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Intersil Corporation (NASDAQ:ISIL)

Q2 2011 Earnings Call

July 27, 2011, 4:45 p.m. ET

Executives

Brendan Lahiff - Senior Investor Relations Manager

David Bell - President and CEO

Jonathan Kennedy - Senior Vice President and CFO

Analysts

Ross Seymore - Deutsche Bank

Craig Ellis - Caris & Company

[Gabriella Jorgensen on behalf of James Snyder]

Joanne Feeney – Longbow Research

[Vincitis] Navarantne – JP Morgan

Evan Wang – Stifel Nicolaus & Co.

Patrick Wang – Evercore Partners

John Pitzer – Credit Suisse

Steve Smigie – Raymond James

Sumit Dhanada – Citadel Securities

[Ucha Ubi – UBS]

Chris Caso – Susquehanna Financial Group

Operator

Ladies and gentlemen, welcome to the Intersil Corporation second quarter 2011 Earnings conference call. I will be your coordinator for today.

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

Brendan Lahiff

Thanks, Jonathon. Good afternoon, and thank you for joining us today for Intersil’s second quarter fiscal 2011 earnings conference call. Today, with me is Dave Bell, Intersil’s President and Chief Executive Officer, and Jonathan Kennedy, Intersil’s Senior Vice President and Chief Financial Officer.

Today we will deliver remarks on the second quarter of 2011 and provide a summary of our third quarter 2011 business outlook. After our prepared comments, we will open the lines for questions.

We completed our second quarter on July 1, 2011. An earnings press release was issued today at approximately 1:05 pm Pacific time. A copy of the press release and supplementary slides to accompany during the conference call are available on the investor relations section of our website at intersil.com.

In addition, this call is being webcast live over the Internet and may be accessed via the investor relations section of our website. A telephonic replay of the conference call and webcast will be available for approximately two weeks through August 10th. Questions during the call may also be submitted online via the webcast but we’ll be answer by e-mail after the call.

Please note that come comments made during this conference call may contain forward-looking statements. I’d like to remind you that while these statements reflect our current best judgment, they are subject to risks and uncertainties that could cause our actual results to vary. These risk factors are discussed in detail in our filings with the Securities and Exchange Commission.

In addition, during this call, we may refer to financial measures that are not prepared according to Generally Accepted Accounting Principles. We sometimes use these measures because we believe they provide useful information about the performance of our business and should be considered by investors in conjunction with GAAP measures that are reported.

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

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

David Bell

Thanks, Brendan. Good afternoon, and thank you for joining us today for Intersil’s second quarter 2011 earnings conference call.

The second quarter was challenging as the entire industry reacted to the impact of the March 11 earthquake in Japan. At the same time, we faced a worldwide economy that weakened as the quarter progressed. Despite those challenges, Intersil grew revenues by 5%, reporting revenues of $209.1 million for the second quarter.

We were also pleased to increase gross margin by 40 basis points to 58.2%, remaining at our desired operating model.

The modest headcount adjustments we made in March were helpful and allowed us to control operating expenses during the second quarter. The combination of revenue growth, gross margin growth, and operating expense controls resulted in significant EPS leverage.

GAAP EPS was at the high end of our guidance at $0.17, and our non-GAAP EPS of $0.23 beat the upper end of our guidance by a penny. Non-GAAP EPS excluding equity-based compensation reached $0.30.

Intersil experienced little upstream supply chain impact due to the Japanese earthquake. Because of alternate sources and resourcefulness of our suppliers, our delivery performance remained excellent. Even so, we believe there is modest inventory growth at our customers during the second quarter as a hedge against potential shortages.

As expected, most of the downstream supply chain impact from the Japanese earthquake has already been resolved. However, we still see some pockets of minor shortages or delivery push-outs, primarily in the display and gaming markets. We expect any lingering shortages to be resolved during the third quarter.

Second quarter results were again driven by the growing strength of industrial business, which grew by 10% sequentially. Tech-Wells’s strong growth in both automotive and securities surveillance, resumption in military growth, and isolated power management growth were several of the contributing factors.

Despite what competitors may claim, Intersil remains the clear leader in PC power management. In fact, we believe our share of the Sandy Bridge notebook market, now exceeds the share we owned on the Montevina platform, and that’s no small fee.

Although competition is intense, the power specifications for new processors are very difficult to meet, and Intersil continues to provide the best performing solutions. We estimate over 70% market share on the Sandy Bridge generation, and although it’s still early, we expect to retain similar market share on the upcoming Ivy Bridge generation.

We are now leveraging our advance power conversion architectures developed for the PC market and producing parts aimed at the performance-intensive infrastructure market. Switches, routers, base stations, servers, and network attached storage, all have similar power conversion requirements that can be addressed by our growing portfolio of IC and module-level of products.

Cloud computing and virtualization will continue to drive strong growth in the communications market. During the second quarter, we completed our transition to add [inaudible] as our single global distributor. This carefully orchestrated process went very smoothly and is already paying substantial dividends. For instance, in North America, the total new distribution opportunity dollars recorded in Q2, more than doubled from those in Q4. The additional resources and forces at focus at AppNet will result in significant growth in the coming quarters as those opportunities turn into revenue dollars.

We’re very pleased with our performance during the second quarter having generated over $45 million in free cash flow. We are committed to returning shareholder value and as a result, our Board of Directors has authorized a quarterly dividend of $0.12 per share of common stock.

You’re only just beginning to see the results of Intersil’s on-going transformation. During the last three years, we made significant investments in new products, both organically developed and acquired.

At the end of my prepared remarks, I’ll highlight some of the key areas that are certain to drive outsized growth during the coming quarters.

At this time, I’d like to turn the call over to Jonathon Kennedy, who will provide a financial summary. I’ll then discuss results from each of our four end markets in more detail, and finally, provide comments on our third quarter 2011 outlook. Jonathon?

Jonathon Kennedy

Thanks, Dave. Let me start with the results of operations. We achieved $209.1 million in revenue for the second quarter of 2011. A 5% decrease from the second quarter last year and a 5% sequentially increase from the first quarter of 2011. The sequential revenue growth was driven by sales in the industrial market as well as the beginning of seasonal gaming pick up in a consumer market.

Revenue from computing products was flat in the March quarter, as demand for our power manager products remained steady.

Our lead times remain normal throughout the quarter with no significant supply constraints and our internal utilization remained at normal levels during the quarter.

Second quarter turns were approximately 31%, and we expect our Q3 turns to be about 34%, at the midpoint of our guidance, in line with historical rates.

Our gross margin was 58.2% in the second quarter just above our target level as the quarter saw a benefit from revenue mix. Looking to Q3, we expect gross margin to be near our target of 58% but lower than Q2, as a third quarter seasonal revenue mix favors lower margin, consumer and computing products.

Our second quarter operating expenses were slightly lower than expected with R&D expense of $47.8 million or 23% of revenue, and SG&A expenses of $36.3 million or 17% of revenue. We expect third quarter operating expenses to be slightly higher as annual payroll increases go into effect.

We expect R&D expense to be about $49 million and SG&A expense is expected to be about $37 million. Amortization intangibles was $6.7 million during the second quarter and Q3 amortization is expected to be about $7.1 million.

Our Q2 operating margin was approximately 15% on a GAAP basis. We had no gains or losses on our deferred compensation investment this quarter, and as such, there were no offsetting increases or decreases in operating expense.

Interest income was $0.7 million for the second quarter and we expect Q3 interest income to be at a similar level. Our interest expense was slightly less than the prior quarter at 4.2 million due to a lower outstanding balance on our long-term debt.

We expect Q3 interest expense to be at a similar level to Q2 at about $4 million. Our second quarter tax rate was approximately 21% on a GAAP basis and our non-GAAP tax rate was 15% within the expected range.

We expect our Q3 effective tax rate to be consistent with Q2. Equity compensation was $9.3 million for the second quarter and we expect it to decrease to approximately $8 million during the third quarter. Our equity compensation by classification in Q3 is expected to be about $0.5 million in cost of sales, $4 million in R&D, and about $3.5 million in SG&A.

On a GAAP basis, we are net income of $21.8 million or $0.17 per share for the quarter.

Now, let me spend a few minutes discussing our results on a non-GAAP basis. We present these non-GAAP measures because we believe they add additional analyst that when considered with the GAAP information, can help investors more thoroughly understand the results of normal on-going operations.

So historically, our non-GAAP presentation and EPS calculations excluded one-time restructuring cost, acquisition cost, amortization and purchase and intangibles, and certain discrete tax items related to the exclusions.

But they included equity compensation expense. However, many analyst continue to exclude equity compensation and their non-GAAP EPS estimates through First Call for Intersil and many of our peers. And while First Call has been correct in its reporting of GAAP EPS, it’s just unable to reliably and accurately distinguish between various versions of non-GAAP estimates, which degrades the usefulness of their reported estimates to investors with multiple versions of non-GAAP mixed together within First Call.

In an effort to align our non-GAAP calculations to our industry peers, our non-GAAP EPS estimates going forward, beginning with the third quarter 2011, we’ll exclude equity compensation in addition to the one-time items and intangible amortization.

This will increase the comparability of Intersil’s actual earnings to published earnings estimates as well as increase the comparability of our earnings to those of our closest peer group. This change will not affect those of you that maintain your own financial models and estimates. For those that rely on Thompson First Call non-GAAP estimates, we expect this change to increase the comparability between Intersil’s non-GAAP EPS and those reported by first call.

But as always, we will continue to publish and maintain our primary focus on GAAP financial results.

Our non-GAAP operating income was $47.1 million and our non-GAAP operating margin was 22.5%. Non-GAAP net income was $37.3 million or $0.30 per share for the second quarter, exceeding the high end of our guidance.

Again, these amounts exclude equity compensation, and amortization of intangibles. A reconciliation between GAAP and non-GAAP measures can be found on Page 8 in today’s press release.

Now to the balance sheet and cash flow. For the second quarter we generated $45.7 million in free cash flow, or 22% of revenue. Our cash and short-term investments increased by $26.6 million during the quarter and we exited the quarter with $416.9 million in cash and short-term investments and $275 million in debt. And we paid out approximately $16 million in dividends during the second quarter.

Our days of sales outstanding was 38, two days lower than the first quarter, and our net inventory increased slightly from the first quarter to $99.9 million. We ended the quarter with a 103 days in inventory, and looking ahead, we expect inventory to decrease by 2 to $4 million.

Our Q2 ending worldwide distributor inventory was up to 76 days as Asian distributors added seasonal inventory for computing and consumer products. Our second quarter depreciation was flat compared to the first quarter at 5.6 million and our CapEx increased to $3.5 million, and we expect Q3 CapEx to be about 3 to $5 million.

Our weighted average diluted share count was about $126 million in the quarter and we expect third quarter weighted average diluted shares to be at similar levels.

Now, I’ll turn the call back to Dave.

Dave Bell

Thanks Jonathon. I’ll now address our business in each of our four end markets. Let’s begin with our largest market, industrial.

Revenue in the industrial market represented approximately 30% of second quarter revenue and increased 10% sequentially. As we projected last quarter, the military business returned to a normal growth rate after the encrypted radio program fell off during the first quarter. Military sales increased 14% sequentially, and while at a lower run rate than in earlier quarters, they provide a good foundation for future growth.

The bulk of our growth in the industrial market came from Techwell Automotive and Video Surveillance products. The close of the second quarter marks the one-year anniversary of our acquisition at Techwell so I think it’s appropriate to do a review of Techwell performance. Tech Well differs from our recent acquisitions in that it became Intersil as successful profitable business.

The debt we took to finance the acquisition, was very inexpensive at a 3.5% cost of capital after tax.

When we acquired Techwell, their internal projections for 2010 were for approximately $88 million in revenue. As of the second quarter of 2011, we were at a run rate of over $100 million and the gross margin is approximately 60%.

Without a doubt, this has been a successful acquisition and the best is yet to come.

The automotive display driver business increased 39% sequentially this quarter, and this is prior to the benefits of the Gold- Branche Kid Safety Act, which will require rearview cameras in every U.S. passenger vehicle by 2014.

Intersil presently has nearly 100% market share of the LCD libraries for rearview mirror displays that are used with backup cameras and over 50% market share in dashboard displays.

Sales into the security surveillance market increased sharply during the second quarter growing by 40% as new video decoder products came on.

New AT1 Video Decoders are replacing older 4-1 video decoders which are enabling further integration and cost reduction of advanced surveillance solutions.

We’re now booking order for new products such as our A-Start 264 Codex, our 964H Video Decoders, the Fish Aisle Lens Correction IC and the security link over coax IC that permits the integration of digital cameras on existing coaxial cables.

With strong sales today, plus a host of new products winning numerous designs, it’s obvious why we’re so excited about Techwell’ near-term growth prospects.

We continue to increase the breadth of our product portfolio and at the horizonal market with several new switching regulators and amplifiers introduced during the last quarter.

Looking ahead, we expect sales into the industrial market to be roughly flat in the seasonally soft third quarter.

Now, let’s look at our computing market. Revenue in the computing market represented approximately 27% of second quarter revenue, a 1% increase from the prior quarter. The split between notebooks and desktops was approximately 62% to 38% with notebooks sales increasing 6% from the first quarter.

The advantage we gained by being the first core power supplier to fully comply with Intel’s Sandy Bridge spec is now paying dividends.

Intersil’s share of notebook Vcord powered grew, which is Sandy Bridge platform, with our estimated share going to over 70% in the second quarter. This is due to superior performance, a smaller footprint and outstanding delivery.

Furthermore, we’re not seeing the same level of competition we’ve seen in the past from several of our traditional PC power management competitors.

We are also well positioned to maintain a similar level of market shares in the Ivy Bridge generation in 2012.

Our success with the Sandy Bridge platform allows us to execute a long-term strategy in the computing market. Retaining customers that value our performance and support, and deliberately seeding market share with those that value price alone.

Looking ahead to the third quarter, we expect sales in the computing market to increase slightly as modest inventories consumed at our ODM customers, offsetting most of the seasonal growth in the third quarter.

Now, let’s look at our consumer market. Revenue in the consumer market represented approximately 22% of second quarter revenue, a 12% increase from the first quarter.

Overall, the consumer market exhibited normal seasonality with the revenue increase driven by our ambient light and proximity centers and the beginning of the seasonal ramp in our tethered gaming business.

Offsetting these gains was a slight decline in mix-signal display products. During the quarter, we introduce new products such as the ISL9110, buck-boost regulator, a function often required in handheld battery powered products.

This is our first buck-boost regulator but we achieved best in class performance. Our customers recognized this performance and we’ve already secured a major program which will begin driving significant revenues as early as the fourth quarter.

Gaming sales accelerated in the second quarter and are expected to peak in the third quarter. However, we expect that fourth quarter sales will remain strong as certain handheld programs delayed due to the Japanese earthquake go into production and offset the normal seasonal declines in tethered gaming system.

We expect annual revenues in the gaming business to increase significantly over 2010 due to increased content in both tethered and handheld products.

Although the mix signal display buffer market showed signs of bottoming in the first quarter, this is one area where downstream supply shortages may affect product of television displays.

We expect these shortages will be resolved during the third quarter, positioning the market for growth in 2012.

Despite these supply chain issues, the display power market grew moderately due to the introduction of new integrated LED drivers specifically designed for tablets and ultra-portable [inaudible] light notebooks.

These LED drivers provide up to 90% efficiency maximizing battery life. The high performance and versatility of this product family also makes it suitable for general purpose industrial and automotive displays.

I'm pleased to report that our ambient light and proximities sensor family continues to outperform with design wins at nearly all Smartphone customers. Our solutions deliver the best performance with superior infrared rejection, the widest dynamic range and the lowest power consumption.

Similar to our success in Smartphones, we’re now seeing many of our sensors designed into a wide range of tables.

Lastly, we are preparing to sample our next generation sensors, which match the human eye spectral response closer than ever before, and we’re increasing the range of our proximity sensors to more than 1 meter.

This technology is already receiving considerable interest for non-content jester recognition applications.

Looking ahead to the third quarter, we expect sales in the consumer market to be flat to slightly down from the second quarter due to worldwide softness in the consumer market. However, with easing in downstream supply constraints, this should position us for a bug seasonal growth in the fourth quarter.

And finally, moving to the communications market. Revenue in the communications market represented approximately 21% of second quarter revenue and decreased 3% from the first quarter. We saw increased sales of rad-hard products, but these were offset by weakness in the China DSL market.

Zurko Labs Digital Power Products continued to accumulate design wins with communications and networking infrastructure customers. Digital Power is finally reached the tipping point with equipment makers now wanting to take advantage of telemetry and programmability features. Hundreds of design wins are now beginning to ramp, solidifying Intersil’s position as the leading digital power supplier for infrastructure applications.

Our radiation harden product revenue grew strongly as we continue to expand the breadth of our rad-hard portfolio. These new product introductions extend our leadership position in the satellite business.

We recently announced the opening of our enhanced low-dose rate sensitivity or ELDRS testing facility. This first of a kind facility provides wafer by wafer radiation acceptance testing and guarantees radiation tolerance for our satellite customers.

In addition, this ELDRS testing facility enables us to test standard off-the-shelf parts for radiation tolerance, creating new opportunities for products never before considered for space applications.

Our DSL business represented 6% of communications revenue. However, ASP reductions in ADSL market have accelerated faster than the adoption rate of higher-value video cell line drivers. We expect this to be the case for the next few quarters until BDSL sales become the majority of sales.

Revenues in the DSL market will continue to be slightly depressed during this period.

Looking ahead, we expect the communications market to be roughly flat with the second quarter.

Now, let’s turn to our outlook for the third quarter. New product introductions are being very well received in several end markets. However, because of the softening economic environment, we expect our third quarter revenue to be roughly flat with revenues in the range of 205 to $213 million, a minus 2% to plus 2% change from the second quarter.

Due to the normal seasonal mix shift toward higher volume lower margin consumer and PC products, we expect our gross margin to be slightly lower but still close to our target of 58%.

On a GAAP basis, we expect third quarter earnings per share to be in the range of $0.14 to $0.17, excluding one-time charges, amortization of intangibles and equity-based compensation, we expect non-GAAP earnings per share in the range of $0.24 to $0.27.

Intersil is pasted the midpoint of a multi-year transformation. Customers and investors are just beginning to see the stream of new, highly differentiated products and many more are in the development pipeline.

We’re absolutely confident that Intersil will deliver exceptional growth because of the sensible investments we’re making.

To give some perspective on why we’re so confident, I’d like to briefly list what we believe will be the top ten drives of Intersil’s growth in the coming years.

Number one, Techwell. The automotive and security surveillance markets will have strong growth in the coming years, and Techwell has technology leadership in both. We expected this $100 million per year business today will grow to double that size in just a few years.

Number two, dense power MOSFETs. We’ve developed a proprietary MOSFET process that will be cold packaged with Inersil’s DC to DC controller ICs. The first product based on this technology will be sampled later this year and will provide significantly higher powered density than any competing products. We expect this to create a new product category with more than $100 million in sales within five years.

Number three, Zorko Labs. Digital power has reached the tipping point in infrastructure applications and hundreds of design wins are now beginning to ramp into production. Our Zorko labs team has developed a new digital control architecture that will simply design in and deliver transient response even better than today’s fastest analog controllers. New parts based on this architecture will sample to customers later this year.

Number four, high-density digital power modules. These modules incorporate Zorko Labs technology into a complete power solution. And we’ve already won a major infrastructure design worth more than $15 million per year. Other large design wins are in process.

Number five, PC power management leadership. This is one of Intersil’s core competencies and we expect to retain dominate market share in further processor generations. We’re also expanding market share in a rapidly growing tablet market.

Number six, active cooper cable technology. Based on [inaudible] technology, Intersil can send higher data rats with longer and thinner cooper cables than anyone else in the industry. Such active cooper cable technology is now being adopted by both infrastructure and consumer customers.

Number seven, Pico projectors. Intersil has the only complete silicon solution for a 1080p laser Pico projector. As green laser prices fall, Pico projectors will become embedded into huge numbers of devices such as Smartphones. We expect this to create a product line with sales of more than $100 million within five years.

Number eight, Automotive lithium-ion cell balancing. New hybrid and electric vehicles are using a lithium-ion battery and all need large numbers of precision cell balancing and monitoring ICs. Intersil has the best performing and most robust parts in the market and we’re now accumulating major design wins.

Number nine, light and proximity sensors. Intersil’s a leader in this category and we expect this product line to grow to more than $100 million within three years. New long-range proximity sensors are opening an additional markets.

And number ten, D2 audio. Intersil makes the only amplifiers that combine a DST and Class D power amplifier. Their further differentiated by our audio canvas tuning software and [inaudible] partnership. Numerous products containing these amplifiers are now on the shelves at Best Buy and many other design wins are being accumulated in consumer and automotive applications.

These are just the top go-to libraries in a portfolio of more than 60 product lines, but these top ten alone are expected to generate $700 million in additional annual revenues in the next five years.

Hopefully, this provides a bit more insight into why we’re so confident that both the organic and acquisition investments we’ve made during the last few years will drive exceptional growth.

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

Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first questions is coming from the line of Mr. Ross Seymore with Deutsche Bank. You may proceed.

Ross Seymore - Deutsche Bank

Hi, this is Bob in for Ross. Thanks for taking my question. I’m curious, within your consumer segment, how much exposure do you have to display in TV market. And can you talk a little bit about the dynamics? You had Corning this morning. Talk a little bit about weakness there. Just for you visibility into that market.

Dave Bell

Well, as I mentioned, the TV and display market overall is one of the few areas where we actually had a little bit of supply chain impact. So that actually has slowed some of the sales here a little bit for us. But we think that most of that is going to be resolved. We don’t break it out individually for revenue any further than in communications market. It’s a pretty sizable chunk though, I’ll say that, of our consumer business. And we think that there’s a lot of growth opportunities there.

We continue to expand our portfolio. We have a number of products both on the power side, where we do power [inaudible] that are specifically designed for LCD’s. We’re expanding that market. We’re doing LED back light driver parts. And we also have gamma buffers and other parts that we’re continuing to expand.

So again, while I won’t quote you a specific number, it’s a pretty sizable number today. And we think that once the supply chain disruptions are over, we expect that to grow nicely.

Ross Seymore - Deutsche Bank

Great, thanks, and maybe just a quick follow-up. Have you noticed any difference in behavior in perhaps your distribution customers versus your OEM customers? And there’s obviously been different commentary from different conductor vendors with high distributor exposure versus some with OEM exclusivity. Can you comment on that maybe if you’ve seen some different actions from the different channels?

Dave Bell

Yeah, I really haven’t seen a whole lot of difference there. I would say that there is broad based weakness that we see right now. And that’s certainly consistent with what you’re hearing from IC makers in the industry. But no, I wouldn’t point to one channel really being all that much different from another.

Now there is seasonal effects as well that we see. In Asia, for instance, a good portion of our PC business and consumer business does go through distribution as well as direct OEM relationships. And those businesses typically are a little bit stronger during the third quarter. But more muted than normal with the economic headwinds that we face.

But I wouldn’t really single anything in particular out.

Ross Seymore - Deutsche Bank

Great, thank you.

Dave Bell

You’re welcome.

Operator

Your next question is coming from the line of Craig Ellis with Caris and Company. You may proceed.

Craig Ellis - Caris & Company

Thanks for taking the question. First Jonathan, when do the cost of living increases go into effect? So differently, is there going to be a carry-over effect in the fourth quarter year for that adjustment?

Jonathan Kennedy

No, there’s effective the beginning of Q3.

Craig Ellis – Caris & Company

Okay, so all inside this quarter. And then Dave, if I exclude the Techwell revenues from industrial, it looks like the business is down about 15% from the pre-acquisition levels. What’s happening there? And what’s the outlook for getting that core business growing again?

David Bell

Well, there’s a lot of investments we’ve been making in horizontal products. The only downside of it is the gestation period for those industrial products is typically very long. But we have seen the core industrial business going nicely. I mentioned about, for instance, opportunities since we consolidated with our single global distributor being Avnet Memec.

And opportunity dollars are more than doubled what they were just in Q4 just two quarters ago. I don’t have the number off the top of my head, Craig, but I know in our core horizontal business, we’ve seen very strong growth there.

Now that said as I just mentioned earlier, we do see some soft newness in the industrial market right now due to economic headwinds. And typically, this third quarter is a seasonally soft quarter for industrial when Europe kind of goes on vacation.

Jonathan Kennedy

Yeah, that [inaudible] military is off a complete component of industrial. We talked last quarter the loss of the military radio program has made a big difference. So you’re comparing year-on-year, that military is probably the big driver. Because everything else in the industrial space is actually up.

David Bell

Yeah, so again, I would emphasize, Craig, that we’re very pleased with the quality and the performance of products. We’re introducing building out our horizontal portfolio. And we are seeing nice growth in those areas. But it’s not immune to the economic headwinds we’re seeing.

Craig Ellis – Caris & Company

Okay, can I ask one more as a follow-up? When you mentioned the top ten drivers and $700 million in incremental revenue over the next five years, Dave, do you envision getting there fairly linearly? So in incremental $140 million per year, or is the growth there more back end loaded? How do we think about the projector?

David Bell

I knew there was a danger in telling you that number as you’re going to try and plot a nice straight line between now and five years from now. And figure out what the growth rate ought to be.

It is not necessarily going to be linear. There is some of those product categories that are kind of vertical markets. And I think we’ll probably grow quite rapidly. Some are already products that are shipping nicely like our ambient light sensors and prox sensors where we’re building on success already. Others are going to take a longer period of time. So it’s not guaranteed to be linear. And in fact, if anything, it probably works a little bit more expediential because some of these things are not even yet shipping in high quantities. And are going to really grow more as you start getting out in that time period.

So don’t just simply draw a straight line and expect that’s what the incremental revenue is going to be.

Craig Ellis – Caris & Company

That’s it. Thanks guys.

Operator

(Operator instructions). Your next question is coming from the line of James Snyder. You may proceed.

[Gabriella Jorgensen on behalf of James Snyder]

Thanks for taking my question. This is Gabriela Jorgensen on behalf of Jim.

You talked about increased compound in gaming. I was wondering, how much is the growth in gaming revenues that you expect in the second half? Would you attribute [inaudible]?

Dave Bell

Well, it is a combination of both. We do see normalcies now in gaming where there’s a strong build in the third quarter for gaming. And also in fact in some of that in Q2. But there definitely are market share gains. We have gained significant market share both in tethered gain consoles as well as hand held devices. So what we’re talking about long term is clearly a growth that is due to market share gains. And near term if the record is a combination of that in the seasonality.

[Gabriella Jorgensen on behalf of James Snyder]

Then a follow-up if I may.

Intersil recently lowered their expectations for PC unit growth. And you mentioned from inventory draw down is [inaudible]. I was just wondering if your expectations for unit growth have changed relative to the beginning of the year.

Dave Bell

Yeah, absolutely. I think that the PC market is literally slower in the second half of the year than we anticipated it being at the beginning of the year. So I’m sure you’re hearing that from many semiconductor suppliers. So the growth is not going to be as strong as we would have predicted six months ago.

That said, I don’t think it’s a complete disaster either. If you look at the kind of projections you’re hearing from Intel and AMD, they’re fairly bullish actually on third quarter with the expectations of 7% to 10% sequential growth. What we hear when we talk to our ODM customers, the people that are actually buying those processors, is closer to flat. So the reality is probably somewhere in-between those two numbers.

[Gabriella Jorgensen on behalf of James Snyder]

Great, thank you.

Operator

Your next question is coming from the line of Joanne Feeney with Longbow Research. You may proceed.

Joanne Feeney – Longbow Research

Thank you. To continue on that theme on the PC side of things, with your 70% market share, I guess two questions.

One, where do you think you are in the Sandy Bridge build? And what is your – what do you think your relative exposure is to consumer oriented notebooks versus commercial oriented notebooks?

Dave Bell

Well Joanne, it’s a really good question. I don’t have a crisp answer for you on this split between consumer and commercial. What I do know is that the consumer notebook business has suffered more than a consumer or the commercial business rather. But I think that we are – clearly, we’re 70% market share. We’re in both of those markets. But I don’t have an exact answer for if we’ve got a greater percentage in commercial or consumer.

But clearly, the consumer stuff has been a little bit weaker.

Joanne Feeney – Longbow Research

Okay, and then a bigger picture question beyond PC. So others are seeing a more negative sort of picture emerging for the third quarter with orders soft in both June and July and into August it looks like. Your outlook is a bit more bullish, lower than consensus, but a bit more bullish than some of the others in the analog space. I’m wondering if you see your guidance in line with your view of end market trends, or are you deviating from some of those more negative outlooks because of perhaps share gain or mix improvement?

Dave Bell

Well, I think there is some share gain going on. So it’s certainly back to the PC talk we were talking about earlier. Our share of the Sandy Bridge generation is higher than it was with Capella. So that has helping us there a little bit. I think that across the board in most markets, we believe that we are gaining market share. Now we’re going to go up and down with the tide like everybody else. But I think we’re perhaps not going down as much as some of our peers primarily just due to share gains in a number of different markets.

Joanne Feeney – Longbow Research

Okay, thanks very much.

Dave Bell

Thanks, Joanne.

Jonathan Kennedy

You know one thing I would point out too just to make a point of that is change over our industrial, more industrial peers report more negativity. For us, our industrial exposure is a little more limited. But it’s also weighted towards these security and automotive business, which are growing. So from somewhat of a unique product mix at Intersil for industrial, that’s differentiated.

Operator

Your next question is coming from the line of [Vincitis] Navarantne with J.P. Morgan.

[Vincitis] Navarantne – JP Morgan

That’s pretty close. Thanks for taking my question. So just as a follow-up with a previous caller’s question, what can you comment about the inventory at distributors? And how do you expect it to trend especially given what some of your competitors talked about earlier today as well as a distributor who had mentioned that there was some weakness in Q3?

Jonathan Kennedy

Sure, I think it’s Jonathan. So we mentioned on the call that distributor inventory was up to 76 days from 69 days last quarter. It’s a little bit higher. And this is a typically time of the year where we would push inventory into the channel in advance of holiday, and back to school, and early next year build. So we don’t see it as an unusual increase. But in 76 days, I would say that that’s the level where our comfort exists. And beyond that probably gets to be too much. So at 76 days, we’re watching it. But it did not exactly surprising given the time of the year.

[Vincitis] Navarantne – JP Morgan

Okay, thanks, and then another question on military. Last quarter and the quarter before, you said that you expected military to be down 3% to 4% Q on Q. I assume that it’s approximately 15% of your overall industrial end market. Is that right? And then so what do you expect it to grow over the next few quarters?

Jonathan Kennedy

Well, as far as the growth prospects for military, I think we’re probably going to be soft for the foreseeable future. One of the key reasons is that as we mentioned in a previous quarter is that our encrypted radio program is come to end of life. And that’s one of the key reasons that the military business has fallen off during the last quarter or so. I think that there is some longer term growth prospects. But as well, the U.S. military budget is certainly under pressure as well. So I don’t really see, to be honest with you, that there is going to be a lot of strong growth prospects in the next few quarters at least. But perhaps there could be beyond that for rising.

Vicotish Matumani – J.P. Morgan

Okay, thank you.

Operator

Your next question is coming from the line of Evan Wang with Stifel Nicolaus. You may proceed.

Evan Wang – Stifel Nicolaus

Yes, hi, this is Evan calling in for Troy Sumburg.

My first question has to do with your guidance. I believe you mentioned that there are two considerations here. You have some lingering from Japan disruption supply chain as well as some Macro [inaudible]. Also, I wondered if you could add some color to that. And maybe break it down for us? Which is more of the overriding factor here?

Dave Bell

Yeah, sure. I don’t think that we have had very much supply chain impact. Certainly when we look at upstream supply chain impact, we’ve been very resilient there. And we’ve had very little impact there. I think that’s because we have multi-sources on most of our high volume products. And our suppliers have been very resourceful.

When you look at downstream supply chain impact, there has been a little bit of that. One of the areas that I highlighted was in the TV and displays area where we think shortages of other components have limited build there a little bit and impacted our deliveries as well.

But I think I would say that the other impact that we’re seeing from Japan is obviously the consumption in Japan, the world’s third largest economy, has been impacted by the earthquake there. And it just kind of added to woes around the globe right now with various economic problems no matter where you look.

So that’s what I referred to, not that we’re really being impacted by our ability to make products. But Japan is just one of many challenges that we’re facing in economies around the globe right now.

Evan Wang – Stifel Nicolaus

Thank you for that clarification.

My follow-up question has to do with your gross margin. It seems like with [inaudible] $700 million revenue opportunity you talked about over the next five years, there could be some movement in your expansion of your gross margin. Could you talk about that a little bit? Then maybe what the gross margin might be near-term as well as longer term?

Jonathan Kennedy

Well, we think we’re going to stay around the 58% level. That’s been our target position. And it’s hard to predict exactly what the gross margin will be five years from now. But our belief is that it’s hovering around that 58% gross margin is the best place to be at least today to maximize EPS growth. Now the market conditions and the competitive situation could be different five years from now. It might make a slightly different optimal point. But certainly for the foreseeable future, we expect to hang right around the 58% point.

Dave Bell

Keep in mind Evan that we, all of those items that David mentioned would all be produced outside as where the majority of our production is it not in house. So we wouldn’t see the same expansion you’d see if we were all making that internally.

Evan Wang – Stifel Nicolaus

I see. Thank you.

Operator

Your next question is coming from the line of Patrick Wang with Evercore Partners. You may proceed.

Patrick Wang – Evercore Partners

Great, thanks for taking my question.

My first question, I don’t if I missed this earlier, but can you comment on your book-to-bill. I think with your six months backlog, which is down slightly here, can you talk about what your recent bookings have been and what kind of visibility you’ve got?

Operator

You next question is coming from the line of John Pitzer with Credit Suisse. You may proceed.

John Pitzer – Credit Suisse

Good afternoon, guys. Thanks for letting me ask a question. David, I'm’ kind of curious from your perspective, the success you’ve had to date on Sandy Bridge, why do you think you’ve had that success? Hwy do you think it carries forward on Ivy Bridge? And I guess when you go back a few years ago with the share you had on Montiveno, I’d be curious how the profitability compares today in that business versus then?

David Bell

Sure. Well, I think our success is due to several factors. First and foremost is that we’ve got the best performing products. I mentioned during my prepared remarks that we were the first supplier to fully meet Intel’s Sandy Bridge power specification, and they’re really tough power specs to meet.

So that certainly gave us an edge there. So performance is reason number one. I would say that density would be another reason. We believe that we have the smallest solutions today, and in fact, the future solutions will be smaller still, which is really important in handheld products. And then third, delivery performance. There were a lot of suppliers that have had delivery problems during the last year or so, and we’ve had virtually none.

In fact, one of the things we’re proud about is we received the supplier of the year award from Quanta not that long ago because of our outstanding delivery performance.

So those are three of the things that I would point to. I think all three of those same reasons apply to the upcoming Ivy Bridge platform. It’s still a little bit early to count market share precisely now, but from everything we can see with the parts that we’re delivering and the kind of design wins that we believe we’re obtaining, we think we’re going to hold similar dominant market share in that generation.

John Pitzer – Credit Suisse

And then profitability this generation versus priors?

David Bell

You know, the profitability has actually been fairly stable. The ASPs have eroded over time, but we’ve kept up with cost reductions on our product. This most recent generation were the CPU and GPU powerage has been integrated actually has driven ASPs up a little bit in the Sandy Bridge generation. But overall, the gross margins, while we don’t give you guys specifics, what I will say is that it’s actually been surprisingly flat for us.

There is actually some hope as we continue developing our technology and pushing our cost reductions that those gross margins might even see some uptick at some point down the road.

John Pitzer – Credit Suisse

And then, David, as my follow up, you made an earlier comment that guys at Intel AMD talking about Q3 being up 7 to 10%. I think you said ever the ODMs or ODM that you talked to were saying flat. That flat combination – is that a market comment, or is that an Interseal product comment?

The only reason why I ask is because you guys had a very strong March quarter in your computing business, and I’m just kind of curious as to whether or not there was a little bit of pre-build ahead of some of the Sandy Bridge shipments and APU shipments out of Intel and AMD?

David Bell

Sure, well, good question. When I’m talking about the ODMs being flat, what I’m talking about is the number of notebook computers they are talking about making. It’s not necessarily how many products they’re buying from Intersil.

So there’s a bit of disconnect there. Obviously, Intel and AMD being reasonably bullish on Q3, whereas the ODMs, when you’re talking about how many notebooks they’re actually going to make during Q3, they are pretty flat in their expectations right now.

I’m not just sure exactly what the reasons are for that, the reality is probably somewhere in between there. As far as our strong Q2 in the notebook business, or the PC business overall, as I mentioned during my prepared remarks, I think there was a little bit of inventory build at our suppliers as they hedge against the Japanese earthquake supply chain disruption.

I don’t think it was a huge amount, though. But that is one of the slight headwinds we’ve faced in Q3, is expecting there to be a little bit of inventory burn before we get back down to the consumption levels.

John Pitzer – Credit Suisse

Great. Thanks, guys.

Operator

Your next question is coming from the line of Steve Smigie with Raymond James. You may proceed.

Steve Smigie – Raymond James

Great. Thanks a lot. I was hoping you’d give a little bit more color on the MOSFET product you talked about. It sounds like you’re going to be packaging it so it’s not really going to be sort of the commodity-type markets. And it seems perhaps similar to what we’re hearing out of TI, which is how those packages [inaudible]. But I guess it seems a little different that you’re talking about packaging it with the controller versus – or with other people talk about packaging it with the driver. So it seems like it’s not so much a driver MOSFET solutions. I was just hoping you could give a little bit more clarification on what exactly you’re planning on doing with that.

David Bell

Yeah, sure. It would be kind of an IQ test I guess, if we said we were getting a discrete MOSFET business. We are not going to be getting into the discrete MOSFET business. But we think that there is a huge and growing opportunity to provide highly integrated, high-current DC to DC convertors. We make some of those today, but they are largely monolithic solutions where the power [inaudible] sits in the same dye as the controller.

You point out the TI kind of combo products where they combine power MOSFET with other ICs. Very similar to that, it is something that we have developed this current MOSFET specifically for that kind of application and for our module level products where we co-package it with our other power management products.

We have the ability to co-package it just with drivers as well and do [inaudible] products and you might see some of those coming along. But I think more importantly we plan to package it with our controller products where we think we’ve got some really highly differentiated technology there.

So it’s going to take that differentiation we’ve got with our analog controllers right now that are getting us that leading market share in the PC market space, we’re going to package them as well with our leading digital technology coming out out Zorko Labs and coming out with some very leading edge, very dense power solutions.

You know, like I said, the first of those products, we’ll be sampling to customers before the end of this year.

Steve Smigie – Raymond James

Okay. And just – with regard to Tec-Wal Product, can you talk a little bit about what you might see, dollar content on your typical surveillance application versus what you might see two parts of the cars; you have the rear camera and then you have the dashboard. Can you talk a little bit about how the dollar content might vary between those three locations?

David Bell

Yeah. Well, really had to get a crisp answer to that. In the display application in the car, we’re really talking about a single LCD driver that would either go in the rearview mirror or in the in-dash display. But keep in mind, there’s a lot of pull through products that we get from other product lines as well; ambient light sensors, power management products, things of that sort, backlight parts, things like that.

So the total opportunity in those things is far more than just a Techwells IC itself.

In the other application, you mentioned security surveillance, it’s widely vary because there’s lots of different functions there. Some of the products now are going with the cameras. Our Slot product line is secured to line over coax for some of those ITs going to the camera.

The bulk of Techwells’s security surveillance products that go on the other end of the cable, and the digital video recording and system that displays the images, and widely varying depending on the size and complexity of the system.

Steve Smigie – Raymond James

Okay. If I could just squeeze one more in. You talked about your digital power management, could you talk a little bit about how you see your cells differentiated in architecture? For example, International [inaudible] to go to that space, and others have talked about their architecture. Obviously, you’re starting to see some leverage. How do you guys differentiate your selves there and why is your solution going to beat out everybody else?

David Bell

Well, one thing I would point out so far is that most of the other digital power guys are really focusing on a décor market. And they are going after processor power.

So far, we are going after process power still with our analog solutions but the best architectures in the world, as testimonied by the fact that we’ve got 70% market share there, we’re taking most of our digital technology as the infrastructure applications. And that’s where I think the customers are really, today, now willing to pay for the telemetry features, and the programmability features that digital and power brings.

I think we’ve got some of the easiest to use, some of the most flexible and best performing digital power products and that’s why, as I mentioned, we’ve got hundreds of design wins already based on Zorko Labs products, most of those in infrastructure applications. Those are beginning to ramp now. We’re putting it also into our digital power module products. And I mentioned just one design win there that we’ve got already, because of our density, because of our telemetry features, because of our programmability features, that single customer is expect to buy more than $50 million per year of that product and we think there’s a lot more of those coming along.

So you know we’ve really kind of focused initially on the infrastructure market where we think the customers are finally recognizing it’s worth it to pay for digital power.

Steve Smigie – Raymond James

Thank you.

David Bell

You’re welcome.

Operator

Your next question is coming from the line of Harsh Kumar with Morgan, Keegan.

Harsh Kumar – Morgan Keegan

Hey, Dave. A question for you on computing and consumer business. We’ve heard from a couple of companies of normal seasonality in your business. September should typically be up. I’m just curious, historically at this time, OEMs typically build and worry about inventory later at the end of the summer timeframe. Do you think there’s a bigger issue here where the OEMs are getting just more – a lot more cautious or their mindset is changing, the supply chain is shrinking and becoming faster? I’d love to get your take on maybe the broader picture, what’s going on and why we’re seeing these kinds of abnormal results across the industry.

Dave Bell

Well, that’s a really good question. I wish I had real clarity for you on that. Our crystal balls are pretty cloudy right now, as I’m sure they are throughout the industry. I would guess though that the ODMs are going to be somewhat more cautious on inventory. And in fact ,that’s one of the reasons, as Jonathan pointed out, earlier, that we deliberately build a little bit of inventory in our supply chain at this time of year because when or ODM customers are running lean. We need to have the backup inventory to support short lead time orders.

So I would expect that is the case there right now, that they’re trying to run pretty lean on inventory just to be careful.

Harsh Kumar – Morgan Keegan

Fair enough. Thanks, thanks, Dave.

Dave Bell

You’re welcome.

Operator

Your next question is coming from the line of Sumit Dhanda with Citadel Securities. You may proceed.

Sumit Dhanada – Citadel Securities

Yeah, hi, Dave, Jonathan. I just wanted to go back to the channel inventory question again. You know, you noted there was 76 days. I just had two questions on that. It seems like it’s gone up for a couple of straight quarters. If I look at it versus last year, I think it was at 64 days in the June quarter. And your revenues were actually a little higher last year, so year over year our revenues are down, but you’re carrying more in the channel. I guess, help me understand the rational for that, especially given the uncertainty in the environment.

Dave Bell

Well, I think your analysis is useful. But I don’t know that there’s a – I don’t know that we control the distributor channel inventory as precisely. So I’m not sure – is your question, what’s the market’s rational for taking inventory or what’s Intersil’s rational for having it out there? Maybe you can kind of dial in.

Sumit Dhanada – Citadel Securities

Well, maybe the latter, especially given that you’re getting mixed signals and, you know, last year we were heading into some kind of a correction, but at the time, at least you were carrying less inventory in the channel. I guess my point is, that if, you know, things turn out to be softer than you suspect from a demand perspective, then you know, I’d suggest that you’re carrying an inordinately amount of, inordinately high amount of inventory in the channel.

Jonathan Kennedy

Yeah, I mean, I suppose – yeah, I don’t think I would see it that way, 76 days is a decent number. I mean, one thing has changed from last year. Techno business is almost all exclusively through the channel, which wouldn’t have been in there early last year. That’s driven it up a little bit. We’ve got some residual inventories still in channel left over from the Aero Lab-Net conversion. So Aero still has an inventory. We have a few distributors out there that we’re – [inaudible] that we’re still carrying inventory that we terminated. So there’s a little bit of sledge out there that probably needs another, you know, quarter or so to work its way out.

And you’re really drilling me now, while the inventory isn’t definitely at that peak of where we’d like it to be, I don’t think it’s at a scary level. Just to kind of put it in perspective, you know, without Techwells, at the you know, worst day that I recall since I’ve been CFO here we had about a 99 days. So at 76 days, we’re still, you know, almost a month less than where the peak was when things were really getting bad.

But I would – you know, I would definitely admit that at 76 days, we’re watching it.

Again, I mean, our distributors are customers and they order inventory and we ship it to them. So they’re ultimately in charge of how much they carry, they have to pay for it, and so that’s kind of the way it goes.

The other thing is, that inventory number does include our North American distributors who are all recognized on the sell-through method, who don’t, you know, so there’s inventory – there’s no impact to future revenue on inventory increases there.

The 76 days, just to quantify it, it’s an entire total of $4 million of just the inventory that’s increased from the last quarter to this quarter. It’s up $4 million, it’s all in Twain, which is almost all exclusively TC and consumer. So if you really drill into it, there’s a $4 million increase. Does that really impact the overall supply chain? Probably not, but definitely for those who buy computing and consumer parts, their inventory is positioned in case there is last-minute demand.

Dave Bell

And, Sumit, I would add that one of the reasons we got 70% market share is because of our outstanding delivery performance. We always try to build a little bit of extra inventory in the channel at this time of the year because we know, especially this year, I think, that ODMs are fairly light in inventory. We know what parts are designed in, so we know precisely which parts to build inventory on and we are very, very cautious and look at those items carefully.

So I think we’re doing exactly the right thing and we watch it very carefully.

Sumit Dhanada – Citadel Securities

Okay. And then just a quick clarification, Johnathan. The $4 million increase in Twain inventory, I assume that got recognized in Q2 revenues since that fell in. Is that accurate?

Jonathan Kennedy

Yes.

Sumit Dhanada – Citadel Securities

Okay. Thank you.

Operator

Your next question is coming from the line of [Ucha Ubi with UBS. Please proceed.

[Ucha Ubi – UBS]

Thank you very much. Can I just ask if the revenue of [inaudible] has changed by the – has been effected by the change in the distribution strategy as you moved more towards that? Has anything changed at all because I seem to recall [inaudible] the professional markets are selling. So can you just confirm what the revenue constructor is and what has changed with possibility of [inaudible].

Jonathan Kennedy

Sure. We’ve has the same revenue recognition policy as long as I can remember, and that is, in North America, distributors are recognized on sell through. Outside North America, they’re recognized on sell in.

[Ucha Ubi – UBS]

Okay. Let me just, TI and [inaudible] was talking about [inaudible]. They were talking about some [inaudible] having a deal and being unwound obviously from the way you are. It doesn’t sound like that’s a lot, but do you know if there’s any of that in the way your distributors behave, and is it something that didn’t affect you a lot related to the comments?

Dave Bell

Well, we have not listened to Intersil’s comments. Maybe you can be more specific?

[Ucha Ubi – UBS]

Well, they said that the aftermarket of Japan obviously was [inaudible]. And that is being unwound now.

Dave Bell

Yeah. I think in our case, we really didn’t have any channel inventory built as a result of that. I think that all the build that we’re looking at right now is just simply making sure that we’ve got the right inventory on hand to support the seasonally strong second half of the year. I really don’t think that we saw any significant dish to inventory impact as a result of the Japanese earthquake.

[Ucha Ubi – UBS]

Okay.

Jonathan Kennedy

I mean, our channel inventory, first, is a relatively small piece of the inventory in the channel to begin with. But second, it kind of falls into two buckets. On the one hand there’s general purpose industrial products that go through guys like Aero. On other hand, there’s more of a fulfillment distributor network in Asia that feeds the consumer and competing market. The North American, European, industrial, general purpose, those inventory levels are – they’re stable quarter after quarter. They really don’t grow much or shrink much.

The piece that moves up and down for us is really the Asian distributors and those typically go up and down with seasonality. So if it’s, you know, the Q2 timeframe, they build up on PC parts. If it’s Q2, they’ll build up on gaming. But then as you get to a later, towards the end of the year, we’ll see our Asian distributors come back down. It’s rare that you’ll see the North American or European general purpose guys go up and down very much. And that – and if you compared us to some of our more industrial peers who may have more attachment to Japanese like automotive or something like that, we just don’t have that type of business.

So from a comparability, it’s probably not – it’s just apples and oranges. But to just kind of give you the color on what our distribution is, it’s part general purpose. It doesn’t really change much. The piece that goes up and down is really computing. So if I were analysing Intersil’s channel, I – and you’re doing it on a quarter-to-quarter basis, like you guys are, you really want to look at PC. The rest of it is just kind of boring and stable.

[Ucha Ubi – UBS]

Good. And just, you know, going back again to the [inaudible]. Any comments on the [inaudible] processes? How much more complicated does it get as you move from [inaudible]? I’m just wondering how much more difficult it would be for your company to upset themselves as we get into the window? Does it get more complicated as you add, you know, more and more stuff to the [inaudible]? I just want to understand what is helping you stay ahead of the competition and how simple that is.

Dave Bell

Well, yes, the difficulty in meeting the specs continues, it gets more difficult. The specs become more complex with the different power modes you’ve got in there. But also, the success of processor generation seem to increase as transient load that it draws out of the power system. So yes, the challenge does become more difficult both because of the complexity of the solution, but also the sheer performance requirements that are expected.

As I mentioned earlier, we were the first company to be able to afford to meet the Sandy Bridge platform specs with our DC to DC convertors, our B-core parts. And I think that’s partly why we got some benefit in market share. We think we’re basically in the same position as well in Ivy Bridge. In fact, some of our leased – at least one our major suppliers doesn’t even have sample part for [inaudible].

[Ucha Ubi – UBS]

Thank you very much.

Dave Bell

You’re welcome.

Operator

Your next question is coming from the line of Chris Caso from Susquehanna Financial Group. You may proceed.

Chris Caso – Susquehanna Financial Group

Hi. Thank you. I’m just wondering if you can comment on the acquisition strategy going forward. Obviously, not giving specifics, but you know your top ten list, there were a number of those areas that were a result of some of the recent acquisitions. I guess, in general, do you guys feel like you’re done at this point, and kind of comfortable with the suite that you’ve got going forward?

Dave Bell

Well, we continue to look at everything. Jonathan and I have kind of taken the strategy of leaving no stone unturned. So we continue to look at opportunities both big and small. However, I think it’s also true to say that our focus right now is on monitizing the investments that we made, both organic investments within the company and acquired investments and turning those into revenues. So while we continue to look, I think that you probably should expect that we’re not going to continue doing acquisitions at the pace that we have during the last several years. We’re going to be very focused on getting those products to market and turning those into profitable revenue.

Chris Caso – Susquehanna Financial Group

Okay. And I guess as a follow up on that, you know, perhaps a comment on the expense structure at this point, and you know, I guess, you know, kind of a year-over-year basis there’s been a lot of issues with the marketplace, you know in terms of growing the top line. But you know, are you guys content with this sort of operating expense structure going forward such that if those sort of top ten areas do grow as you expect it, that you’re going to get sufficient leverage there and maybe just comment on how much leverage and what you think going forward.

Dave Bell

Well, let me take a stab at answering your question and Jonathan can add some color if he wants. But I think the situation’s pretty simple at this point. We are going to be very, very cautious about OpEx in the coming quarters. We are going to see very little, if any, OpEx growth until we get our revenues up to the billion dollar revenue run rate.

Once we get up to that billion dollar revenue rate, then we can afford to start investing a little bit more into R&D and sales, and places like that who will, in turn, generate even more revenues. But until we get up to that $250 million quarter level, we’re going to be pretty darn tough on OpEx control. And what that means is that as our revenues do grow in the coming quarters, you ought to see very nice leverage. A lot of that stuff dropping right through to the bottom line.

Chris Caso – Susquehanna Financial Group

Okay, great. Thank you.

Operator

And with no more question in queue, I’d like to had the call of to Mr. Dave Bell for closing remarks.

Dave Bell

Great. Thank you for joining us today for Intersil’s second quarter earnings conference call. As you’ve heard this afternoon, we’re excited about all the investments we’ve been making and the revenue growth that is sure to result. We’re also confident in the strong earnings leverage that investors will see as revenue growth resumes in the coming quarters.

We look forward to updating many of you on our progress at two conferences in Boston in August. The Oppenheimer Annual Technology and Communications Conference on August 9th, and the Canaccord Genuity Growth Conference on August 10th.

We’re also presenting at the Deutsche Bank Technology Conference on September 14th in Las Vegas.

Thank you and have a good evening.

Operator

Ladies and gentlemen, thank you for your participation in today’s call. The presentation has ended, you may now disconnect. Have a good day.

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