean to say that both computing and consumer would be down seasonally, meaning that -- you will see a sort of typical normal seasonal decline for those segments as you go into Q1?

Rich Beyer

Yeah Chris, that -- the current expectation is that each of those will see pretty normal seasonal downturn. The industrial and the comp that should impact show a positive growth from where we shipped today is likely to continue to suffer from this inventory issues and a little bit of the weakness that we have seen in the market that [I alluded] to you. So that's how we constructed the prospects in Q1.

Chris Caso - Friedman, Billings, Ramsey

Right, and certainly then in terms of variants from -- what you consider normal conditions industrial and communications, would have highest variants for normal?

Rich Beyer

Yes. Sure from normal Chris, yes.

Chris Caso - Friedman, Billings, Ramsey

Okay. And, I guess just maybe a little bit longer-term question. With respect to your gross margins and -- I know you guys haven’t -- you've increased the margins already with intension to increase it further. Are there any product segments that fall off the bottom of your mix as those margins go higher. Inevitably, the pricing is what it is for certain segments and if it doesn’t meet your margin model that needs to go away. Some of your customers have engaged in that sort of practice, how do we think of that for Intersil going forward?

Rich Beyer

Yeah, I don’t see entire segments falling off the table for us. I believe that to abandon market segments would lead to very serious erosion in the revenue growth and we believe strongly that our success is a corporation today and yesterday, and going forward is continuing to outgrow our peers while expanding gross margins, while expanding operating margins. So I don’t see any wholesale abandoning of market segments. Having said that, we absolutely are prepared, and do it. Walk away from certain business in segments that we just categorically don’t want, it's so ugly that it would drag down that whole product family. So, I think we'll continue to, in a sense walk away from opportunities that would seriously detract from the objectives I've laid out, but I don’t see that we would wholesale simply abandon our product segments.

Chris Caso - Friedman, Billings, Ramsey

Okay. And just one last one if I could with respect to the optical drives. As the transition to the high-definition drives occurs as go through this year, should we expect that those products as a whole to grow in 2007, and I guess that’s probably dependent on how quickly that the Blu-Ray drives pick up. And then maybe talk about first half in particular, should that be something we expect to decline in the first half is the new product turn out yet?

Rich Beyer

I think the answer is yes and yes Chris, with the first half its typically seasonally down we see a typically down in Q1, we see it begin to grow in Q2 it goes more in Q3, grow slows albeit that will come down in Q4. And to be candid, the rate of growth of the HD and Blu-Ray is absolutely the key driver of growth in this business. Candid we are hoping that typically takes off their some indications that the clarity between these two standard is fixing itself in the form of players that can read either one and so forth so, hopefully that plus solving some of the component deficiencies like the laser, the availability of lasers for the technology are going to solve itself. So, our best guess is we are going to see a little bit of growth in the second-half of this year because of the content increase its going to help us if its robust enough, optical will be a growth business for us this year, if its not then 2008, would be a quite high growth business for us.

Chris Caso - Friedman, Billings, Ramsey

That’s right, okay, thank you.

Operator

Our next question comes from the line of Sumit Dhanda with Banc of America Securities go ahead.

Eric Ghernati - Banc of America Securities

Hi, this is Eric Ghernati for Sumit. Just few housekeeping item. First of all, with respect to the OpEx guidance for March implies a big step down versus December. How do should we think about that as you go into Q2 to 2007?

Dave Zinsner

The step down is driven by two things, one by the lower sales obviously, we drive a lower upper end spending, and then the other pieces we are just going to try to tighten our belt a bit in terms of spending during this period of softness. As Rich alluded, we're expecting the company to return the growth in the second quarter and so with that we would expect operating expenses to kind of trend in the same direction. However, we do want to still see some fall through in terms of improving operating margins from the base we have in Q1.

Eric Ghernati - Banc of America Securities

Can you share with us what's the percentage of your high end consumer now driven by the software market?

Dave Zinsner

What percentage of the --

Eric Ghernati - Banc of America Securities

High end consumer sales?

Dave Zinsner

We don’t get into that level of projections, we don’t discuss what the even how much handheld, LCDs, optical drives et cetera represents, but I think it's fairly to say since our entire consumer business includes optical storage, LCDs, various handheld devices that include cell phones, smart phones, and digital still cameras and MP3 players and Bluetooth headsets in the grand scheme of things are our cell phone business remains quite modest part of overall portfolio diligently to change that, but it is what it is?

Eric Ghernati - Banc of America Securities

How about the notebook businesses [expansion] period?

Dave Zinsner

Yeah, we don’t break that out, it is still the lesser of the two when compare to desktop, it's build smaller than our desktop business?

Eric Ghernati - Banc of America Securities

Okay. Thank you.

Operator

Our next question comes from the line of David Wu with Global Crown Capital. Go ahead.

Hun Lee - Global Crown Capital

Hi, this is Hun Lee for David Wu. Thank you for taking my question. And I am just wondering what gives you the confidence that in the computer business you are going to see the inventory situation you see in the computer business world last only one quarter, and what's the typical seasonality for that business? And I have a quick follow-up?

Rich Beyer

Yeah well -- I mean inventory issue has been problem in computing of course in Q4 and it again is an issue as we've identified for Q1. I don’t want to indicate that the problem will be completely behind us. I would like to be by the end of Q1, but I am not suggesting that in our guidance if that the case. What we expect is or what indicated is I believe that Intersil is going to begin growing again in second quarter. I am not given any guidance about sector-by-sector market, segment by market segment, we have looked at all of the various parts of our business and the design wins as well as the introduction of platforms of handheld devices and MP3 players and notebooks and desktops and some of the industrial systems that we go into and DSL et cetera. So we build up our expectation based upon each of the product family. So we are not counting on everything being solved in the way of computing and inventory out at the EMS and the distribution channel by the end of this quarter.

Hun Lee - Global Crown Capital

Okay and the follow-up is then -- for the LCD TV business, you've mentioned that you have some sort of decoder and what do you feel about the SoCs, SoC companies like Broadcom, Marvell and MediaTek, (inaudible) how much would that impact your LCD TV business, especially in the tuner side?

Rich Beyer

Yeah, we don't really -- we don't compete with those companies that you just indicated. They deliver other parts of the system. We deliver the DCPs, we deliver the amplifiers, we deliver the analog front ends, we deliver power, we integrate some of the power into the amplifiers and so forth, and we stay way clear of the SoCs that deliver the controller type of functionalities. So those guys really operate into different domain than we do.

Hun Lee - Global Crown Capital

Okay. Thank you very much.

Operator

Our final question comes from the line of Krishna Shankar with JMP Securities. Go ahead.

Krishna Shankar - JMP Securities

Yes, Rich. On the industrial side of your business, can you talk about where you stand with respect to the inventory correction at distributors and what are the takes for growth in the industrial segment to resume in Q2? Are there new products, or is this just a straight inventory correction?

Rich Beyer

It's actually both. There is an inventory correction that needs to take place and the industrial market for Intersil is concentrated largely in North America and in Europe. There's a pretty significant industrial business in Japan, although we only participate in the small part of that and we are trying to rectify that. But the industrial market is a market that we really began to focus on about two and half years ago in power and about three and a half years ago in the analog signal path and we’re continue to introduce interesting products that span a series of areas. Some of the products are the products that we introduced in '06 and the design-win momentum in those areas is what gives us confidence that besides the inventory correction we’re going to get growth in that those parts of our business in 2007 by virtue of the products and the design-win. It’s not really associated with new products we will be introducing into the marketplace in '07. They are not likely to have any significant impact on our revenue growth in '07.

Krishna Shankar - JMP Securities

Great, and can you again give us a split between your application specific analog and standard analog and how much the growth was '05 to '06?

Dave Zinsner

I can do that. So, you mean for the whole year what the split was or for the quarter?

Krishna Shankar - JMP Securities

Yes.

Dave Zinsner

For the full year it was 60% application specific and 40% general purposes. Application specific are 20% year-over-year and general purposes grew 28% year-over-year.

Krishna Shankar - JMP Securities

Great thank you.

Dave Zinsner

You want the fourth quarters as well.

Krishna Shankar - JMP Securities

Sure.

Dave Zinsner

Okay, so the fourth quarter application specific was 59% of revenue, general purpose was 41%. So, application specific grew sequentially or declined sequentially 7% and general purposes decline 5%.

Krishna Shankar - JMP Securities

Great, thank you.

Dave Zinsner

Sure.

Operator

Ladies and gentlemen that does conclude our time for questions today; I would now like to turn the call back over to Mr. Rich Beyer, Chief Executive Officer for closing remarks, go ahead sir.

Rich Beyer

Thanks, let me just sum up by saying that despite the industry softness that also affected Intersil in Q4, we are very pleased with our performance throughout 2006. As you recall Intersil grew 12% in 2005, while our peers grew about 2%, we grew 23% in 2006 and it appears that that's certainly higher than the overwhelming majority of really fine high performance analogue companies that we compete with.

Our profitability has moved up steadily from last three years to where we are now performing in the model that we established for ourselves three years ago. And we are very pleased that we continue to remain with in that profit model despite being dropped in revenue in Q4 and we are going to work very hard to remain within that model in Q1 of this year and then we believe a return to growth in Q2 will suggest that we can continue to expand both gross margins and operating margins going forward through the remainder of this year and hopefully through strong markets into 2008. We think we have a very-very solid strategy and we think 2006 was yet another really fine for our us as a corporation.

Thanks very much I am sure we will see all of you at one of the upcoming events that we talked about at the beginning of the call. Have a great day, we will see you then or in 90 days. Operator, thank you.

Operator

You are welcome. Ladies and gentlemen that does conclude today's conference. We thank you for your participation. You may now disconnect.

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