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Intersil Corp. (NASDAQ:ISIL)

Q1 2007 Earnings Call

April 18, 2007 4:45 pm ET

Executives

Rich Beyer - CEO

David Bell - President and COO

David Zinsner - Vice President and CFO

Sanjay Arora - Director of IR

Analysts

Ross Seymore - Deutsche Bank

Craig Hettenbach - Wachovia Securities

Craig Ellis - Citigroup

Tore Svanberg - Piper Jaffray

Deepak Sitaraman - Credit Suisse

Romit Shah - Lehman Brothers

Simona Jankowski - Goldman Sachs

Cody Acree - Stifel Nicolaus

John Lau - Jeffries & Co.

Michael McConnell - Pacific Crest Securities

Steve Smigie - Raymond James

Shawn Webster - J.P. Morgan

Chris Caso - Friedman, Billings and Ramsey

David Wu - Global Crown Capital

Sumit Dhanda - Banc of America Securities

Krishna Shankar - JMP Securities

Louis Gerhardy - Morgan Stanley

TRANSCRIPT SPONSOR
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Operator

Good day ladies and gentlemen, and welcome to Quarter One 2007 Intersil Corporation Earnings Conference Call. My name is Michelle, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference. (Operator Instructions) And as a reminder, this conference is being recorded for replay purposes.

And I would now like to turn the presentation over to your host for today’s call, Mr. Sanjay Arora, Director of Investor Relations. Please proceed.

Sanjay Arora

Thanks, Michelle. Good afternoon and thank you for joining us today for Intersil's first quarter 2007 earnings conference call. Today with me are Rich Beyer, Intersil's Chief Executive Officer and Dave Bell, President and Chief Operating Officer and Dave Zinsner, Vice President and Chief Financial Officer.

In a few moments, Dave will deliver remarks on the first quarter of 2007 and provide a summary of our business outlook. After our prepared comments, we will open the line for questions.

We completed our first quarter on March 30th, 2007. 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 section of our website. A replay of the conference call and webcast will be available for two weeks through May 2nd.

Please note that some comments made during this conference call may contain forward-looking statements. I would like to remind you that while these statements reflect our best current judgment, they are subject to risks and uncertainties that could cause our 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 provides useful information about the performance of our business and should be considered by investors in conjunction with GAAP measure that we also provide. You can find the 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 participating in the Merrill Lynch Tech Forum on May 1st, in New York. The Deutsche Bank Technology Conference on May 16th in San Francisco. The J.P. Morgan Technology Conference on May 23rd at Boston, and the Wachovia Conference on June 28th in Nantucket.

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 first quarter 2007 earnings conference call. The first quarter was a challenging yet exciting quarter for Intersil. The company achieved net revenue of $167.7 million and diluted non-GAAP EPS of $0.29. Both metrics came in at the high end of the estimates that we provided in January.

We saw our bookings grow sequentially in the first quarter. Our book-to-bill was above one and orders improved as the quarter progressed. We continue to effectively balance our business among the four market segments we addressed. In Q1 each segment represented between 22% and 29% of revenues.

And our balancing of general purpose products and application specific products, is working as well. Our general purpose product families represented 42% of Q1 revenues, up from 41% in Q4. As you know these product families generate higher gross margins in our corporate average and our one contributor to our strong gross margin improvements over the past few years.

Intersil continues to make excellence strides in returning cash to shareholders. During the quarter the company repurchased approximately $100 million or 3.9 million shares of its stock, under a previously announced stock repurchase program.

In addition, as a result of our continued strong positive cash flow and strong balance sheet position, in April the company’s Board of Directors authorized and declared a quarterly dividend of $0.10 per share of common stock. We are returning record amounts of cash to our shareholders with one of the higher dividend yields among our analog pears.

I am pleased to report that during the quarter Intersil receive two product of the year awards by analogZONE. We received Best RF Consumer Gain Block award for use in the ISM band or in satellite receivers and LNB converters. And we received Best Connector-Eliminating Solution for portables award.

Intersil’s product enables transmission of audio, video and high speed USB data through a single input, output port, eliminating up to two ports on each portable device. We are very proud of these achievements.

Finally, certainly one of the highlights of the quarter is Dave Bell’s appointment to the position of President and Chief Operating Officer. As most of you already know, Dave serve as President of Linear Technology from June 2003 until January 2007.

Prior to becoming President of Linear he served as the Vice President and General Manager of Linear’s Power Products business from 2002 to 2003, and as General Manger of this business from 1999 to 2002. Dave joined Linear Technology in 1994 as the manager of the strategic product development. Without question Dave, brings with him a wealth of high performance analogs, experienced from a top tier company.

I would like to take this opportunity to formally introduced Dave Bell, Intersil’s President and Chief Financial Officer. Dave?

David Bell

Thanks, Rich. I am thrilled to be part of what is already a very successful company, with an extremely talented team. From my perspective there are three things that make a successful high performance analog company. First is the ability to develop unique high performance products that address customer’s needs.

Second the ability to manufacture and deliver these products with exceptional quality and get them in a customer’s hands on time. And third a sales force that has the ability to sell the full value of those products. I firmly believe that Intersil processes all three key ingredients.

Intersil is clearly been gaining market share with his unique product offering. The combination of our Fab-Lite manufacturing, plus the strategy that combines both general purpose and applications specific products, puts us in a unique position. Because of those advantages we are certainly on our way to becoming a billion dollar top tier high performance analog company. I am very existed to partner with Rich and rest of the Intersil team with a focus on realizing this goal.

At this time I’d like to turn the call over to Dave, Zinser, who will provide a financial summery. Dave?

David Zinser

Thanks, Dave. Let me begin with the income statement. As Rich, stated we reported 167.7 million dollars in net revenue for the first quarter of 2007. A decrease of 6% from the same quarter last year and a decrease of 7% sequentially. We closed the first quarter with the booked-to-bill slightly above one. As a result, based on the profile of our backlog, we require an order turns rate during the second quarter of slightly more than 45%.

On a GAAP basis, net income for the quarter was $33.1 million or $0.24 per diluted share, up 2% from $32.4 million or $0.22 per share for the same quarter last year, and down 15% for net income of $38.8 million or $0.28 per share for the fourth quarter of 2006.

Our GAAP tax rate was 19.5% for the first quarter. The rate was lower than forecast by approximately $1.6 million due to a change in our tax estimates. We expect our second quarter GAAP 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 $40.2 million or $0.29 per diluted share, down 3% from $41.3 million or $0.28 per share for the same quarter last year, and down 17% from net income of $48.2 million or $0.34 per share for the fourth quarter of 2006.

Our non-GAAP gross margins this quarter were 58% down from 58.2% last quarter. This 20 basis point decline was driven by less favorable overhead absorption on lower sales. Over the next couple of years, our goal is to drive gross margin improvement through continued cost reductions and by improving the mix of our products.

As a percent of revenue, first quarter R&D expenses excluding equity compensation were 16.3%, up 110 basis points from 15.2% in the fourth quarter. In absolute dollars, R&D expenses were down $100,000 from the prior quarter.

As a percent of revenue, first quarter SG&A expenses, excluding equity compensation were 14.7%, a 30 basis point decrease from 15% in Q4. In absolute dollars, SG&A expenses decreased by $2.5 million. During the last few quarters while demand was soft, we carefully managed discretionary spending including advertising, hiring and travel.

We now believe that we are returning to revenue growth. As a result, we expect to increase our operating expenses, specifically the hiring of design engineers and field application engineers.

Non-GAAP operating expenses should be up approximately $2 to $3 million in the second quarter. Our non-GAAP tax rate was 24.6% for the first quarter; we expect our second quarter tax rate to be approximately 24.5% on a non-GAAP basis.

Equity compensation was $9.8 million or 6% of revenue, down $1.6 million from last quarter as expected. For the second quarter, we expect equity compensation to be up approximately $3 million.

You may remember that the company moved from quarterly grants to annual grants last April. This change causes a spike in our equity compensation every second quarter for four years. Equity compensation should drop by at least $1 million in the third quarter from our expected Q2 levels. In addition, we expect equity compensation to be down approximately 5% in 2007 versus 2006.

Now, moving to the balance sheet. For the first quarter, we generated more than $44 million in free cash flow and exited the quarter with approximately $656 million in cash and marketable investment. We used the cash flow together with a portion of our existing cash balance to maintain the rate of our stock repurchase program.

This quarter, we repurchased approximately $100 million or 3.9 million shares of our stock. As a result of this share repurchase activity, our diluted weighted average share count decreased by approximately 3 million shares in the first quarter, versus the fourth quarter.

For the upcoming quarter, we expect fully diluted total shares to decline again by at least 2 million shares, as we will continue to be active in repurchases of our stock.

On an absolute dollar basis inventory increased by $1 million from the fourth quarter and our days of inventory increased nine days to a 118 days. However, inventory at our distribution partners was down by a greater magnitude from the prior quarter.

We have seen a steady reduction in our distributors, inventories over the last three quarters, and are now back to satisfactory levels. Looking forward, we expect our internal inventory to decline in days over the next several quarters. Days sales outstanding was 54 days; no change from the fourth quarter.

Capital spending was $4.2 million, and depreciation was $5.1 million for the first quarter. We also closed on the sale of unused land and space in Palm Bay, Florida. We received $4 million in cash in the first quarter as a result of that sale. In the second quarter we expect depreciation to be $5 million and capital spending to also be approximately $5 million.

In summary, despite the soft environment for the industry, we were very pleased with the company's financial performance in the first quarter. We saw sequential growth in bookings, achieved the high-end of our revenue and EPS estimates and maintained both gross margins and operating margins within our model.

Now I will turn the call back over to Rich, who will provide highlights into each of our core end markets and discuss our Q2 outlook.

Rich Beyer

Thanks David. First I will start with comments about high-end consumer. Revenue into the high-end consumer market represented approximately 29% of first quarter revenue. On an absolute dollar basis, revenues into the high-end consumer market increased 6% year-over-year, but decreased 10% sequentially.

The sequential decline is due to typical seasonal softness associated with the consumer space during the first quarter. In handheld, we experienced single-digit sequential decline in Q1 due to normal seasonality.

The handheld product families are expected to return to growth in the second quarter. Our new product introductions have continued in handheld, and have resulted in many new design wins.

During the quarter, we introduced a low dropout regulator for GSM-based cell phone applications. This device combines superior power supply rejection ratio for stability and low noise, making it ideally suited for GSM portable wireless applications.

We also introduced enhanced single cell chargers that provide a significant improvement in charge current accuracy, and output voltage accuracy compared to the devices currently available in the market.

In LCD displays, we experienced a sequential decline as expected. Again, this was due to normal seasonality. We continue to see strong design win activity for our products used in LCD displays. In fact, we secured a very significant design win with one of our top tier customers for their next generation platform of LCD TVs.

During the quarter, we started sampling our white LED drivers for notebook PCs and have received positive customer feedback on this device. We are well positioned to take advantage of the migration of LCD backlight solutions from CCFL to LED.

In Q1, we introduced the industry’s smallest S-Video Drivers with filters to increase battery life. With their ultra small packages and extremely low current consumption, these devices are ideal for portable applications and next generation video appliances.

We are currently sampling this product to many different applications in both handheld and display devices. In fact, this quarter we secured a very significant design win with a top tier customer for a TV application. Several other major companies are evaluating the device as well.

In the optical storage business, we experienced a normal seasonal decline in Q1. We are making progress with our new triple laser diode driver that is used in Blue-Ray and HD DVD systems.

We have already secured design wins with several tier one customers. In the short-term we continue to maintain the necessary design win momentum to sustain our share in the 16X DVD Red marketplace. Looking ahead to Q2, we expect Intersil revenues to be up modestly in our consumer segment.

Now lets look at our computing business. Revenue into the computing market represented approximately 23% of first quarter revenue. On an absolute dollar basis, revenues into the computing market decreased 23% year-over-year, and decreased 2% sequentially.

As you may recall in the first quarter of 2006, Intersil and many in the industry saw a very high demand that far exceeded consumption rates. This began the inventory builds that have been worked down over the past several quarter.

In Q1 2007, revenue from notebooks was seasonably down, however, both desktop and server revenue bucked the seasonal trend with low-single digits sequential growth. In desktops, we saw a strong growth in peripheral ICs in Q1, due to market share gains and product ramps in point-of-load applications. And we continue to maintain our leadership position in both Intel and AMD platforms with our core power product offering.

During the quarter we expanded our core portfolio for Intel’s Broadwater platform with the introduction of I and II Phase controllers with integrated MOSFET drivers. These integrated driver solutions have become very popular and provides solid gross margin improvement for Intersil.

In the area of servers, we continue to maintain our leadership position in Intel’s Woodcrest and Clovertown platforms and AMD’s Opteron and greyhound platforms.

In embedded computing, we continue to win new sockets in embedded boards. We have been successful in securing a significant portion of the Intel reference designs.

In notebooks we continue to strengthen our position by defining and introducing new products for core power and battery charger sockets, as well as introducing additional power management products to compliment these.

During the quarter we introduced the narrow VDC battery charger controller for Lithium ion and Lithium ion polymer battery packs in notebooks. It is the only charger on the market that is optimized for narrow VDC run applications, allowing customers to run their laptops at lower voltages thereby providing better efficiency, longer battery life and improve thermal management.

We have begun to ship the part to one significant tier-1 one customer. This product is expected to proliferate to many notebook platforms due to the power and thermal savings that narrow VDC provides.

Intel's much anticipated platform transition from Napa at Santa Rosa is expected to happen in Q2. Intersil currently provides one, two and three phase core power, the battery charger and the GPU controller for the Napa platform. In addition to these products we will provide additional silicon content in the Santa Rosa platform including the system regulator, IO controllers, memory and graphics controller and new battery charger IC's.

We are looking forward to seeing additional revenue generation, given our strong design wins for Santa Rosa notebooks. Looking ahead to Q2, we expect the computing market segment to be up slightly, due in part to the launch of Intel's Santa Rosa platform for the notebooks.

Now let's talk about the industrial market. Revenue into the industrial market represented approximately 24%, our first quarter revenue. On an absolute dollar basis revenue into the industrial market decreased 8% year-over-year, and decreased to 11% sequentially due mainly to excess inventory in the channel.

In Q1 while some of our products in this market-experienced weakness, we did see strength in several of our product families including RS-485 interface, analog switches and multiplexers, operational amplifiers and voltage references.

We had another great quarter for design wins, with a concentrated focus on the industrial market, Intersil has been able to provide total solutions to address many of our customers’ power requirements.

In addition, we continue to expand our customer base, and have recently extended our reach into additional high growth applications, such as industrial motor control, UPS, medical devices, digital test equipment and instrumentation.

During the quarter, we introduced the industry’s lowest current consumption, low-noise voltage references. These high precision devices are being received extremely well by high-end industrial instrumentation and medical equipment manufacturers.

The revenue for these types of broad market industrial products will ramp over the next few years, and carry gross margins above the corporate average. This type of product demonstrates Intersil’s continuing success in introducing highly differentiated products for the broad based industrial market.

Our military IC revenue was up modestly. We secured design wins this quarter for a variety of applications including, but not limited to flight control in cockpit displays. Our military design wins are running at a rate, that suggest that we are on a strong growth path for the next several years.

We continue to develop new products for this market. During the quarter, we released our first PWM controllers on an enhanced package plastic flow to offer more cost effective solution in fully compliant hermetic products, while being more reliable than commercial off the shelf products. This new area expands our military served market by almost $75 million.

Lastly, we extended our fully compliant offerings to include high-speed operational amplifiers. Customer interest is very high for both of these product families. In the area of video, we continue to see nice strength in our broad product portfolio.

During the quarter, we introduced our DVI\HTMI multiplexer product line. This is the world’s only DVI\HTMI multiplexer that retimes the HTMI signal to improve, reach and performance. We have already secured several design wins, and in fact one HTMI switch box is selected to go to the retail shows in Q2.

We expect several other HTMI related design wins to begin ramping in the second half of the year. Looking ahead to Q2, we expect revenue in the industrial market to be up modestly from the first quarter.

And finally, moving to the communications market. Revenue into the communications market represented 25% of first quarter revenue. On an absolute dollar basis, revenues into the communications market increased 3% year-over-year, but decreased 4% sequentially as expected due to softness in the several segments of the communications infrastructure market.

During the quarter, we introduced the wide VIN Synchronous Buck Regulator that greatly reduces noise and filter requirements. This regulator is an ideal general-purpose product, which can be used in a wide variety of communication, and networking applications.

We have provided samples of this device to numerous customers, many of whom have expressed high interest in our solution. Our DSL revenue increased double-digits in the first quarter with both, VDSL and ADSL contributing to the increase. During the quarter, we introduced two new products for ADSL that provide lower power, reduced cost and saves space. These products were expected to ramp into production in the second half of 2007.

Revenue for products targeted at wireless base stations also increase this quarter. We saw a bit of strength in China and Europe as customers go up for the anticipated need for the 3G base stations, particularly in the China market.

Looking ahead to Q2, the communication segment could experience some weakness in the quarter, due to the timing of some of our products in communication satellites, and also to some uncertainty about the 3G rollout, therefore we expect this segment to be down slightly.

Let me turn to our outlook for the second quarter of 2007. For the second quarter, we expect Intersil to return to revenue growth, as we feel the inventory correction associated with Intersil products is largely behind us. And we continue to benefit from both new products and design wins throughout 2006, and continuing in Q1 of 2007 that are driving our growth for the remainder of this year.

We currently anticipate Intersil's revenues for the second quarter to be up between 3% and 5% from the first quarter of 2007. We expect GAAP earnings per diluted share of approximately $0.22 to $0.23, and non-GAAP earnings per diluted share of approximately $0.30 to $0.31.

Before we open it up for questions, I’d like to summarize with this key points. Despite the decline in revenue in Q1, our gross margins and operating margins remained within our model, 58% to 62% for gross margins, and 27% to 30% for operating margins.

We are gaining market share and increasing silicon content in many areas, including LCD displays, handheld, video and notebooks. And we are securing a steady stream of design wins, with our ever expanding general purpose product portfolio.

And we continue to drive profitability through revenue growth, gross margin expansion, operating expense leverage, strategic tax planning and an aggressive share repurchase program.

We’ve created a strategy, culture and infrastructure for sustained success. And with the addition of Dave Bell to our talented leadership team, I am confident we can maintain this momentum.

With that Dave Bell, Dave Zinser and I will be happy to answer your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ross Seymour of Deutsche Bank. Please proceed.

Ross Seymore - Deutsche Bank

Couple of questions, the first one looking back at the first quarter, you guys came in at down 6% better than you had guided. What was the real surprise in the quarter?

Richard Beyer

Ross, it’s Rich. A little bit of a surprise was the computing came in a little bit stronger than we had anticipated. We would have expected notebooks and desktops seems to go a little bit down, as we indicated desktops, we’re up, we are seeing integrated driver solutions are being accepted in the marketplace a little bit more. And the consumer market term was a little bit more positive than we’d anticipate.

Ross Seymore - Deutsche Bank

Was the industrial inline with what you had expected, it looks like it is a little bit weaker than I had thought.

Richard Beyer

It was a little bit weaker than we thought, yes.

Ross Seymour - Deutsche Bank

Anything beyond inventory is the reason?

Rich Beyer

No there is nothing of particular note in the industrial business for us to spread across so many product families and some of them were up, some of them were down. There is nothing in particular that drove it other than some inventories amongst some of our distribution partners that they continue to reduce.

Ross Seymour - Deutsche Bank

Okay, then the one follow-up question looking forward then would be. You mentioned a lot of design wins when you went through the four main segments.

How do we think about design win driven growth versus kind of normal seasonality as we go to the rest of the year. Seasonality plus some aspect of growth because the design wins or things rolling off, just any sort of help you can provide there will be great?

Rich Beyer

Yes, I think that you know given the balance that we have some of our markets perform a little bit more strongly in the first half of the year, and the other markets perform more strongly in the second half of the year.

I think it will continue to see the second half of the year for industrial represent higher sequential growth in Q3 and Q4, then we achieved in the fist half of any given year. But as we indicated the design win momentum has been very significant.

Last year, we set very aggressive targets for increasing design wins and we exceeded those targets. Again we’ve set very aggressive targets for this year, and we are very pleasantly surprised by the strength of our design wins in Q1.

And so, you know, some of the markets come into drive revenue within a quarter or two. Some of them take three or four quarters, but we believe throughout the course of this year Q2, Q3, and Q4 we are going to see the benefit of the design win momentum let that begin in early 2006.

Ross Seymour - Deutsche Bank

Great. Thank you.

Operator

Your next question comes from the line of Craig Hettenbach of Wachovia. Please proceed.

Craig Hettenbach - Wachovia Securities

Thank you. Rich given that inventory is now in balance, can you just contrast order expectations within distribution versus and OEM customers?

Rich Beyer

We think that the inventory situation is in balance. I will say that the, that our distributor partners are continuing to be quite conservative. Their POS has exceeded. Their ordering and shipments in, we are becoming more and more responsive.

As a company we decreased our delinquencies over the last several quarters. And so we are being very responsive. So our partners would like them to put a little bit more inventory on the shelves in some cases, but they are continuing to be quite cautious.

So, we saw orders a little bit below in the distribution channel. The consumption rate, we are hoping that the, that we see an improvement in that situation in Q2 & Q3. As you know in North America, since we don’t recognize revenue until they ship it, it really doesn’t have any effect on the revenue stream.

As order rate from distributors outside the United States get more in line with consumption, we should see a positive benefit from that. And we expect little bit of that in Q2, more of that in Q3 &Q4.

Craig Hettenbach - Wachovia Securities

Okay. And then, if I could follow up on the PMIC opportunity that was highlighted for handsets at the analyst day, can you talk about where you stand in the customer standpoint process, and then just the potential timeline for revenue over the next 6 to 12 months?

Rich Beyer

Yes. We did highlight that in the analyst meeting, that the product is sampling and we’re getting positive feedback from it. We anticipate that we will start to see revenue in the latter part of the year, towards the end of the year for the PMIC, the first of the family.

Craig Hettenbach - Wachovia Securities

Thank you.

Operator

Your next question comes from the line of Craig Ellis of Citigroup. Please proceed.

Craig Ellis - Citigroup

Thank you. Rich, the color on expectations for the second quarter by major end market was helpful. I am wondering if you can just help frame some expectations on relative growth in the portfolio on a full year basis?

Rich Beyer

It’s a little early to call Q3, in Q4, but the fact of the matter is that the balance of our portfolio still indicates that we should see greater sequential revenue growth in Q3 and Q4, as we look out at that timeframe from where we sit today. We don’t have better visibility but we can see what we think is going to happen in terms of design wins and so forth. So we would expect from where we sit today to see accelerated sequential growth in Q3 and Q4 over the guidance we’ve given you today for Q2.

Craig Ellis - Citigroup

Okay. And then for David Zinsner, what was manufacturing utilization in the first quarter, and what’s the expectation for the second quarter, and can we see a return to gross margin expansion in the second quarter?

David Zinsner

Utilization for the first quarter was about 65%. We are expecting second quarter to be roughly in that range. So, that wouldn’t contribute to margin expansion. We do still have mixed improvement and cost reduction helping us out on the gross margin. So, our goal would be to be at least flat with gross margins, maybe up slightly in the second quarter.

Craig Ellis - Citigroup

Okay. In that 20 to 30 basis points range you’ve talked about at the analyst day?

David Zinsner

And that would be kind of the high-end of range, right.

Craig Ellis - Citigroup

Okay. And then lastly for David Bell, welcome aboard. Can you just give us an overview of what do you expect over the first six months, and how do you expect to spend the time, and what, if any, takeaways if you had from your experience so far at the company?

David Bell

Well, thanks Craig. It’s really great to be here and I knew that Intersil is a great company competing with them for the last several years. And now that I am on board and able to meet some of the people and learn about their the strategies and even more excited to be here.

So, obviously, I have only been on board now for just a little bit over two weeks, and have been so far spending my time getting to know the organization, join the people and learning about some of the products and that are in our pipeline that are yet to be introduced.

So I don’t have any specifics that I am willing to talk about at this point. But I will underscore again that now that I am learning more about what’s going on within Intersil, I am really pleased with what I see. Nevertheless, I think there is always going to be opportunities to sharpen our gain and even accelerate our growth further as we further hone our ability to develop high value products and further refine our ability to get paid completely for the value of those products.

Craig Ellis - Citigroup

All right. Thanks guys.

David Bell

You are welcome.

Operator

Your next question comes from the line of Tore Svanberg of Piper Jaffray. Please proceed.

Tore Svanberg - Piper Jaffray

Yes. Good afternoon. DSL business was very strong in the March quarter. Is your caution there for, Q2 related to maybe some bills earlier on in the year?

Rich Beyer

Yes. Tore the caution in the communication space has a little bit do with DSL, a little bit to do with 3G wireless base stations. Those businesses unfortunately tend to be a little lumpy. We think we are continuing to be a very successful in DSL with our line driver business. But if those go through modest fits and starts in terms of how many system. Some of our customers built in any different quarters. So, that’s part of our caution if you will in the communications markets for Q2.

Tore Svanberg - Piper Jaffray

Great. And the question for Dave Z, you mentioned inventory days coming down potentially in the June quarter, could you gave us maybe a magnitude?

Dave Zinser

Well, in terms of inventory on our balance sheet?

Tore Svanberg - Piper Jaffray

Yes, correct.

Dave Zinser

Yes. What our expectation would be that the days of inventory would come down. We are trying to make steady improvement toward a 100 days and hopefully in the 90 days through the next four or five quarters. We don’t have a specific target, and a lots going to depend on the expectations for the third quarter and what we want to build ahead of that demand.

Tore Svanberg - Piper Jaffray

Okay. Final question for Dave B. You only been there for two weeks, but have you identified anything so far, do you think Intersil is missing at this point?

Dave Bell

Well, again, I think that two weeks is a pretty short period of time and I was still coming out the speed, but I think there is a lot of opportunities. The opportunities within the high performance analogs space are vast and I think Intersil has great penetration in some of those product categories.

But, frankly I think there is a lot of new opportunities in the product categories that the company doesn’t exploit at this point. So, there is certainly its not going to be any limitation on our growth just based on saturating our ability to come out with unique product.

So, yes, I think there are some opportunities that I am recognizing. Not surprisingly I am not going to tell you what those are in the conference call. But as I stated a few minutes ago I am really impressed by some of the new products, that I see, they are already in the pipeline. And when I was on the other side of the fence, I was thinking about some of the products that I was surprised Intersil didn’t have, many of those are in the pipeline already.

And again, I think that the opportunities are vast for the company to exploit even new product categories that we don’t participating right now. So, hopefully you can sense that I’m pretty excited by what I’m worried about right now and we are excited about even accelerating our growth further as we exploit some of those opportunities.

Tore Svanberg - Piper Jaffray

Great. Thank you very much.

Dave Bell

You’re welcome.

Operator

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

Deepak Sitaraman - Credit Suisse

Thanks. This is Deepak Sitaraman for Michael. Rich, looking at your guidance it is pretty tight range, can you help us to understand the level of your visibility into June and perhaps, give us some qualitative insight into customer mentality and order impact have improved?

Rich Beyer

Well, I think visibility isn’t dramatically improved, but we did indicate that not only did we see bookings improve in Q1 relative to Q4, but the rate of improvement was just the way we’ve like it from January, into February, into March we saw the bookings profile improved.

Our lead times are not moving out, so there is not a sense that customers are placing backlog on us further out into the future. But from our discussions with our sales organization and their discussions with the customers there seems to be a general sense that in a pretty broad range of our markets we have reason to expect that things are going to pick up.

We talked about things like Broadwater, in the computing space, Broadwater and Santa Rosa that we think are going to start to have a positive impact on us as a corporation.

The cell phone business, LCD TV, our business should start to pick up, typically our optical storage business is down in the first quarter, while the manufacturers really take, assess the inventory level that they have in their built plan, so Q2 invariably results in an uptick in optical.

So those two businesses look like they're going to be fine and then when we look at the industrial market, there are number of areas that we just, we're seeing that there should be an uptick in the business based upon discussions with distributors and some customers. The communications is the one where there is, some areas we expect to be up, but we see some lumpiness that gives us caution.

Deepak Sitaraman - Credit Suisse

Great. That's very helpful. Thank you.

Operator

And your next question comes from the line of Romit Shah of Lehman Brothers. Please proceed.

Romit Shah - Lehman Brothers

Yeah. Thanks a lot. Just a question on the gross margins, I know they were down a bit. Can you just help me reconcile the lower absorption from the factories, with the fact that sales were little bit better then you are expecting?

Rich Beyer

Well, Romit they were little bit better than we expected, and it was the high end of the range. But the mix of products was a little bit less favorable for internal production.

We have our six inch, four inch fabs in Bombay, Dave indicated a moment ago that the utilization rate was at about 65%, that's down from about 75% in the previous quarter and the increase in sales above the midpoint of the guidance was of a nature that it wasn't in the product categories there.

And so, we're anticipating, we're going to have at about the same utilization in the second quarter and it's little bit early to say what utilization pattern is going to be in Q3 and Q4.

Romit Shah - Lehman Brothers

It is really more of a mix issue.

Rich Beyer

Yes.

Romit Shah - Lehman Brothers

Okay. And I guess given your plan to get inventories down closer to a 100 days, should we assume then that, you know, any drivers from gross margin from here on till the rest of the year is going to be cost savings or product mix, utilization is probably not going to be a contributor to any gross margin expansion in the second half?

Rich Beyer

Probably not significant, but in the second half, some of the products that we make in Bombay still go into the computing space, some of them go into the consumers space where we see a little bit of an uptick. So we're not going to get overly bullish if there is going to be a huge uptick in gross margin as a result of absorption, but there could be a modest contribution

But the bulk of the contribution is going to come from cost savings and product mix and some of the cost savings have to do with migrating a product families from 0.6 micron to 0.25 micron, for example and smaller package sizes and so forth.

And then the mix, we indicated that general purpose products had yet again gone up as a percent of sales and this is slow, but sure growth, but also each of the product lines has passed with finding of ways to increase gross margins in the individual product families and so that should contribute as well.

Romit Shah - Lehman Brothers

Okay, just last question Rich, Intel missed their Q1 revenues by about a $150 million and then they guided Q2 down about $400 million relative to consensus. I know you're expecting your computing business to grow in Q2. How do we correlate the two or how do you think about it?

Rich Beyer

Well, I think the first thing we need to remember is we had a very weak quarter in Q4 in computing, a very week quarter. It was down quite substantially and so the bar for us was relatively modest and so we’re seeing a number of things again. In the desktop arena we’re seeing greater acceptance of PWMs with integrated MOSFET drivers provides us greater ASP. In given situation we’re seeing a little bit of improvement in content in that area.

So, as we go into this quarter, we’ve just seen reasonably healthy order patterns. March seemed to be a good quarter for a number of our customers in Taiwan, in terms of build plans and shipments, and so also with the anticipated launch of Santa Rosa, we are seeing some increase in order demand.

We have more content in a typical Santa Rosa platform, and we also believe, we have quite a degree of success in Santa Rosa platform design wins relative to the NAPA platform design wins.

So, I think, Romit it’s not one big home run, but I think it’s a lot of modest steps that we’re taking that are positive that are leading us to feel a little bit better about the computing business than the Intel discussion of their situation would suggest.

Romit Shah

Good day. Well best of luck with your new opportunity. Thank you guys.

Rich Beyer

Thanks Romit.

Operator

Your next question comes from the line of Simona Jankowski of Goldman Sachs. Please proceed.

Simona Jankowski - Goldman Sachs

Hi, thank you. Just wanted to see if you might be able to comments on, following today’s announcement by Linear as far as there re-capitalization how you guys might be thinking about your use of cash at this point?

Rich Beyer

I can take a dig at that Simona? So, in the fourth quarter of 2006 we announced our $400 million share repurchase program. So we had already taken steps to begin to bring our cash balance down, the $400 million program was designed to do that.

We bought about a $100 million worth of stock in the fourth quarter. We bought another $100 million worth of stock in the first quarter. And, as I talked about in my portion of the script, we planned to pretty active in the second quarter, or a big difference in many of the peers, and that we haven’t exhausted all opportunities to make investments or acquisitions, that get us a good rate of return, a good return on capital, and really drive growth for us even faster than we are today.

So that needs to be factored in when we evaluate our capital structure. I am surprised just to say that, Rich and I have looked at these various alternative, and I would leave it as we're evaluating them, and to see how they fit in with the greater strategy of the company.

Simona Jankowski - Goldman Sachs

Great. Thank you. And if I can ask one more question on your guidance for up 3% to 5%. You know, it seems that on your comments, which is consistent with that of linear, is that, the inventory overhand at least for the analog company just behind us. Yet both of you guys are actually guiding for below seasonal second quarter.

And in your case in particular, you should also have a couple of helpers in the second quarter, such as Santa Rosa, and you're historical seasonality is been closer to 6 to 7% in June. I am just curious, if there are any other factors that should be considering and why we are still below seasonality in the analog space?

Rich Beyer

Well, we haven't generalized about the entire analog space simply comment on us. We feel that most of the inventory issues have been behind us, but as I think I indicated Simona, our distributors and our customers continue to be pretty cautious. We have not seen our lead times move out at all. We've not seen any change in ordering patterns from our customers. And so I think we’re attempting to be cautious about, whether Intersil are completely through the inventory correction, and so I think that’s shaping our guidance. I think we’re just coming out of this trap for the sector and we’re not quite prepared we don’t see indication and so we should get overly bullish yet.

Simona Jankowski - Goldman Sachs

Okay. Thank you.

Operator

Your next question comes from the line of Cody Acree of Stifel Nicolaus. Please proceed.

Cody Acree - Stifel Nicolaus

Thanks. Hey, Rich could we follow up on that last statement. I think in the beginning you said that, you fell you were kind of shipping to consumption on almost all areas. Are there, if you went and looked at your kind of granularity inside in markets that may be like comps or you think that maybe some weakness, are there still areas where you are little concerned that maybe you are not quite back there in consumption?

Richard Beyer

Some of the industrial markets where some of our distributors are continuing to reduce their inventories, they see that we are able to ship reasonably quickly, for example in Europe our POS is quite strong. But our distributors are continuing to take products at somewhat lower rate and given that we are being quite responsive and there are delinquencies have come down steadily.

I think there is an example of where you may not in this quarter see our shipping rate equal the consumption rate. So, that’s an example of it.

There are no other major areas that I would say we find there to be large over hang of Intersil products having changed.

Simona Jankowski - Goldman Sachs

Okay. Great. That’s helpful. Gross margin range 58 to 62 long-term obviously lots of design wins coming in. Is there a points in the future where you think that enough of this newer products maybe the more standard products, higher margin products, coming that we start to see more than just a few tens of basis points a quarter where you might expect to see more rapid acceleration in gross margin?

Richard Beyer

I think when we get back to let say more aggressive revenue growth and combine that with some of the new products that we have brought on stream and a return to consumption equaling our shipment rate, for example, at distributors where the products are more industrial in nature with higher than corporate average gross margins.

So, I think, you put all those pieces together and I think we should be in a position to be able to expand the gross margins at more than the 20 or 30 basis points that we've done over the last couple of quarters.

Simona Jankowski - Goldman Sachs

Great, right. And then lastly maybe more of a very high level question. Obviously over the past few years you've been able to grow through a strong combination of both organic growth and through acquisitions, you got a nice balance sheet obviously that some use of the cash going on, but how should we look at Intersil in the next few years? Is it likely to be primarily an organic growth story or would you look to acquisitions as the use of cash and if so are there any areas that maybe make more sense than others?

Richard Beyer

Absolutely, you should expect that we will be considering, and in all likelihood doing further acquisitions. We have some ideas that are under consideration, one of the things that we will be doing over the next several months as Dave Bell gets more and more familiar with our product portfolio, identifies areas that’s represent interesting product areas, market areas that we may not have been focusing on.

Then we as a management team will start to look at acquisitions that might enable us to strengthen ourselves in some of those areas or enter into areas much more quickly than we might be able to what we do with organic growth. But, I think it is fair to say that over the next several years, what we certainly anticipate it will augment organic growth with one or more acquisitions.

Cody Acree - Stifel Nicolaus

Great. Thanks guys and nice performance here.

Operator

Your next question comes from the line of John Lau of Jeffries. Please proceed.

John Lau - Jeffries & Co.

Great, thank Rich. I know, that you have talked a lot about the order patterns and things like that and how you are cautiously optimistic. I wanted to just put a final point on that. You had mentioned that the insurance business for the Q2 would be above 45%. What is that on a historical basis?

David Zinser

I’ll actually answer. This is David Zinser. Last quarter it was around the same range. In general over the last 12 quarters or so it’s average at about 45%.

John Lau - Jeffries & Co.

Okay. So, in terms of the backlog that you have on the current quarter, you remained as comfortable as you had in the over the past several quarters, not an incremental change that’s why there is at least still a little cautious tone in your voice?

David Zinser

That’s correct.

John Lau - Jeffries & Co.

Great. And you had meant and just to finish that off, is there any change in average selling prices or any additional pressure out there as we are coming out of the inventory correction?

Rich Beyer

No, change in pricing.

John Lau - Jeffries & Co.

Great. Thank you very much.

Rich Beyer

Thank you.

Operator

Your next question comes from the line of Michael McConnell of Pacific Crest Securities. Please proceed.

Michael McConnell - Pacific Crest Securities

Thank you. Rich, just a question on the PWM side, with respect to the Intel market on the desktop side, is it suffice to say that the inventory has been cleaned up there?

Rich Beyer

By and large they have. There is still a little bit of inventory in a couple of isolated places. But by and large it seems to be for our parts back in reasonable shape.

Michael McConnell - Pacific Crest Securities

Okay

Rich Beyer

If we got out of whack in Q1 and Q2 of last year and then we worked perfidiously to bring that back in line. We brought the inventories back a bit in Q3 of last year, a bit more in Q4 and then again this quarter. So we think in the desktop space we are in reasonable shape.

Michael McConnell - Pacific Crest Securities

Great. And then how is the reception been in the AMD market? I know you are, I think, but believe last quarter you started to shift to PWM’s and for the entire markets, server, notebooks in desktops. How is the reception been in that market?

Rich Beyer

Yeah, really good. Even in Q4 we were in quite reasonable shape as it related to a core controllers for both AMD and Intel. But we did not in fact participate in AMD notebooks in Q4, but I think as we pointed we had introduced our solutions at the end of Q3 and they were being considered for designs.

And so, we are quite pleased with our success rate, we have now been designed into a reasonable number of systems and those systems are on the verge of starting to ship with of our products.

Michael McConnell - Pacific Crest Securities

Super. And then, could you just remind us, we look at DVD-RW today. What your contents is in terms of your dollar content. And then if we look at the Blu-Ray opportunity with the dollar content could be within each of those drives, both PC side and on the DVD player side?

Rich Beyer

Yes, in a typical Red DVD recorder, our contend today is in the $0.50 area. Our content is, while it’s quite sophisticated, it’s a laser diode driver with some other embedded functionality but that’s at the end of the cycle of innovation.

When we get the Blu-Ray and HD DVD, we will have a laser diode driver, we will have a power management IC, a photo diode IC. And the contents could, at least at the early stages of the Blu technology be in the $3 to $3.50 area because of all that functionality

And because it’s the beginning of the cycle and it’s very difficult to ourselves and others to achieve this very-very high speed at the very early stages in cycle. So we could see as you see from the map pretty significant uptick.

We see a little bit of sign of emergence of that market. We are still down in the very trivial numbers in Q1. It will still be trivial in Q2. Q4 is looking like it will start to be a decent number albeit, it’s not going to move the needle of Intersil yet, but 2008 in all likely it can be a very solid year for us.

And then the point about whether it’s a PC or desktop, the OPU, the Optical Pickup Unit is not a different pickup unit. So, when we ship to our customers, we don’t know ultimately whether it’s being, we being used in a drive that goes into a PC or a set top box. So for us, we were pretty agnostic.

Michael McConnell - Pacific Crest Securities

Okay, great. Thank you very much.

Operator

Your next question comes from the line of Steve Smigie of Raymond James. Please proceed.

Steve Smigie - Raymond James

Great. Thank you. My question is actually just a follow up on the blue laser. Are you seeing any specific activity by either Sony or Toshiba or their partners to force the issue of getting blue laser out there faster just in terms for their own interest trying to promote the particular standards. And if, that’s making the market look more attractive sooner than you anticipated?

Rich Beyer

We don’t see any massive reconciliation between these two camshafts. What we do see is people like LG, Phillips, and like just say and we don’t really care about it. So let’s just develop a player that supports both standards and a recorded that records the one standard but, that it can be read by a player that can support the other standards.

So, I don’t think the issue today is so much the standards war because I don’t think consumers care about which one they want to see, what a content is available and so forth. I think the issue at this stage is still the cost of these systems I think the best you can do is about $399 for these systems, which is still a bit pricey.

We think that will start to rectify itself over the next two, three, four quarters and that’s why ‘08 is likely to be a big growth driver. I think you’ll start to see these in more PCs. Particularly, beginning of next year as the supply of lasers improves and the cost of those lasers and other components comes down.

So, I think it will follow a cycle not too similar to DVD Red about four years ago, when the cost finally came inline and the technology took off very rapidly and very quickly these format wars, back then it was plus RW, minus RW, RAM, all fell by the way side. I don't think most consumers have a clue, which one they have, or users were having. I think the same thing will happen with Blu and HD.

Steve Smigie - Raymond James

Okay, great. Thank you.

Operator

Your next question comes from the line of Shawn Webster of J.P. Morgan. Please proceed.

Shawn Webster - J.P. Morgan

Good evening, thank you. Can you, I think you mentioned that you said your lead times aren’t to going out yet, can you tell us what they were in Q1 or what they are now?

Rich Beyer

In Q1, they were about 5 weeks and today they are about 5 weeks.

Shawn Webster - J.P. Morgan

Okay. And in terms of the notebook transitions that are happening, can you wraps some numbers around for us in terms of where you think your share was in notebooks for the Napa transition and where its heading for Santa Rosa and then what the dollar contents in each of those transition was for you?

Rich Beyer

We had what we consider to be a reasonable share in Napa. It was not the largest share in the marketplace and it’s way to early to determine. You know what the share is going to be amongst the major suppliers. What I would like to say though is we're very pleased with the design wins that we've had and we think as a result we are going to see a nice strong growth in our notebook business this year.

The content I think, it would be fair to say that there are potential contents if notebook manufacturers used all of our available parts in Napa was on the order of $2 and if a notebook manufacturer uses all of our components in the Santa Rosa platform it could be $3.50 or so.

Shawn Webster - J.P. Morgan

Okay. Great. Thank you.

Rich Beyer

Sure.

Operator

Your next question comes from the line of Chris Caso of Friedman, Billings and Ramsey. Please proceed.

Chris Caso - Friedman, Billings and Ramsey

Yes, thanks. Just as a follow on to that. Can you guys give us a sense of within your computing segment, how much exposure there is to desktop, notebook and server. And I guess with some of the additional shares that you're going to have in this next generation of notebooks, how much do you think that changes as you go through this year?

Rich Beyer

Yeah. Chris the desktop remains the largest element of our computing business. The notebook is the second, and the server has been and will remain a modest part of it. We expect this year to see modest growth in our desktop business, a more significant growth in the notebook business, modest growth in the server business.

So clearly the notebook with more components, now a pretty broad spread of functionality in the notebook is going to become an increasingly important part of our overall computing business.

I don't know that it will surpass the desktop business yet this year, but we are probably not terribly far away from where it will get about to that point.

Chris Caso - Friedman, Billings and Ramsey

Okay. And within margins for the desktop business now, because that's the area where at least your competitors talk about a lot of competition there. Are you guys confident that the margins in that business will still hang together this year?

Rich Beyer

Well, I think we've been pretty candid that if you look at the broad range of markets we serve that the computing space in general is the area where the margins are under the most pressure, desktop in particular, server much lesser and notebook in the middle. We've accomplished that into our thinking.

I think, I did indicate that in the desktop arena, when we integrate the MOSFET drivers, we decrease to build materials for our customers and yet we increase our selling prices and we expand our margin. So, there are individual actions that we are taking including moving down technology curves to keep the gross margins at an acceptable level which they are.

So, we don’t see anything Chris, its going on at the moment that suggest anything terrible is going to happen there. But in fact the matters is, it's a huge volume market and its highly competitive and including Taiwanese suppliers there, they are in the game and some of the other North American suppliers who coming from other parts of the marketplace to do the PWMs. But this is the natural slugging and they goes on in the high volume market like this. So, these numbers are accomplished in our overall plans for the remainder of the year.

Chris Caso - Friedman, Billings, Ramsey

Okay. And just one final with regard to the operating expenses, you guys have a model, I guess, its 17%, 18% R&D spend. It sounds like the OpEx, it will be up a little bit this quarter and in Q2. What can we expect for the back half of the year and do you think that you'll start to get within those R&D long-term target this year?

Dave Zinsner

I'd say R&D, we are probably looking at something in the 16% of sales for Q3 and Q4. SG&A will probably we’ll continue to see some leverage from where we are today, we're at 14.7% and we'd expect that one to actually start to come down in the back half of the year as a percent of sales.

Chris Caso - Friedman, Billings, Ramsey

It’s a very helpful. Thank you.

Dave Zinsner

Thank you.

Operator

Your next question comes from the line of David Wu of Global Crown Capital. Please proceed.

David Wu - Global Crown Capital

Thank you for taking my question. Dave, very simply, if I were doing my numbers on GAAP, can you give us any guidance or the tax rate on a GAAP basis for the rest of this year?

Dave Zinsner

GAAP tax rate will be 23.5% for the rest of the year.

David Wu - Global Crown Capital

23.5% sort of second quarter rate. Okay. The other thing is Rich, I was thinking about two things, your PC business, I think your PC power management business going into the year was below industry average in terms sort of mix of notebooks versus desktop and server.

I hear from what you're saying is with Santa Rosa that ratio should be at least equal to industry average if not higher as we exit this year, did I read it correctly?

Rich Beyer

Yes. I think it’s true that our position in notebooks are relative to our position in desktops absolutely was lower David than the industry numbers because we established a very strong position in desktops, we really only develop a core regulator and a graphics, and memory regulators for the notebook business, so, we had modest content and more modest share.

But the share has improved the content has expanded only modestly up until the last six months or so. Now we have more content, we think we’re more competitive and I can’t say categorically will we, in fact have a balance that is equated to exactly what the market looks like in terms of a balance between notebooks and desktops. But clearly, as I said, the notebook business for us is kind of grow more rapidly than either the other two segments. So it’s going to approach that passing toe over the next year or so.

David Wu - Global Crown Capital

And just one more question, Rich on the optical storage that’s the business that the, if I try to remember, it used to be very high gross margin business, at least at the beginning of these technology moves.

What is roughly the percentage of that consumer businesses now constitute, because I remember it was obviously of Elantec it was a pretty high percentage of a total, but now in the bigger Intersil, that I was just thinking in the segment called high performance consumer, roughly what magnitude are we talking about in terms of contribution?

Richard Beyer

Well, we don’t typically break that out, David. I will tell you back in Elantec days it was at least 30% of the business. I will comment, however, that you are right at the early phases of a new technology like several years ago DVD Red and like the next several years DVD Blue. Our value to the pick unit manufacturers and to drive manufacturer is really quite significant.

We move very rapidly from one 1x drives, to 2x drives, to 4x drives, etcetera. And so our prices are quite satisfactory and our margins are quite satisfactory. When you get to the later part of the cycle, the fact of the matter is innovation disappears it becomes a cost game. Our prices come down quite considerably and the margins also come down considerably. So, as I think as investors you can think about when DVD blue and HD take off and become an increasingly important part of our optical business. It not only is revenue driver, it’s also a gross margin driver as well.

David Wu - Global Crown Capital

Are these manufactured primarily in Florida or are they outsourced?

Richard Beyer

They are outsourced.

David Wu - Global Crown Capital

I see.

Richard Beyer

Yeah, they are outsourced.

Operator

And your next question comes from the line of Sumit Dhanda of Banc of America Securities. Please Proceed.

Sumit Dhanda - Banc of America Securities

Hi, good afternoon guys. I had two questions, first just a clarification you noted that inventories and distribution were down fairly nicely on a sequential basis. Could you help reconcile the increase in your deferred revenue line relative to that comment?

Richard Beyer

There was an increase because of North America inventory increasing, but when, I talk about inventory, I am talking about worldwide inventory. So, that offsetting decline, which was more significant than the increase in North America, happened in Asia and Europe.

Sumit Dhanda - Banc of America Securities

So, the extension and then that you’re on sale in basis outside of North America?

Richard Beyer

That’s correct.

Sumit Dhanda - Banc of America Securities

Okay. The other question I had was I think you made a common Rich, about pick up with TDS-CDMA in China. Could you help us understand what components exactly you’re you supplying there, what the content there is on a per base station basis, if you can divulge that. And then the caution you noted as it relates to that segment is it just overall caution and communication, or is there something specific there heading into Q2?

Richard Beyer

Yeah, we’ve got some converter technology that we developed several years ago, that has been designed into a number of wireless base stations around the world. Its modest content, but it provides a nice uptick, it’s healthy gross margins for us and its one of probably 15 product families, which serve the communications space, and so it’s a bit lumpy, and we don’t have very good visibility and sometimes our customers order for a pretty a sizable production run and than turn to speak it off in its entirety.

As far as the broader guidance about Q2, some of it has to do with DSL, some of it has to do with the wireless space stations, and some of it has to do with communication satellites. All three of those, which is the little bit cautious about what they are going to represent for us in the quarter.

Sumit Dhanda - Banc of America Securities

Okay. Thank you very much.

Operator

Your next question comes from the line of Krishna Shankar of JMP Securities. Please proceed.

Krishna Shankar - JMP Securities

Yes, can your folks give us a sense for the inventory levels of LCD TV out there and talk about your design win activity material and content increases that you have eluded to over the last several quarters?

Richard Beyer

Okay Krishna, we don’t really know anything more, or certainly we don’t have better inside into LCD inventories than you guys do. You follow it really, really closely.

Suffice you to say, that we saw in the first quarter normal seasonal behavior that is relatively modest ordering in the January and February timeframe.

And improvement in the orders in March, and now our visibility this quarter suggests that we’re going to see a modest return and nice return in terms of increase in production of LCD TVs. And our content continuous to be a quite interesting.

We’ve expanded from some of the signal processing parts like the buffer amplifiers and digital external potentiometers to power management circuits, we’ve got DC to DC converters, we got some LDOs etcetera that are going into the LCD TV.

So our content 3 or 4 years ago was probably on the order of a dollar, and now our content can be as much as $5 to $7. If one of the customers would use all of our functionality, which itself is seldom the case, but nevertheless, our average content has gone up nicely, and by the way continuous to go up a steadily.

Krishna Shankar - JMP Securities

And then in wireless handset can you give us a sense for your design win momentum there, and what types of handset manufacturers you are engaged with there?

Richard Beyer

Well you know the big ones we’ve said, we’re major player, as it relates to companies like Samsung, LG, Motorola, are more modest player with Ericsson, Sony, Siemens, Benq is not a very powerful force at the moment. And Nokia is still a work in progress.

We continue to see our parts expand particularly in the three majors that I talked about Samsung, LG, Motorola, more content we started with battery chargers. We’ve got converter PWM’s, we’ve got LDO’s, we’ve got some instances that can be light sensors and video up parts that are going into certain of these devices. So, the content is increasing nicely on a pretty stable basis.

Krishna Shankar - JMP Securities

What would be the range for that content, you think now and say a year for now?

Richard Beyer

Well we probably talking about the potential to have maybe a $1.50 content and a year from now it could be somewhere north of $2.

Krishna Shankar - JMP Securities

Great. Thank you.

Operator

Your final question comes from the line of Louis Gerhardy of Morgan Stanley. Please proceed.

Louis Gerhardy - Morgan Stanley

Yeah, good afternoon, thanks for answering all the question. I just had a couple of follow-ups. If you look at your net bookings in the quarter, how did they compare with the year ago quarter? I understand it improves sequentially, but what does it look like on a year-over-year basis?

Rich Beyer

I’m not going to give you precise numbers, Louis. I guess we could find them, but they are down pretty significantly. If I recall at this time last year inventories were building. Our revenue was, I think 6% higher than it was and the world and our ourselves had not yet figured out that we are getting a little ahead of ourselves. So the bookings were quite strong, but of course all that came to disappointing results by the summertime, when we realized, as did others that we’re way ahead of ourselves.

So I know the bookings were, the book to bill last Q1 of the year ago, I’m pretty confident Dave, you know was positive.

Dave Zinsner

Yeah.

Rich Beyer

It was above one.

Dave Zinsner

Anything like positive.

Louis Gerhardy - Morgan Stanley

Yeah, okay, and then just in terms of the channel in Q1 what percent of revenue was in roughly? What’s the split between North America and then the overseas, guys?

Dave Zinsner

So what was the split between distributors in OEM, so that was your question?

Louis Gerhardy - Morgan Stanley

On Q1 what percent of your revenue here was the channel

Dave Zinsner

Okay.

Louis Gerhardy - Morgan Stanley

And then the second part of that question is, of that what percent is North America and what percent is overseas?

Dave Zinsner

Okay. So 51% of our revenue in Q1 was distributors and about 25% of that was North America, 75% of that overseas.

Louis Gerhardy - Morgan Stanley

Thank you very much.

Operator

And we have now reached the end of the question and the answer session. I will turn to Richard Beyer, Chief Executive Officer for closing remarks.

Richard Beyer

Okay. Thanks very much everybody for your interest in Intersil. Let me just sum up by saying that we are very pleased. We believe Intersil has weathered this downturn very successfully. We had only two quarters it would appear where our revenues declined.

We were able to continue to operate within our margin models and those margin models are very important to us. We think at the low end of a cycle, we should be at the low end of the model and at the high end of the cycle we should be at the high end of the cycle and we certainly seem to have weathered this particular cycle staying within that framework.

We’ve just added Dave Bell to our team. He is a fantastic addition, bringing great insights, great leaderships skills and so we think as a cooperation as the inventories are behind us and as the industry sees an uptick that Intersil is going to continue to outperform it's peers over the next several years, as we have successfully outperformed those peers over the last several years.

So, we’re very pleased with the results that we’ve delivered, and very pleased also with the momentum that we feel we have for Q2 and for the second half of this year.

Thanks very much and we’ll see many of you, I hope at one of these upcoming conferences and all of you 90 days from now.

Thanks very much operator, that’s all we have.

Operator

Ladies and Gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.

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Source: Intersil Q1 2007 Earnings Call Transcript

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