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Intersil Corporation (NASDAQ:ISIL)

Q4 2011 Earnings Conference Call

February 1, 2012 4:45 PM EST

Executives

Brendan Lahiff – Senior IR Manager

Dave Bell – President and CEO

Jonathan Kennedy – SVP and CFO

Analysts

Bheeshma Chaudhary – Deutsche Bank

Craig Ellis – Caris & Company

Jim Schneider – Goldman Sachs

Steve Smigie –Raymond James

Terence Whalen – Citi

Tore Svanberg – Stifel Nicolaus

Patrick Walsh – Credit Suisse First Boston

David Wu – GC Research Ltd

Operator

Ladies and gentlemen, welcome to Intersil Corporation’s fourth quarter and fiscal year-end 2011 earnings conference call.

I will be your coordinator for today.

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

Brendan Lahiff

Thanks, Tunisia. Good afternoon and thank you for joining us today for Intersil’s fourth quarter and fiscal 2011 earnings results 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 fourth quarter and fiscal 2011 results and provide a summary of our first quarter 2012 business outlook. After our prepared comments, we will open the lines for questions.

We completed our fourth quarter on December 30th, 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 the earnings conference call are available on the Investor Relations section of our website at ir.intersil.com.

In addition, this call is being webcast live over the Internet and may be also accessed via the Investor Relations section of our website. A telephonic replay of the conference call and webcast will be available for two weeks through February 15th. Questions during the call may also be submitted online via the webcast that will be answered by email after the call.

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

In addition, during this call, we may refer to financial measures that are not prepared 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 reported.

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

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

Dave Bell

Thanks Brendan. Good afternoon and thank you for joining us today for Intersil’s fourth quarter and 2011 year-end earnings conference call.

I’ll first quickly review the results of the fourth quarter and the full year, I’ll then make some comments on the present business conditions and our strategy for managing through the present economic environment.

We reported fourth quarter revenues of $165.8 million, an 11% decrease from the third quarter, and a 15% decrease from the fourth quarter of 2010. Jonathan will provide more financial details in his remarks.

The economic conditions in the fourth quarter failed to improve significantly with demand remaining weak in all markets. With this downturn now headed into an unprecedented third quarter, we believe that demand in inventory drawdown have reached bottom. Some of our peers are already seeing the early stages of recovery. With the fourth quarter book-to-bill ratio slightly less than 1 and a quarter-to-date book-to-bill ratio slightly above 1, we’re anticipating clear signs of recovery in the near future.

We have seen economic cycles many times before and we’re positioning the company to respond to the upcoming demand snapback. During the last cycle, we’ve won awards from many of our customers due to our responsiveness and continuity of supply, and we expect the same this time around. We build inventory primarily in dye bank on parts that are likely to have high turns business. We’ve also reserve sufficient manufacturing capacity for strong growth in the coming quarters.

As I explained during the last two earnings calls, we focus the company on our top 10 growth drivers. These focus areas are expected to generated $700 million of additional annual revenue within the next five years. At the same time, the investments made in products aimed at the broad Industrial market are also paying off with increased design wins in sales. I’ll provide a bit more color on our product strategy after Jonathan’s financial summary.

Intersil’s management team reacted swiftly to control operating expenses during this downturn. We conducted another small reduction in force in R&D related to a refocusing efforts and at manufacturing to address underutilization. Our asset light manufacturing strategy allows us to be flexible with our manufacturing costs through the inevitable ups and downs in the semiconductor business. However, we have continued to make sizeable R&D investments in the top 10 areas that we’re absolutely confident it will drive strong growth. We have not allowed these critical R&D investments to be whipsawed with the ups and downs of the economic cycles.

Our Board of Directors is also committed to sustaining shareholder returns and has authorized a quarterly dividend of $0.12 per share of common stock.

At this time, I’d like to turn the call over to Jonathan Kennedy, who will provide a financial summary. I’ll then discuss the results from each of our end markets in more detail and finally provide comments on our first quarter 2012 outlook. Jonathan.

Jonathan Kennedy

Thank you, Dave. Let me start with the results of operations. We achieved $165.8 million in revenue for the fourth quarter, a 15% decrease from the fourth quarter of last year and 11% sequential decrease from the third quarter of 2011. Our Industrial market achieved a 4% sequential revenue growth, due to the strength in the automotive display and security surveillance businesses. Revenue from the Computing end market declined 14% on lower overall demand and revenues from the Consumer and communication markets were down 19%, again on overall lower demand. The 2011 full-year revenue was $760.5 million, or 8% decrease from $822.4 million reported in 2010.

Once again, our lead times remained normal throughout the quarter, with no significant supply constraints, and our internal utilization was below optimal levels, as we reduced the buffer inventory we put in place during the consolidation of our internal fabs in 2010.

Fourth quarter turns were 36%, and we expect Q1 turns to be about the same at the midpoint of our guidance, while turns with the high end of our historical norms, low channel inventory and weak demand typically cause an increase in turns.

Our gross margin was 56.7% in Q4, 30 basis points lower than the previous quarter, due to unfavorable mix changes and lower utilization rates. Looking to Q1, we expect gross margin to go down by another 50 basis points to 100 basis points on lower utilization as we continue to workup inventory of internally produced products.

Our Q4 operating expenses were lower than expected due to lower labor cost driven by year-end vacations and our year-end shutdown. R&D expense was $42.3 million or 26% of revenue, and SG&A expense was $34.6 million or 21% of revenue. Our Q1 operating expenses will be higher as lower spending due to year-end vacation and shutdown that do not repeat in the first quarter. We expect R&D expense of about $47 million and SG&A expense of approximately $35 million for Q1 2012, and both of those include equity compensation.

Amortization of intangibles was $6.7 million during the quarter and Q1 amortization is expected to be about $7 million.

Our Q4 operating margin on a GAAP basis was 5.3%.

The reduction in force that Dave discussed earlier resulted in $1.6 million in restructuring cost during Q4, and we expect to incur an additional $1 million during Q1, as we complete the process.

Gains on our deferred compensation investments were $0.4 million during Q4, which increased SG&A expense by similar amount.

We sold all of our option rate securities during the quarter, receiving $57 million in cash and resulting in a book loss of $6.5 million.

Our interest income was $0.5 million for the quarter and we expect Q1 interest income to be slightly lower, as we anticipate a lower averaged cash balance as we make [Technical Difficulty] in our long-term debt. Interest expense was significantly lower than the prior quarter at $2 million due to lower interest rates and a lower outstanding balance on our new revolving credit agreement.

We reduced our long-term debt by $78 million during the fourth quarter and ended 2011 with a balance of cash and short-term investments, net of debt of over $210 million.

We expect Q1 interest expense to decrease to approximately $1.7 million on a lower long-term debt balance.

Our Q4 GAAP tax benefit was $22.9 million, which includes the re-measurement of our uncertain tax positions. The re-measurement benefit reflects our best estimate of the likely outcome of these positions. And our non-GAAP tax rate was 13.7%.

We expect our Q1 GAAP effective tax rate to increase to about 30%, and non-GAAP to be approximately 25%. This increase in tax rate is primarily due to the expiration of R&D tax credits and to a lesser extent on certain tax expenses relative to a low pre-tax income.

Our equity compensation was $6.9 million for the fourth quarter and we expect Q1 to be about $7.5 million, with $0.5 million in cost of sales, $4 million in R&D, and about $3 million of equity compensation in SG&A.

On a GAAP basis, we earned net income of $24.1 million or $0.19 per diluted share for the quarter. And net income for the total year 2011 was $67.2 million or $0.53 per diluted share.

Now, on a non-GAAP basis, we present non-GAAP measures because we believe they add additional analysis that when considered with GAAP information, can help investors more thoroughly understand the results of our normal ongoing operations. Our non-GAAP estimates exclude equity compensation, in addition to unusual items and intangible amortization. And as always we continue to publish and maintain our primary focus on GAAP financial results.

Non-GAAP operating income was $24.6 million and our non-GAAP operating margin was 14.8%. Non-GAAP net income was $19.8 million or $0.16 per share for the fourth quarter. Our 2011 non-GAAP net income was $112 million or $0.89 per diluted share.

Again, these amounts exclude equity compensation, one-time items, amortization of intangibles, and all the related impacts on income tax expense. A reconciliation between GAAP and non-GAAP measures can be found on page eight in today’s press release.

And, on to the balance sheet and cash flow, for the fourth quarter, we generated $28.9 million of free cash flow, or 17% of revenue. For 2011, we generated $128.6 million, again about 17% of revenue in free cash flow. This compares to a $122.5 million or 15% of revenue in 2010.

Our cash and short-term investments decreased by $10.6 million during the quarter. We exited the quarter with over $410 million in cash and short-term investments and $200 million in long-term debt.

Our net cash position increased by over a $100 million during the year and we paid out over $60 million in dividends. Dividends paid for the quarter were $15.3 million.

Our days of sales outstanding improved a day to 37 days for the quarter. Our net inventory decreased $5.6 million from the third quarter to $97.9 million. Days in inventory increased to a 128 on the lower revenue. And looking ahead to Q1, we expect inventory dollars to be down another $5 million or $6 million, and inventory days to decrease to about a 120 days.

Our Q4 ending worldwide distributor inventory was 72 days on lower revenue, while inventory dollars actually declined by about 8%.

Our Q4 depreciation was down slightly compared to the third quarter at $5.1 million and CapEx decreased in the quarter to $1 million. And we expect Q1 CapEx to be between $2 million and $3 million.

Our weighted average diluted share count was 126.8 million shares in the fourth quarter and we expect first quarter weighted average shares to be about the same.

Now, I’ll turn the call back to Dave Bell.

Dave Bell

Thanks Jonathan. I’ll now address our business in each of our four end markets beginning with Industrial.

Revenue in the Industrial market represented approximately 32% of fourth quarter revenue and increased 4% sequentially. For 2011, the Industrial market represented approximately 29% of revenue and declined 11% from the prior year. The Industrial market was buoyed in the fourth quarter by our video signal processing product lines recovering sharply from depressed third quarter revenue levels.

Automotive video processors, decoders and display drivers continued to accumulate design wins as automotive OEMs seek to differentiate their vehicles via technology enhancements. Our automotive video products drive displays in instrumentation clusters, navigation panels, heads-up displays and rear camera monitors in both mirrors and center consoles. We saw more than 80% annual growth in automotive video products. However, it’s interesting to note that this growth was due to a wide variety of automotive video applications and not primarily due to rear camera displays to satisfy the Kids Transportation Safety Act. Although, many automotive customers are building these systems into vehicles ahead of the legal requirement, we are still in very early days of this revenue ramp.

We continued sampling our lithium iron cell balancing products to a growing list of North American and Japanese auto customers. The performance and reliability requirements for these mission-critical ICs are extremely high and were one of only a few suppliers capable of satisfying customer demands. In the coming years, hybrid and electrical vehicles will represent a rapidly growing portion of worldwide automobile sales. Intersil is positioned to enjoy substantial revenue growth within the next few years, so it’s not surprising that this ranks us one of our top 10 growth drivers.

In our Techwell security surveillance video product line, we’re continuing to see strong acceptance of our video decoders. During the fourth quarter, we sampled innovative new products such as eight channel H.264 compressor and decoder IC that enables very cost effective 16 channel digital video recorder solutions and a revolutionary HD fisheye camera processor continues to attract huge numbers of customer requests in a wide range of applications.

Our proprietary security link over coax technology allows connection of HD digital cameras over existing coaxial cable. Sony is the world’s largest producer of video surveillance cameras and they have partnered with Intersil to make this a real game changer as HD cameras are retrofitted into existing facilities without the need for recabling.

During the fourth quarter, demand for a general purpose Industrial products fell moderately across the board. This result is consistent with reports from other suppliers of industrial ICs.

Looking ahead to the first quarter, we expect sales into the Industrial market to be slightly down sequentially, due to continued soft market conditions.

Now, let’s look at our Computing market. Revenue in the Computing market represented approximately 26% of fourth quarter revenue and declined 14% from the prior quarter. For 2011, the Computing market represented approximately 27% of revenue and declined 2% from the prior year.

Although the Computing end market as a whole was weaker than forecasted, we’ve maintained our 70% market share in the Sandy Bridge notebooks. Sales into the notebook and desktop markets decreased by almost equal amounts on a percentage basis, as worldwide shipments declined by approximately 9% in the fourth quarter, primarily due to upstream supply constraints associated with the Thailand flooding and resulted in disk drive shortages.

We currently believe the disk drive supply constraints will be resolved during the second quarter and demand will increase throughout the remainder of 2012, driven by the launch of Intel’s Ivy Bridge platform and Microsoft’s Windows 8. Design activity on the upcoming Ivy Bridge platforms has been strong and we believe that we’ve retained market share leadership despite increasing competition and dropping ASPs.

Intersil continues to deliver the highest performance power management solutions, along with the best service and delivery track record. So this has positioned us for early design wins and continued dominance in notebooks. It’s also important to note that Intersil share a core power in AMD platforms remains over 70%. We expect to retain similar market share as AMD refreshes their products in 2012.

We just saw a large number of ultrabooks on display at CES and we agree with Intel that this new category should gain significant share during 2012. High efficiency and small solution size are critical in these new thin and light products and this plays to Intersil’s strengths. We’ve been working closely with Intel and notebook customers to design more integrated power management ICs that are perfect solutions for ultrabooks. We’re excited about these new products and the potential to dominate this new category just as we’ve done in notebooks.

Looking at the first quarter, we expect Computing sales to decrease slightly as inventory levels throughout the channel continue to drop to low levels.

Now, let’s look at our Consumer market. Revenue in the Consumer market represented approximately 21% of fourth quarter revenue and declined 19% from the third quarter. Revenue decline in the fourth quarter was primarily due to ongoing weakness in the television market and the seasonal roll-off of gaming revenue.

In the display market, we are currently sampling new programmable gamma buffers going into notebooks, ultrabooks, and tablets that result in approximately 75% power savings versus existing discreet designs plus many fewer external components.

Handheld revenue was flat in the fourth quarter, largely due to increased sales in our optical sensors business, which had another record quarter. We demonstrated Intersil’s agility by quickly ramping production in response to product shortages with several competitors. This responsiveness has opened doors for long-term relationships with new smartphone customers in China. Our optical sensors business also continues to expand into a myriad of applications outside the mainstream smartphone and notebook markets.

Tethered gaming console sales bottomed in the fourth quarter, as our primary customer reduced production on their 2011 chassis. We have a strong relationship with this customer and it won the design in the 2012 chassis, ensuring continued revenue for this product line.

At CES, we demonstrated a complete Intersil solution for picoprojectors. Picoprojector technology evolution was dramatic during the last year with huge improvements in image brightness, resolution, power efficiency and size. This is a small and obscure product category today, but is expected to have explosive growth in the next few years as picoprojectors get embedded into smartphones, tablets and notebooks. Intersil has clear technology leadership in this area and it will soon become clear why this is one of our top 10 growth drivers.

Looking ahead to the first market, we expect sales into the Consumer market to be down moderately, as the holiday season builds taper off and inventory continues to stabilize.

And finally, moving to the Communications market. Revenue in the Communications market represented approximately 21% of fourth quarter revenue and decreased 19% from the third quarter. For 2011, the Communications market represented approximately 22% of revenue and declined 8% from the prior year. Radiation-hardened products and general purpose communications ICs accounted for most of the decline in the fourth quarter, offset by a rebound in DSL line drivers.

We continue to invest in our very profitable rad-hard product portfolio. During 2011, we invested in one of the analog industry’s only low-dose radiation chambers. And as a result, we are now known as the clear leader in radiation quality assurance, where failure is not an option. We have completed low-dose testing of most of our high-volume parts and are actively testing other parts we believe maybe suitable for satellite applications.

We also introduced a new 3 amp ultra-low dropout linear regulator in January that improves performance over any of other available rad-hard linear regulator, and we’re sampling a number of new rad-hard parts that are expected to drive continued growth of the very profitable satellite market.

While we expect the overall DSL line driver market to remain relatively stable due to the slow transition from ADSL drivers to VDSL drivers, we noted that the ADSL share market has started to decline as more customers embrace next-generation VDSL driver technologies. In addition, we’ve identified new opportunities in the power line Communications market where our line drivers are being used in numerous Industrial and consumer applications.

Looking ahead, we expect the Communications market to be up slightly due to resumption in normal rad-hard sales.

Now, let’s turn to our outlook for the first quarter. Bookings gradually improve throughout the fourth quarter and we ended the quarter with a book-to-bill ratio of slightly less than 1. So far in the current quarter, our book-to-bill ratio has been running slightly above 1. Although, we have not seen a sharp uptick in bookings, we expect to see concrete signs of recovery in the near future. However, we will remain cautious with our guidance until the anticipated recovery is clearly evidenced.

With a slightly higher turns percentage built into our guidance, we expect our first quarter revenue to be in the range of $152 million to $160 million, a reduction of 3% to 8% from the fourth quarter.

Gross margin is expected to drop by 50 basis points to 100 basis points, due to reduced utilization resulting from lower revenue and continued inventory reduction.

On a GAAP basis, we expect first quarter earnings per share to be in the range of minus $0.03 to $0.00. Excluding one-time charges, amortization of intangibles and equity-based compensation, we expect non-GAAP earnings per share in the range of $0.05 to $0.09. As Jonathan mentioned, after-tax income and EPS are expected to be lower in the first quarter, due to the exploration of the R&D tax credit at the end of 2011.

Beginning with our first quarter results, we will modify our end market categories to better reflect Intersil’s product strategies. We will combine the Industrial and Communications markets into a new Industrial & Infrastructure market, the new I&I end-market category will include applications such as base stations, network switches and routers, network attached storage and servers. It will continue to include traditional Industrial categories such as automotive, security surveillance, military, medical and factor automation.

We will retain the existing Consumer end-market category, but the Computing end market will be renamed Personal Computing. As such, the PC market will contain notebook and desktop computers, but servers will now be included in the I&I market. Although, there is a spectrum of handheld computing solutions, we will play smartphones and tablets into the Consumer market, while notebooks and ultrabooks in the PC market.

Please note that the first quarter guidance given in each of the end-market discussions is based on the current market segmentation. We will provide a historical break down of the three new end-market categories with our first quarter financial results.

We are now more than three years into a complete transformation of Intersil’s business and we’re just beginning to see the results of our strategic investments. Some of these investments will begin to have an impact on revenues during 2012, but many more are expected to contribute to a much steeper growth rate in 2013.

More recently, we’ve increased the focus of our R&D investments in what we believe will be the top 10 growth drivers for Intersil. These top 10 areas are now aligned with macro trends and specific technologies and markets where we know we have the ability to beat much larger rivals. Together, these top 10 areas are expected to generate an additional $700 million in annual revenue in less than five years. At our upcoming Analyst Day on May 8th, we will provide details on each of these top 10 growth drivers and explain why we are so enthusiastic and confident of strong growth in the coming quarters.

Sustained investments in these growth areas have weighed on earnings during the last several years, but those investments are now poised to produce exceptional shareholder returns through growth and earnings leverage in the coming quarters.

In addition to these top 10 growth drivers, the investments we’ve made in a broad range of analog products aimed at the Industrial market are also beginning to payoff. The broad horizontal market is inherently slow growing, because design wins at thousands of customers slowly accumulate layer by layer. But the payoff for patience is that they design wins have above average profit margins and will drive steady profitable growth for decades to come.

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). And the first question comes from the line of Ross Seymore. Please proceed.

Bheeshma Chaudhary – Deutsche Bank

Hi, thanks for taking my question. This is Bheeshma Chaudhary for Ross Seymore. A couple of questions here. On the guidance, the EPS is near loss at trough revenues, any thoughts to further kind of sizing OpEx levels. As your revenues rebound how should we model the OpEx growth?

Dave Bell

Well, the GAAP numbers do show a range of minus $0.03 to flat on EPS, that is $0.00 on EPS. Our non-GAAP is $0.05 to $0.09. So yes, you’re correct, with the GAAP numbers we do show a slight loss there, but Jonathan can clarify this further, we’ll still be cash flow positive.

One thing I’d like to emphasize again that I said in my prepared remarks is that, there needs to be kind of a balance between managing for the short term and investing for the future. I think we’re striking the right balance. We have made cuts; we’ve had a number of modest reductions in force and tightened our belts in operating expenses in a number of ways. In fact, our operating expense is basically flat with the prior year, so we’ve done a good job there, I think despite increases in salaries and so forth.

On the other hand as I also mentioned, I don’t think it’s appropriate and sensible for us to completely whipsaw our R&D investments and our sales investments just because the economy as is inevitable ups and downs. So I think we’re doing a good job of balancing the near-term need to cut our operating expenses and control them, but at the same time sustaining our investments. And as I also mentioned in the last call as well as this one, we’re really focusing our R&D investments on the areas where we think it’s really going to drive strong growth in the coming years.

Jonathan Kennedy

Yes, I would add to that too, the guidance for Q1 OpEx is to go up a significant amount from Q4. Q1 tends to be a higher OpEx quarter for us, because the vacations and holidays just aren’t – don’t exist like you’d see in other parts of the year. And I would say even though you point out trough revenue levels, I wouldn’t expect R&D and SG&A to go back up as fast as revenue returns. There is really nothing in the Q1 guidance that’s abnormal in the OpEx.

Bheeshma Chaudhary – Deutsche Bank

That’s helpful. Just a quick question on the Communications segment that was soft in 4Q and then soft again in 1Q. So just trying to understand that seasonally it shouldn’t have been so punitive, and within that the rad-hard weakness in 4Q, how should we think about that, is that a snapback expected in that sub segment?

Dave Bell

Well, let me start out and then Jonathan can maybe give you some more specifics, since he’s got the spreadsheet in front. The rad-hard market is inherently a really lumpy business. So we have certain times where there is large rad-hard orders and we have other periods where it kind of troughs, and as I mentioned in my remarks where it kind of a troughed in Q4 with that. We’ve been investing heavily in our rad-hard business in recent years, we expect that to grow in the coming quarters and years, because of those investments, and it’s an area that you need to have a lot of patience with as you might imagine, because the satellite design-in process is long, but absolutely over time we expect that to go up, but it will remain kind of a lumpy business. That’s just the nature of it.

Bheeshma Chaudhary – Deutsche Bank

Thanks.

Jonathan Kennedy

It’s lumpy, but it does recover in Q1 back to historical levels.

Bheeshma Chaudhary – Deutsche Bank

Thanks. That’s helpful. Last question here, for the redefining of the segments, should we be concerned about any cost implications, are there any interim implication of that, or is it just you kind of tied it on to the growth segments?

Dave Bell

No, there is not cost implications, whereas all we’re doing is kind of regrouping the markets and the products that we sell to better align it with our strategic plans. One of the things that’s been a little bit confusing in past years is that we have historically kept PC business and server business all lumped under the Computing category, and those businesses are quite different. So what we wanted to do by just keeping one market segment for PC is a lot of people such as yourself to have a better idea just what our PC business is, and then we’re going to put the server in the Infrastructure business, since it’s much closer to other products like base stations, routers, switches, so forth.

Bheeshma Chaudhary – Deutsche Bank

Thank you.

Dave Bell

You’re welcome.

Operator

Ladies and gentlemen, as a reminder, please limit yourself to one question and one follow-up question. And the next question comes from the line of Craig Ellis. Please proceed.

Craig Ellis – Caris & Company

Thanks guys. Dave, your recent peak-to-trough revenue change looks like about a 25% decline which is noticeably steeper than I think the analog group. Are you comfortable that you’re holding on to share in your served markets or are is the issue that some of the headwinds that you talked about I believe that was back in the July conference call from businesses that are trading, are those still at playing and buffeting the business, how do we reconcile your peak-to-trough performance versus peers?

Dave Bell

It’s a good question, Craig. I think the simple answer is that just appears to be the nature of our business. If you look at prior downturns if you go back to the one at the end of 2008, early 2009, we similarly went down more than our peers, but we snapped back faster than our peers as well. During that downturn, I think we were down approximately 50% from the prior peak. So I think it’s the nature of our business. I think part of that is owing just to the businesses that we’re in.

I think part of it as well is just the way we manage our business is that when we see business going down, we don’t do extraordinary things to try and prop it up. And like right now we’re making sure that we continue to drop inventory levels, both on our own books as well as in the channel to prepare us for a snapback. So no, I don’t think there is any share loss that’s contributing to that. I think it’s the nature of our business due to the markets that we’re in and due to the way that we manage our business.

Craig Ellis – Caris & Company

And then on the – go ahead, Jonathan.

Jonathan Kennedy

I was just going to say, I mean for that peak-to-trough analysis, I mean that’s a fun analysis to do, but it will be more fair if everybody is in the same business. But as you know Intersil is weighted much more heavily towards PC and consumer light business than some of our peers, and those businesses tend to have very quick recoveries and then very quick declines, and so our peaks are higher and our troughs are lower. So that delta between peak and trough tends to magnify for us.

Craig Ellis – Caris & Company

Okay, thanks for that. And then on the product side, Dave, when you were talking about PC market share, it wasn’t clear to me if in Ivy Bridge you were saying you’re going to retain 70% of the core power management share or if it was just a majority share. And then on the automotive business with the TSA mandate that’s coming through, do you think that’s really a 2012 tailwind or is that really a 2013 tailwind for the company?

Dave Bell

Well, your first question on Ivy Bridge, it’s too early to tell frankly exactly what our market share is going to be. I think it’s safe to say that we will certainly have a dominant share north of 50%. I can’t assure you at this point that will be as high as 70%. But we certainly believe that we’re very well positioned there, we’ve got a great relationships with our customers who kind of give us an advantage there, because the way we’ve supported them in the past generations.

As far as the Kids Transportation Safety Act is concerned, we’re just seeing the very beginnings of that. The law, I think the enactment date of the law is potentially going to be pushed out a little bit. Nevertheless you’re seeing some car manufacturers already putting those capabilities into vehicles. So I don’t think it’s going to have a huge impact on 2012. I think we’ll start seeing it having a much bigger impact in 2013. But the message that I was trying to communicate is that, while the Kids Transportation Safety Act eventually is going to drive really strong revenue growth in that area, we’re already seeing strong revenue growth. In fact, 80% growth in our automotive video business is just due to other applications within the automobile as well.

Craig Ellis – Caris & Company

Thanks guys. I’ll get back in the queue.

Operator

And the next question comes from the line of Jim Schneider. Please proceed.

Jim Schneider – Goldman Sachs

Good afternoon. Thanks for taking my question. I was wondering if you could provide a little bit of color on the bookings activity you’re seeing so far post Chinese New Year in the PC and consumer electronics areas, realizing of course that’s only been about a week in rears of that event. Can you give us any kind of color on whether you’ve seen a noble pickup in those areas or not?

Dave Bell

Jim, the short answer is no. Chinese New Year was last week. Obviously, we see a perturbation every year due to Chinese New Years. And, in fact, the perturbation becomes bigger and bigger as the Asian markets are bigger and bigger consumers and products. So obviously bookings go way down during Chinese New Years. You tend to see them come back obviously after Chinese New Years, but we only got a day or two afterwards. And, in fact, they don’t necessarily snapback. So the honest answer again is I can’t give in a color on what the bookings are looking like after Chinese New Years.

Jim Schneider – Goldman Sachs

I understand. And then on the distributors, we’ve heard so far for this earnings season some mixed commentary from various distributors about whether their inventory motive is point still or whether they’re actually kind of flat to increasing inventories. What are you hearing from your distributors at this point about that?

Jonathan Kennedy

Yes, this is Jonathan. Well, I mean, we have actual data, so it’s not anecdotal. But we know, it’s like as I said in my comments that distributor inventory and the channel is going down about 8% on a typical balance about $60 million. So we know that our channel is reducing. I don’t know about others.

Dave Bell

And in reality Jim, it’s a partnership that we have with our distributors. So we’re not solely at their mercy, we work together, and deciding where to reduce inventory and by how much. But clearly, that’s one of the things that contributes to sales going down is that especially with our international distributors where whatever we sell those guys is shown as revenue. When we’re dropping our inventory in the channel significantly during the last quarter, that impacts the sales number as well.

Jim Schneider – Goldman Sachs

That’s very helpful. Thank you.

Operator

And the next question comes from the line of Steve Smigie. Please proceed.

Steve Smigie – Raymond James

Great, thank you. Jonathan, I was hoping you could talk a little bit about how OpEx dollars might look as we move throughout the year. Just as an example if I were to see June revenue to bounce back to something closer to December number, would I expect to see the OpEx dollars slightly down from December just because you’ve made the additional cuts, is the right way to sort of think about that.

Jonathan Kennedy

Well, I think I was saying a few minutes ago, the Q1 OpEx is pretty straight-up OpEx number, there is nothing unusual in Q1 that would cause it to be artificially low or artificially high. And so I mean I think I would use that as a benchmark. June quarter, it has some vacations in it with summers – summer vacation, things like that, a little more than Q1, there is really nothing in there. Yes, I think I guess we’ll too have spring break in Q2, so we’ll see more vacations. So labor cost go down when we have vacations. So I wouldn’t expect any major difference between Q1 and Q2. Q3, again it’s late summer, it’s usually pretty flat. And then Q4 in 2012 we’d probably see the OpEx down as it traditionally does with more vacations, we have a one-week shutdown that we do companywide at the end of the year. And so that’s kind of the normal flow. But, I guess, the main point is, there is nothing in the OpEx today that would be driven solely by increases in revenue or otherwise.

Dave Bell

So Steve let me add to that as well. Maybe if you were polite in asking your question, are we going to lose complete control on OpEx if the revenue snapback? The answer is no. You’re going to see us exhibit a lot of discipline on operating expenses. We’re going to hold them as flat as we can until we get the company up to our desired operating model. So – but as Jonathan was implying, I think the most painful step throughout the fiscal year is going from Q4 to Q1, where you have the most holidays and vacation days in Q4 to the fewest in Q1, so it always look like we just lost control on our OpEx. But it is just simply more work days. But again, the bottom-line is that we’re going to be very, very disciplined on controlling our OpEx and we’re going to be very focused on where we’re putting our OpEx into our top 10 growth drivers.

Steve Smigie – Raymond James

Okay, that’s very helpful. I appreciate that. With regard to the R&D that you walked away from, are you willing to share what area that was in?

Dave Bell

No, it’s a myriad of areas. But one of the things that we have done broadly though is to back off a little bit on some of the general purpose products that have been broadly aimed at the horizontal market and focusing those resources on the top 10 growth drivers. Now, I’m a huge proponent of the horizontal business and you’ve heard me on many prior calls talk about how valuable the horizontal business is, and we’ve made a lot of investments in recent years into those areas, and we’re still going to continue to see the fruits of those investments, because it’s a market that just has a lot of inertia to it. But what we also recognize is that we need to focus R&D into some top growth drivers that are going to have a little bit shorter-term payback for us, and where they’re aligned with macro trends and where we really think we can move the needle on revenue. So we refocused some of those resources offer products that were aimed at the horizontal market into these top 10 growth drivers. And I think that makes sense, because those are things that are really going to drive growth in the next few years.

Steve Smigie – Raymond James

Okay, great. Thank you very much.

Operator

And the next question comes from the line of Terence Whalen. Please proceed.

Terence Whalen – Citi

Thanks, good afternoon. This question relates to the upcoming Intel 22-nanometer process. Are there significant changes because of – since that’s to the power management architecture and how do you anticipate that evolves further at 22-nanometer as well?

Dave Well

Well, that’s a good question, Terence. Yes, that – I’m not going to talk in detail about it, because we’re obligated to keep some of those details confidential with our – relationship with Intel. But there architectural differences that happen in some of these future generations of parts, we’re well aware of that, we’re working very closely with Intel, we’re on their CRBs. So I think we’re doing all the right things to make sure that we’re adapting to these architecture changes. We make sure that our revenue continues to have a growth year-after-year despite these changes in the power architecture.

Terence Whalen – Citi

Terrific. And then as my follow-up, I think Dave you stated that you expect revenues to bounce back after they bottom in March. One of the questions we always try to answer is, to what consumption rate do you bounce back. In other words, as we look back at revenue levels between 200 and 220 over the past six to eight quarters, how much of those revenues perhaps were inflated slightly by industrial restocking and the channel that might not return given tighter credit in China? Thank you.

Dave Well

Well, that as well is a really good question, and I wish I had a really precise answer for you. What we do know with confidence is that during the last few quarters and in Q1 as well, we are shipping below consumption in the industry broadly, so we’re seeing that with reductions in inventory in the channel, as well as staying frankly throughout the channel all the way to the buyers of those goods. So the actual consumption level is clearly above where we are right now. That said, I think the overall consumption level in some markets probably is lower than it was a year-ago, it’s just due to the macroeconomic conditions. So we’re going to see a snapback in our business.

We’re confident that that will happen in the near future sometime here. Just exactly what it snaps back to, of course we can’t predict at this point, but it’s going to be a combination of going back to consumption levels. And, frankly, it probably goes a little bit above consumption levels. The industry is inherently cyclical because inventories are very low right now. I think there is a lot of our customers, for instance in the PC markets that are sitting there, their foot is just ready to stomp on the gas pedal but they haven’t done it yet. And when they see their demand come back, they’re actually going to have to replenish them inventory. So it’s a classic cycle. On top of that, Terence, I think that we’re gaining market share in some areas. And so I think that’s what’s really going to drive growth in 2012 and 2013. So it’s going to be a combination of that shipments going back to meet the actual consumption plus market share gains especially in this top 10 areas.

Terence Whalen – Citi

Thanks Dave. Thanks for fitting me in.

Dave Well

Sure.

Operator

(Operator Instructions). And the next question comes from the line of Tore Svanberg. Please proceed.

Tore Svanberg – Stifel Nicolaus

Yes, thank you. First question, can you just talk a little bit about how you view your Computing business this year. Obviously there is a lot of moving parts. Everyone is waiting for Windows 8, but yet then we have this hard disk drive issue and maybe a recovery as early as Q2. So as you plan for the year, how do you manage over your PC business?

Dave Well

Well – and first of all, Tore, we’re not going to give you comments anywhere beyond Q1, so we’re doing the best job we can internally to plan for that. But you’re right, with the flooding in Thailand impacting the disk drive production, that’s put a damper on the PC business. And I think the principal impact right now is that the low sales in Q4 are going to be extended through Q1. And as best as we can tell right now, we think probably sometime in Q2 that disk drive supply constraints ease and we see the PC business start coming back a little bit.

Tore Svanberg – Stifel Nicolaus

Very good. And as my follow-up question, just looking at your smartphone business, you’ve had some very important design wins with some of your sensory products. This seems to be like a trend right now where some of that sensor type technology maybe integrated. Could you comment on that and what is Intersil doing as far as integration of analog in let’s say a smartphone or a tablet?

Dave Well

Well, the sensor business has been very good. In fact, in our fourth quarter, we had record sales in our sensors area. We have technology leadership in that area, so we’re very enthusiastic about growth there too. Also, as I mentioned the flooding in Thailand had an impact on a couple of our competitors there, and we were quick to react and fill in the gap there. And I think that’s going to benefit us down the road as well.

As far as the integration is concerned, yes there is integration to a degree, because of the unique processes and package and technology, you need obviously optically clear packaging for these sensors, you’re not going to integrate it with a base band chips that are something like that. But you are seeing sensor function themselves coming together. One thing that the industry kind of calls it three in one for instance is something that we add now where you include the ambient light sensor, the proximity sensor and the infrared LED. So there is integration to that extent and we think we’re at the forefront at that integration as well.

Tore Svanberg – Stifel Nicolaus

Great. Thank you very much.

Operator

And the next question comes from the line of John Pitzer. Please proceed.

Patrick Walsh – Credit Suisse First Boston

Yes, this is Patrick Walsh calling in for John Pitzer. I just had a quick question on the gross margins. I know it only came down slightly quarter-on-quarter and you mentioned that mix partially drove that. But then I’m seeing that Industrial is kind of up 4%, while the business was down 11%. I was wondering if you can just give a little color there.

Jonathan Kennedy

Sure. Even within each end market there is mix changes, so it’s not as if we have a – a homogenous margin in every single market. So that top side of your analysis would be correct. If you look at our Industrial business, I’ll give you some color. We had a drop in our military business over the last couple of quarters, this quarter was pretty flat, but last Q3 and Q2, and offsetting increase in revenue from the Techwell security and automotive that doesn’t have the same margins as the military business, there is probably a 20-point margin difference there. So while the revenue is going up, it isn’t as rich as you’d find in satellite or military or something like that. It’s still about north of corporate average. But – so within Industrial, the mix is going down.

And then also for the fourth quarter and then guidance for the first quarter, we’re making a concerted effort to reduce inventory on our books. The inventory area that we’re reducing is predominantly the stuff we make internally in our fabs. We’ve built an inventory back in 2010 as we consolidated fabs and now we’re burning that off. Now that that transfer is complete and we feel very comfortable with the capabilities in the consolidated for that, we’re going to start working off inventory. That’s going to cause a temporary reduction in gross margin as we just don’t have the utilization that you would normally – once we cleared the inventory and all likelihood through the end of Q1, then we’ll start to go back to normal production and we’ll see those margins increase from that.

Patrick Walsh – Credit Suisse First Boston

Okay, awesome. Thanks for the color there. I think the rest of my questions have been answered.

Dave Well

Sure.

Operator

And the next question comes from the line of David Wu. Please proceed.

David Wu – GC Research Ltd

Yes, the first one I have is, if the Thailand situation gets resolved by Q2 of this year and you have your seasonal builds going into the third quarter, as I recall, you folks have very strong swings in the power management PC business in the past when this sort of things happens. Is there any reason why this time it’s different?

Dave Well

Well, there is always perturbations and this year it’s the Thailand flooding. Typically, Q2 is when we really see the uptick in the Computing business, the PC business, Q1 tends to be down. So right now, with the Thailand flooding on top of seasonally down quarter, it’s not surprising that we’re not seeing a stronger sales in PC. Hopefully, the disk drive problems are resolved, kind of in concert with the normal seasonal uptick that we would see in Q2. I’m not sure if that answer your question or not David.

David Wu – GC Research Ltd

Well, hopefully we’ll see that – particularly the Windows 8 just around the corner. The other thing is, do you – can you size roughly 10 growth drivers in terms of revenues. And I’m sure that they’re not humongous in Q4, but approximately what size is that we’re looking at?

Dave Well

Well, probably a discussion that’s going to take longer than we should take right on the call, but the answer is yes, we have sized them. We can give you some color offline about what we think some of the biggest ones those are. But there are 10 growth drivers, you’ve seen the list, we put it up the last two conference calls here. Some of them we think are going to be enormous and others are going to be not quite as big, but still really going to move the needle for us. I’m sorry, go ahead, David.

David Wu – GC Research Ltd

If you put all those 10 together, that’s of the focus [ph] of last year, what size were they in aggregate, those 10?

Dave Well

Not all that big. The biggest of the 10 right now, I guess would be our PC power management business, Techwell is in there as well, so I’m talking about $700 million in additional incremental revenue coming from these top 10 within five years. So right now it’s a small fraction of that $700 million.

David Wu – GC Research Ltd

Are we looking at sort of $50 million range?

Dave Well

I think there are some of them that can be in excess of a $100 million. One of the things that I think people are just now starting to recognize for instance our picoprojectors. Last year, at CES, most people said, “What’s a picoprojector?” This year we had a lot of attention on picoprojectors, because people are starting to see the potential for those to be embedded in the smartphones, tablets, notebooks, computers, cars, you name it. So that’s just one example, where that I think with the kind of dollar content we have got with the complete chipset for picoprojectors that can be well north of a $100 million peer within five years.

Jonathan Kennedy

Yes, David, on the website we have posted these top 10 growth drivers and several of them do have amounts of where we think they can grow to.

David Wu – GC Research Ltd

Well, I was just looking at where they are, all right? Where they grow to is projections. But where they are, we’ll have a starting point of – from whatever the level they are to something like $700 million.

Dave Well

Yes.

Jonathan Kennedy

Well, I can give you a rundown of maybe the Techwell as we said and the first line item that’s already about a $100 million business, you know the PC power management, we report that every quarter. Light proximity sensors, we’ve talked about that already is a pretty big business for us. So you can get a pretty good string [ph]. I mean we don’t break out by product group revenues, so we break it out by end market. There is a lot of color in the top-end growth drivers, but I think we’ll have to leave it to you to kind of make your own judgment on where you think these can go.

Dave Well

And, frankly David, in some cases, we just don’t want to give that kind of resolution. So some of these small. Zurko Labs Digital Power that’s just now starting to really takeoff, our D2 audio product is just starting to takeoff, automotive lithium ion cell balancing that’s still in the sampling stage right now, so there is a number of these that are in their [inaudible] that we think are really going to takeoff. But we’re deliberately not going to give you specific numbers in out top 10.

David Wu – GC Research Ltd

Okay, thanks.

Operator

And the next question comes from the line of Patrick Wang. Please proceed.

Mike – Evercore Partners

Hi guys. This is actually Mike [ph] on for Patrick. In the past you guys have talked about targeting server, I was hoping you can give us some key milestone we should look for and maybe when you think it’s going to impact on revenues?

Dave Well

I’m sorry, Mike. What was it that you were asking about?

Mike – Evercore Partners

Can you hear me now?

Dave Well

Yes.

Mike – Evercore Partners

In the past you guys talked about targeting server, I was hoping you guys could give us some key milestones and maybe when we can look for some revenues from server?

Dave Well

Right. Well, we do have some revenues now; we tend to not break it out specifically. But in our Computing market that we have up to this point included PC business, so notebooks, desktops and servers are in there. The servers was the smallest piece. That said, we’ve been investing a lot into products aimed at the server business, and in fact a lot of the requirements necessary for servers are not unlike where they’re necessary in other infrastructure products. So that’s one of the reasons that we’re putting that in that same bucket. So even though it’s a relatively smart part of our Computing market sales today, we think in the coming years, it’s going to have very rapid growth.

Mike – Evercore Partners

Are there any key milestones we can look for or when you think it could be more meaningful?

Dave Well

Well, I think as you start seeing new Intel generations coming along – I mentioned that for instance we’re on the CRB for some of the Intel products, that really gives us an advantage when customers start implementing their designs. We’ve got a fair amount of R&D going into new products, both analog and digital products that are aimed at infrastructure and server applications. So I don’t think you’re going to see a lot other fruits of those investments this year, but I think you’re going to start seeing them move the needle on sales next year.

Jonathan Kennedy

And as we – time goes on Mike, we do talk about various design wins and key milestones. We don’t put them out at that level of detail. We have hundreds of products and then 65 different product lines. So finding one that’s particularly material, one on its own is kind of difficult. But we do talk about it frequently. And as you hear us talk more about design wins that’s when you’ll know it’s happening. It’s not going to be something that’s going to be surprised one quarter from the next that Intersil had some major uptick in its sever market which is too broad, unlike something more smaller focused peers on that it might be meaningful for us, it’s just not going to be meaningful, so we just don’t devote as much time to that.

Mike – Evercore Partners

Sounds good. I appreciate it, guys. Thanks.

Dave Well

You’re welcome.

Operator

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

Craig Ellis – Caris & Company

Thanks for taking the follow-up. Jonathan, I just wanted to get a better sense of how you’re looking at where utilization is likely to be exiting the quarter and where inventories are. So are you saying that by the end of the first quarter, the inventories on a – on hand and in the channel will be at desired levels? And from that level if you get any kind of growth utilization would actually go up or do you think given the guidance that you’ve put out that you’re still going to have further inventory reduction to do beyond the first quarter?

Jonathan Kennedy

Well, it depends on where what the forecast looks like for Q2 and Q3, and we just don’t have enough color there. I would say we believe that we will be in a good position for inventory in Q1. But if we don’t see a snapback, then I’d say we’ll probably have some more room to move down and we wouldn’t see the margins improve until that. Margin created by volume manufacturing isn’t necessarily connected to very short-term revenue. So when you look at inventory at a product line basis and we build when we need it, at least that’s we try to do, and then not try to build too far ahead. We built ahead on purpose when we did our fab consolidation, and so we’re working that down. You can see a snapback in revenue which is in all likelihood going to be driven from a Computing and Consumer markets and as well in Industrial, it’s unlikely it’s going to be driven from the products we make in Palm Bay. So it’s not necessarily the case that we are going to have inventory go down as quickly as we would like it, just because of the nature of the parts that we make internally.

Craig Ellis – Caris & Company

And I’m sorry if you’ve mentioned it already, but what’s the value of the fab shutdown transition inventory that’s still on the books and where would you like it to be?

Jonathan Kennedy

I don’t have a break out for you on the sub segments of inventory, but there is probably an extra 10%, 15% of inventory like to work down to get us down to below a 100 years in the near-term, but that 100 days is part of the calculation is what is – what’s forward-looking revenue look like. And so if we have a snapback that would give us a little more opportunity to build, but it will not be a snapback in the areas that we build internally.

Dave Well

Craig, there was a question asked earlier, perhaps it was you that asked this when you were on the call earlier, why do we tend to seem to have a higher peak-to-trough delta than some of our peers, and in part of it is because we actually are trying to do the right thing for our business, dropping inventory on our books during the downturn, dropping the inventory out our distributors, but at the same time making sure that we have adequate inventory in the parts that we believe are likely to snapback quickly. So as you know, things that can be done with inventory to prop-up utilization, to prop-up sales, or using inventory at international distributors, if you are going to sell-in revenue recognition, we just don’t see fit to do these things. We think it’s best for us to manage our business to do the right things despite the fact it might actually cause a little bit higher peak-to-trough levels.

Craig Ellis – Caris & Company

A fair point, Dave. Thanks guys.

Operator

Ladies and gentlemen, this concludes the question-and-answer session for today’s call. I would now like to hand the call over to Mr. Dave Bell for closing remarks.

Dave Bell

Well, thank you for joining us today for Intersil’s fourth quarter earnings conference call. From today’s discussions, I hope that each of you can clearly see that Intersil is focused on our top 10 growth drivers, and that because of those growth drivers we’re positioned for exceptional growth in earnings leverage as these investments begin to bear fruit later on this year and even more so in 2013. We look forward to updating many of you on our progress at the Oppenheimer Semiconductor Summit on February 26th and on the first quarter conference call in late April. We will also be hosting our 2012 Investor and Analyst Day on May 8th in the Silicon Valley. Thank you and have a good evening.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.

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