Full Transcript of Intersil’s 3Q05 Conference Call - Prepared Remarks (ISIL)

| About: Intersil Corporation (ISIL)

Here’s the entire text of the prepared remarks from Intersil’s (ticker: ISIL) Q3 2005 conference call. The Q&A is in a separate article. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

[Rich Beyer, CEO, President]

Good afternoon and thank you for joining us on our third quarter earnings conference call. We are exceptionally pleased with the company's performance in Q3. For the fourth consecutive quarter, Intersil delivered solid financial results gaining steady and strong revenue and profit momentum. We exceeded our third quarter expectations and continue to experience ongoing success across many product families and many applications, further diversifying our revenue stream.

For the third quarter, the company achieved record highs in both revenues and earnings as a high performance analog company. We also had record bookings again in Q3. We posted revenues of $157.2 million, and non-GAAP earnings per share of $0.21, surpassing the high end of revenue expectations of $148.8 million and EPS of $0.17 for the quarter.

We experienced sequential revenue growth from all four of our end markets. Our computing market experienced the strongest quarter-over-quarter growth. Our consumer market continued to show rapid growth, driven by expanding portfolio of handheld and display product families. The communications and industrial markets also experienced solid sequential growth, surpassing our expectations. I will talk in more detail about the end markets after Dave reviews the financials.

We continued our strong cash generation, delivering over $35 million in cash flow from operations during the quarter. We exited the quarter with approximately $691 million in cash and marketable securities. At this time, I would like to turn the call over to Dave Zinsner, Intersil CFO and Vice President, who will provide a financial summary. After that, I will discuss results from each of our end markets and provide some comments on our fourth quarter outlook.

[Dave Zinsner CFO, VP]

Thanks, Rich. Let me begin with the income statement. As Rich mentioned, we reported $157.2 million in revenue for the third quarter of 2005, up 24% from the same period last year and up 13% from a very strong Q2. In the third quarter, our book-to-bill ratio was once again solidly above one. Based on the profile of our backlog, we require an order turn rate during the fourth quarter of a bit less than 40%.

On a GAAP basis, we reported net income of $27.2 million, or $0.19 diluted earnings per share. This compares to a net loss from continuing operations of $24.5 million or $0.17 per share for the same quarter last year, and net income of $17.3 million or $0.12 per share for the second quarter of 2005.

On a non-GAAP basis, excluding the amortization of acquisition-related costs and other unusual items, net income for the quarter was $30.8 million or $0.21 diluted earnings per share. This reflects an increase of 90% from $16.2 million or $0.11 per share from the same quarter last year and an increase of 43% from net income of $21.5 million or $0.15 per share for the second quarter of 2005.

We saw an increase in our gross margins for the quarter from 55.5% to 56.2%. The increase was driven by margin improvements in several product families by higher volumes in our internal FABs and by continued efforts across the company to reduce product costs. We expect margins to be in the range of 56% to 56.5% next quarter.

As a percentage of sales, third quarter R&D expenses were 17.8% of sales, down from 20.2% in Q2. In absolute dollars, R&D expenses were relatively flat with the second quarter and we expect them to remain at this level for the fourth quarter, as well.

Our SG&A expenses for the third quarter were 16% of sales, down from 17.7% in Q2. In absolute dollars, the increase of $600,000 from the prior quarter was due to higher incentive and commission costs result of our higher sales. For the upcoming quarter, we expect SG&A expenses to be similar to the third quarter levels on an absolute dollar basis.

As a result of our rapid sales growth, gross margin leverage and cost containment, our non-GAAP operating income for the third quarter was 22.4% of sales. This represents a 480 basis point improvement from the second quarter. We expect to see further operating income expansion next quarter, as we continue to see leverage on our increasing sales.

Our tax rate was 24% in the third quarter, and included a one-time true-up to bring our annual non-GAAP tax rate down to 24.5%. This true up did not have a material impact on our third quarter earning per share. We anticipate that the fourth quarter non-GAAP tax rate will be approximately 24.5% as well.

Now moving to the balance sheet. As Rich mentioned, for the third quarter we generated over $35 million in cash flow from operations. Year-to-date, we have generated approximately $100 million in operating cash flow. This already eclipses our cash flow for the entire year of 2004. For Q3, we exited the quarter with approximately $691 million in cash and marketable investments and no debt. We also continue to focus on our working capital.

Our inventory turns improved from 2.7 to 3 turns as we continue to work down end-of-life inventory, while continuing to improve our inventory position and our high growth product families. DSO increased slightly from 47 days in the second quarter to 48 days in the third quarter. Inventory levels at our distribution partners continue to be relatively low and therefore we remain confident that our sales are in line with end consumption for our products.

During the third quarter, we repurchased approximately $30.4 million or $1.5 million shares of our stock. As a result, our fully diluted weighted average share count declined for the third consecutive quarter to $144.1 million shares. Now I would like to turn the call back over to Rich.

[Rich Beyer, CEO, President]

Thanks, Dave. Intersil's success in 2005 is derived from our strategy and our investments to diversify into new and expanding markets, to broaden our product offerings and to increase our silicon content in major high-growth applications, while controlling our operating expenses. Going into 2006, we will stay this course. Many of the product families that we've introduced are in the very early stages of their life cycles. Therefore, we are very excited about the company's prospects for the next several years.

Now I would like to discuss our highlights from each of our end markets. Let me start with a few comments about high-end consumer. Our sales to the high-end consumer market represented approximately 28% of third quarter revenue. We continue to experience strong sequential growth from our handheld and display products and saw continued strength in optical storage. Specific to our handheld business, we secured design wins at another top tier handset manufacturer. We are now engaged with four of the top five OEMs in the world.

In addition to the ramping of existing designs and platforms, our families of handheld and display products are seeing increasing success rates in new applications in emerging markets. For example, we have secured several battery-charged design wins for Bluetooth headsets. These headsets are used in conjunction with some of the leading cell phones in the market today. Revenue from these products will ramp in Q4.

We have also launched our new family of highly differentiated low dropout regulators, which promise to further increase our content in handsets. Revenues from this new product family will also begin in Q4. Additionally in the quarter, we further diversified this part of our business by securing design wins with significant MP3 player OEMs and ODMs with our power management products and analog signal processing solutions.

In Q3, we began shipping our video line drivers in the consumer market, to enable customers to deliver high quality video signals from a handheld device to a display. This is a great example of how we are leveraging existing product families by deploying them into new areas and driving additional revenue expansion. With well over 250 customers, our handheld business is expected to show solid expansion in the fourth quarter and is poised for an exciting 2006.

For our display products, we are also seeing strong quarterly growth due to seasonality and our expanded content of programmable buffers, display power, DCPs and analog frontends. We have been successful by working closely with panel manufacturers to jointly develop new approaches to existing as well as new applications that deliver better resolution video and higher picture quality. During the quarter, we launched and secured design wins on two new display product families, ambient light sensors and white LED drivers.

As a result of our focus to expand our display portfolio, we continue to secure new design wins with top tier manufacturers on next generation displays, including LCD TVs, which are expected to grow significantly over the next year. Following a strong Q3 for our display products, we expect growth in Q4 and solid growth in 2006.

Moving on to the optical storage market. We are seeing strong demand in 2005 as expected. And we have maintained our leading market position. Through the first three quarters of 2005, our unit shipments of laser diode drivers is up more 30% of first three quarters of 2004. We are actively working with our customers to deliver the most cost-effective solutions, like our spread spectrum LDDs to keep pace with the market's current pricing and technology trends. For the fourth quarter, we expect unit demand of our LDDs will be at approximately the same level at Q3.

In total, the high-end consumer market is performing better than expectations. Our growth has been across numerous product families including battery chargers, display power, display buffers, DCPs, analog frontends and video line drivers. As we expand our portfolio and our silicon content within each targeted application, we expect to see continued exciting growth.

Now let me turn to the computing sector. Our sale to the computing market represented approximately 24% of revenue in the third quarter. In a quarter that is seasonally up, we saw robust growth in both our notebook and desktop businesses. We continue to serve both of these segments with innovative solutions based upon several of Intersil's proprietary process technologies and our advanced designs.

For desktop, we continue to be the market leader with approximately 50% share in core regulators. We are seeing our controllers with integrated drivers widely accepted in this market as these products offer real material cost advantages and area savings.
In the area of notebooks for the current platform, we continue to see steady strong growth. During the quarter, we saw significant acceptance of our Lithium ion battery chargers for notebooks. Furthermore, we saw additional revenue growth for our core power solutions based upon AMD's Athlon platforms.

Design wins continue to be strong on next-generation notebook platforms as well. In addition to the wins we've secured with major OEMs in North America and ODMs in Asia, we are now securing design wins with major Japanese notebook manufacturers.

In the computing space, we continue to be strongly positioned through our technical leadership. We continue to be the only major high performance analog company to offer both analog and digital controllers for the computing market. Going into Q4, due to seasonality, we expect computing to demonstrate additional growth.

Moving to the communications market. Our sales to this market represented 24% of third quarter revenue, a revenue increase sequentially driven by demand for our DSL products and our telecom and datacom infrastructure power management products. In the area of DSL we experienced healthy growth from Q2. Demand has been strong and we believe inventories in the channel remain lean. We are forecasting Q4 to be modestly down, due to normal seasonality in this area.

We are also seeing strong momentum in several other communication product families, particularly in our infrastructure power management products, such as low-noise controllers, bridge drivers, isolated power, and PWMs with integrated FETS. We have added numerous customers, including several large OEMs who are using our solutions in various products such as satellite set top boxes, monitoring equipment, and base stations. This progress is helping diversify our general-purpose revenue stream and should benefit Intersil during a typical seasonal uptake in the first half of 2006. For Q4, we expect our communications end market to be flat to slightly down basically due to seasonality.

And finally moving to the industrial market, our sales in the industrial market represented 24% for the third quarter. Within this segment, most of our product families experienced sequential growth. Over the past several quarters, we have secured numerous video design wins with KVM manufacturers in North America, Europe and Asia. Revenues from these customers started in Q3 and is expected to grow in Q4.

Other product families are also showing consistent growth. For example, our analog switches and muxes and our RS45 transceceivers achieved solid revenue growth in the quarter. Our general purpose products have proliferated in Q3 into a broad range of applications, such as electronic biking motors, medical displays, in-flight entertainment systems, power-over ethernet, displays for the retail environment and instrumentation equipment. For Q4 we expect our industrial end markets to be flat to slightly down again, largely due to normal seasonality.

Now let me turn to our outlook for the fourth quarter. Our broad-based market success has generated solid momentum as we headed into the fourth quarter. As a result, we expect Q4 revenue to grow between 5% and 7% from our already strong third quarter revenue of $157.2 million, which as you know, was up from a very strong quarter in Q2 where we grew sequentially by 9%. And in Q4 we expect non-GAAP earnings per share of approximately $0.23 to $0.24 per share, up from the record we just achieved of $0.21 in Q3.

Before we open it up to questions, I would like to summarize with the following points. We believe our third quarter results demonstrate the power of Intersil's strategy and our execution. Our balance sheet continues to be extremely solid. And our operation strategy enables us to consistently generate sizable cash flow from operations each quarter. The broad-based strength that we are experiencing should result in a powerful, long-term business model that will produce consistent results, increase our profitability, and enhance shareholder value.

With that, Dave, Mohan, Lou, Susan and I will be glad to answer any of your questions.

Proceed to reading the Q&A.