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Intersil Corporation (ISIL)

Q2 2007 Earnings Call

July 18, 2007 4:45 pm ET

Executives

Sanjay Arora - Director of IR

Rich Beyer - CEO

Dave Zinsner - VP and CFO

Dave Bell - COO

Analysts

Simona Jankowski - Goldman Sachs

Ross Seymore - Deutsche Bank

Michael McConnell - Pacific Crest Securities

Craig Hettenbach - Wachovia

Sumit Dhanda - Banc of America Securities

John Lau - Jefferies & Co

Michael Masdea - Credit Suisse

Romit Shah - Lehman Brothers

David Wu - Global Crown Capital

Tore Svanberg - Piper Jaffray

Cody Acree - Stifel Nicolaus

Steve Smigie - Raymond James

Joe Osha - Merrill Lynch

Sandeep Bashir - Morgan Stanley

Doug Freedman - Amtech Research

Shawn Webster - J.P. Morgan

Craig Ellis - Citigroup

Presentation

Operator

Good day ladies and gentlemen and welcome to Q2 2007 Intersil Corporation Earnings Call. My name is Antoine and I'll be your operator for today. At this time, all participants are on a listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. Sanjay Arora, Director of Investor Relations. Please proceed sir.

Sanjay Arora

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

In a few moments, they will deliver remarks on the second 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 second quarter on June 29th, 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 Relation's 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 August 1st.

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 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 pro forma or other financial measures that are not prepared according to Generally Accepted Accounting Principles. We use these non-GAAP measures, because we believe they provide useful information about the performance of our business and should be considered by investors in conjunction with GAAP measures that we also provide. You can find a reconciliation of non-GAAP to comparable GAAP measures on the Investor Relation's section of our website.

For those of you interested in learning more about Intersil at an upcoming investor event, we will be participating in Citigroup's Global Technology Conference on September 4th in New York City. 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 second quarter 2007 earnings conference call.

The second quarter was an exciting quarter for Intersil. The company achieved net revenue of $178.3 million, a 6% increase from the first quarter. And our non-GAAP EPS was $0.31, a 7% increase from the first quarter. We exceeded our revenue growth expectations due to stronger than expected demand for our computing and industrial products. Our bookings were a highlight for Intersil. For the second quarter in a row, we saw sequential growth in orders. Our book-to-bill was well above one, and orders improved as the quarter progressed. We are confident that Intersil is well positioned to achieve very solid growth in the second half of 2007. We continue to effectively balance our business among the four market segments we address. In Q2, each segment represented between 22% and 28% of revenues.

Intersil continues to make excellent strides in returning cash to shareholders. During the quarter, the company repurchased approximately $120 million or 3.9 million shares of its stock, under a previously announced stock repurchase program.

In addition, as a result of our strong continued positive cash flow and balance sheet position, in July the company's Board of Directors authorized and declared a quarterly dividend of $0.10 per share of common stock.

I am pleased to report that during the quarter, Intersil was recognized as one of the top 100 employers in electronic design. We are very proud of this achievement, as it reflects on our ability to attract, develop, challenge and retain top talent in the industry.

At this time I would like the turn the call over to Dave Zinsner, who will provide a financial summary. Dave?

Dave Zinsner

Thanks Rich. Let me begin with the income statement. As Rich stated, we reported $178.3 million in net revenue for the second quarter of 2007, a decrease of 5% from the same quarter last year, and an increase of 6% sequentially.

We closed the second quarter with a positive book-to-bill. As a result, based on the profile of our backlog, we required an order turn rate during the third quarter of slightly less than 40%.

On a GAAP basis, net income for the quarter was $31.2 million or $0.23 per diluted share, down 27.4% from $43 million or $0.30 per diluted share for the same quarter last year, and down 5.7% from net income of $33.1 million or $0.24 per diluted share, for the first quarter of 2007. The year-over-year drop is due to a one-time tax benefit that we realized in Q2 of last year.

Our GAAP tax rate was 23.9% for the second quarter, and we expect our third quarter GAAP tax rate to be approximately 24%. On a non-GAAP basis excluding the amortization of intangibles, stock-based compensation, and other unusual items, net income for the quarter was $42.4 million, down 3% from $43.7 million for the same quarter last year, and up 5.5% from net income of $40.2 million for the first quarter of 2007.

EPS for the second quarter was $0.31 per diluted share, up from $0.30 in the same quarter last year and up from $0.29 per diluted share in the first quarter of 2007.

Our non-GAAP gross margins this quarter were 57.9%, down from 58% last quarter. This 10 basis point decrease was driven by product mix, as our sales into the computing market increased at a faster rate than the other end markets.

As you know our computing products carry gross margins that are below the corporate average. This was partially offset by cost improvements in operations.

We expect product mix to put further pressure on gross margins, as our computing business is expected to be very strong in the second half of the year. However in early 2008, we expect to see gross margin improvement through continued cost reductions and an improving mix of unique, high-value product across several end markets.

As a percent of revenue, second quarter R&D expenses excluding equity compensation were 16.5%, up 20 basis points from 16.3% in the first quarter. In absolute dollars, R&D expenses were up $2.1 million from the prior quarter. The increase was driven primarily by our success in hiring design engineers and continued strength of our new product development engine.

As a percent of revenue, second quarter SG&A expenses, excluding equity compensation, were 14.4%, a 10 basis points decrease from 14.5% in the first quarter. In absolute dollars, SG&A expenses increased by $1.3 million, driven primarily by sales commissions on higher sales, higher marketing expenses and our success in hiring field sales and application engineers.

As we continue to grow over the second half of 2007, we expect to only modestly increase our operating expenses on an absolute dollar basis, specifically the higher design and field application engineers.

Non GAAP operating expenses should be up approximately $1 million to $2 million in the third quarter, but should decrease slightly as a percent of sales giving us further operating leverage next.

Our non-GAAP tax rate was 24.5% for the second quarter and we expect our third quarter non-GAAP tax rate to be approximately 24.5% as well.

Equity compensation was $12.8 million or 7% of revenue, up $3 million from last quarter as expected. You may remember that the company moved from quarterly grants to annual grants in April 2006. This change causes a spike in our equity compensation every second quarter for four years. For the third quarter, we expect equity compensation to decline to approximately $11 million.

Now, moving to the balance sheet. For the second quarter we generated more than $72 million in free cash flow and exited the quarter with approximately $667 million in cash and marketable investment. We used the free cash flow together with the cash inflow from the exercise of stock option to increase the rate of our stock repurchase program. This quarter we repurchased approximately $120 million or 3.9 million shares of our stock.

On an absolute dollar basis, inventory increased by $0.5 million from the first quarter, while our days of inventory decreased six days to 112 days. Looking forward, we expect our internal inventory to continue to decline in days over the next several quarters.

Inventory at our distribution partners declined this quarter, driven by a higher then expected demand in some product areas. As a result, our lead times have extended in these product areas. However, we have increased production at certain external partners and expect to bring lead times back to normal within the quarter. Days sales outstanding was 50 days, down from 54 days in the first quarter.

Net capital spending was $1.8 million and depreciation was $5 million for the second quarter. In the third quarter, we expect depreciation to be $5 million and capital spending to be approximately $5 million as well.

In summary, we are very pleased with the company’s financial performance in the second quarter. We saw sequential growth in bookings, revenue and earnings per share and increased our earnings faster than our revenue.

Now, I will turn the call over to Dave Bell who will provide highlights from each of our foreign markets. Dave?

Dave Bell

Thanks, Dave. Let me begin by talking briefly about a couple of focus items during my first quarter at Intersil. Considerable effort is being spent on refining of product strategy with an emphasis on creating value through unique high-performance products. It's already increased share in the general purpose market and we are deploying our R&D resources in the areas with a greatest growth potential.

One of our key strategies is to balance our portfolio between general purpose and ASSP products. I've also been spending considerable time working with our general managers and product marketing managers to refine our product strategies in ASSP markets as well.

And finally, I have been working with our sales organization to make sure that we are improving our relationships with major customers and we are getting paid for the full value of our products and services we deliver. Although the impact of these refinements won't be seen for several quarters, I'm very confident that Intersil is well positioned to continue gaining market share in both general purpose and ASSP products.

Let me now address our performance by market starting with the high-end consumer market. Revenue into the high-end consumer market represented approximately 28% of second quarter revenue. On an absolute dollar basis, revenues into the high-end consumer market decreased 6% year-over-year and increased 3% sequentially.

In handhelds, we experienced a single-digit sequential increase in Q2 due to normal seasonality. The handheld product families are expected to grow nicely in the third quarter, driven by normal seasonality and our strong design win momentum.

In the second quarter we introduced a new single-cell lithium ion charger solution further expanding our battery charger portfolio. This product offers a full feature set, including safety timer, appended dual mode protection, thermo guard wall protection and improved charge voltage accuracy. We expect this new product will sustain our battery charger leadership and build market share in the cellular phone and other handheld product markets.

In the LCD displays, we have experienced a single-digit sequential increase as expected. We predict our LCD display revenue will increase sequentially driven by normal seasonality and unit volume growth.

During the quarter we started sampling our next generation of highly integrated power solutions for LCD panels that combine power and analog signal processing functions into a single device. Our new solution offers significant size and cost benefits over currently available solutions. These parts were developed in conjunction with a major panel maker and are designed to work with the latest LCD panel technology that will be going into production later this year.

In optical storage, we experienced a single digit-sequential increase as optical drive manufacturers started building optical drives ahead of Q3 PC demand. During the quarter we sampled the worlds smallest optical power measurement IC and a slim and ultra slim blue drives. This product has already been sampled to five of the top optical drive manufacturers. We also demonstrated and sampled the world’s only programmable photo detector IC, which is supposed to be the smallest footprint in the world and is critical for slim drivers.

In addition, we sampled our latest two new blue laser diode drivers, one that targets writers and the other designed for players, demonstrating our commitment to this market. In previous generation lead read laser drivers Intersil only offered laser diode drivers ICs. In the emerging blue drive market Intersil now has a market potential of up to four distinct parts, which increase our dollar potential per drive.

Looking ahead to the third quarter, we expect revenues in our consumer segment be up sequentially driven by normal seasonality and a leadership position in handhelds and LCD displays.

Now, lets take a look at out computing business. Revenue in the computing market represented approximately 25% of second quarter revenue. On an absolute dollar basis, revenues in the computing markets increased 3% year-over-year, and 16% sequentially, as the industry came out of the inventory correction and we capitalized on our strong leadership position in both desktops and notebooks.

In desktops and servers, we saw a sequential growth in a seasonally down quarter. During the quarter, we expanded our core portfolio with the introduction of a highly integrated power solution for AMD's Phenom processors for desktops and Opteron Barcelona processors for servers. This new power management product helps us maintain our leadership position in core power. We have already won several key designs in the AMD server space with this solution.

In notebooks, Intel's much anticipated platform transition from Napa to Santa Rosa began in Q2. As we had mentioned in our last earnings call, we supplied a core power regulator, the battery charger, and a graphics processor regulator for the Napa platform. In addition to these, we expanded our footprint in the Santa Rosa platform to include the system regulator, I/O controllers, memory and graphics controllers and new battery charger ICs. Our increased dollar content and strong design win momentum in Santa Rosa, showed strong sequential growth in Q2. Growth was across all products, as our expanded product portfolio continues to gain traction.

We are currently sampling core power solutions for Intel's next generation Montevina notebook platform, as we continue to build on a relationship of our leadership position in Intel notebooks.

Our investment in AMD solutions for notebooks has also begun to pay off as a number of design wins in the Thuriam platform went into production in the second quarter. We both are seeing high interest in our solutions for the next generation AMD Griffin platform.

Looking ahead to Q3, we expect Intersil revenues in the computing segment to outgrow the market, driven by a rapid transition to the new Intel Santa Rosa platform.

Moving now to the industrial market; revenue into the industrial market represented approximately 24% of second quarter revenue. On an absolute dollar basis, revenue into the industrial market decreased 6% year-over-year and increased 9% sequentially as we came out of the inventory corrections and our strong design wins in the last year started generating revenue.

The strength in Q2 was driven by several of our product families, including RS-45 interface, Voltage Monitors, Low-Speed Data Converters and Voltage References.

During the quarter, we launched the worlds' lowest noise and distortion Single-Supply Op Amps. These low levels of noise and distortion have previously been unattainable from existing [analog] suppliers from a single power supply rail. These products highlight Intersil's enhanced performance compared to any products available from other analog competitors for the accurate amplification of small signals, typically seen in the industrial and automotive markets.

Continuing Intersil's leadership in digitally controlled potentiometers, known as DCPs', we introduced a new family, of 256 tapped products which offer performance improvements over existing products in operation up to 125 degree Celsius for the first time. Looking ahead to Q3, we expect revenue to be flat from the second quarter.

And finally moving to the communications market. Revenues into the communications market represented 23% of second quarter revenue. On an absolute dollar basis, revenues into the communications market decreased 11% year-over-year and decreased 1% sequentially as expected, due to softness in several segments of the communications infrastructure market.

During the quarter we introduced the world's first dual port VDSL2 Line Driver in a tiny 4/5 millimeter QFN package. This product leverages Intersil's internal fab process and design experience in DSL to provide a smallest footprint, highest density line driver solution for VDSL2.

VDSL2 is a 100 megabit per second broadband technology that enhances triple play services, including IPTV service over phone lines. So ISL1539 is currently being used in tier-one DSLAM equipment, and now is shipping for the largest IPTV service being deployed in North America.

We continue to invest in processes and new products that demonstrate Intersil's leadership in low power, high performance line drivers for wireline communications. Leveraging our incumbent status in the DSL line driver segment, we are providing complete power management solutions to DSL vendors, that combine DSL line drivers, along with total power distribution products. This packaged cell has allowed us to increase our revenue content at our top DSL customers.

In the high reliability space, we continue to build on our leadership position in communication satellites. Recently, we won several design wins in the major Globalstar 2 and Spacebus 4000 platforms. These design wins go into production later this year, and throughout 2008.

We continue to expand our presence in the communications infrastructure market, by winning key designs in enterprise network switches with our family of value-added voltage sequencers. These wins will contribute to double-digit growth in subsequent quarters for the sequencer product line.

Looking ahead to Q3, we expect the communications segment to be down modestly from the second quarter. Now I will turn the call back over to Rich, who will discuss our Q3 outlook.

Rich Beyer

Thanks Dave. Now let's turn to our outlook for the third quarter of 2007. For the third quarter, we expect continued strong revenue and earnings growth. We are entering a seasonally strong quarter for the computing and consumer markets. This, together with our strong penetration of our products in these markets, is expected to drive revenue growth of 6% to 8% from the second quarter.

We expect GAAP earnings per diluted share of approximately $0.27, and non-GAAP earnings per diluted share of approximately $0.34. Before we open it up for questions, I’d like to summarize with these key points.

We are pleased with our strong revenue growth in Q2 and now expect to build on that momentum as we move through the rest of the year. We are gaining market share and increasing silicon content in many areas, including LCD displays, handhelds, video and notebooks. And we are securing a steady stream of design wins, with our ever expanding general purpose product portfolio.

We also continue to drive earnings per share through revenue growth, deliberate manufacturing and cost management strategies, strategic tax planning, and an aggressive share repurchase program.

We have created a strategy, culture and infrastructure for sustainable success. But with the recent recognition as one of the top 100 employers in electronic design, we are confident in our ability to attract and retain the key talent that should enable Intersil to continue to outperform the high performance analog market.

With that David Bell, David Zinsner 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 Simona Jankowski. Please proceed.

Simona Jankowski - Goldman Sachs

Hi, thank you very much. Dave, if I heard you correctly, I think you said that your turns requirement for the quarter is going to be less than 40% and I think your normal turns are about 45%. So, just curious why you think turns are going to be lower and conversely why you wouldn't guide higher?

Dave Zinsner

Well, two reasons. One, our lead times are stretching out a little bit, so that is causing the turns to be a little less. And then typically when we do start to move into the upturn in the market, we generally are on the lower-end of the turns requirement and usually in the weaker part of the market we're on the higher end of 45%.

Simona Jankowski - Goldman Sachs

Okay. Thank you. Then second question is can you elaborate on which particular areas you saw some stretching of lead time? And also, some of the strength we've seeing in the computing market in Q2, and it looks like in Q3 it seems have been really well above the normal seasonality.

At what point do we start worrying about potential stock piling in the market and have you seen any signs of that? And maybe related to that, how orderly has the Santa Rosa transition been in terms of the inventory?

Rich Beyer

Simona, this is Rich. The areas that we saw lead times move out are in fact in the computing space in domains both desktops and in notebooks, very little outside of that domain. There has been a very rapid transition in notebook space from Napa, which was going quite strong until or well into Q2, and then it has seen a real acceleration in Santa Rosa happening in the later part of the quarter and that continues into this quarter.

We are obviously measuring very carefully our distributor's inventories around the world and obviously in the computing space that's largely focused in Taiwan and China. So, we know the inventories of our distributors who are also have pretty frequent conversations with both our PC OEMs and our ODMs. We do not believe as a result of that that there is any stock piling going on at the moment in the computing space as it relates to our products.

Simona Jankowski - Goldman Sachs

Thank you, Rich, and just one last question if I may on your design wins. You commented at your Analyst Day that the design wins in ’06 were about 60% ahead of the prior year. Can you comment on your design wins for the first half of this year, compared to the same period of last year?

Rich Beyer

We have seen continued very, very strong growth in design win momentum. We've set a pretty aggressive target and we are exceeding that target. We had anticipated growing on the order of 20% to 25% over last year's very healthy rate and we are at the moment growing about 30% for the entire first half of the year and it was very solid in Q1, and it was very solid again in Q2.

Simona Jankowski - Goldman Sachs

Right. Thank you.

Operator

Your next question comes from the line of Ross Seymore with Deutsche Bank. Please proceed.

Ross Seymore - Deutsche Bank

Hi guys, question on the forward guidance. It's useful to have the segment breakdown. It looks like almost the growth, if not all of it coming from consumer and computing. So, the first question is if you could go into little bit of the specific drivers there in notebook, desktop and may be handheld LCD, et cetera.

And then the follow-up question would be, Dave, could you give a little clarification on what you meant by the gross margin continuing to be under mixed related pressure? Any sort of numbers around that will be helpful.

Dave Bell

Yeah. Ross, this is Dave Bell. Let me start off with the first half of the question. I can give you a little bit of color commentary on what’s driving our growth in, as you pointed out computer and consumer. Part of it is the seasonality. Obviously, you expect to see greater growth in the computing segment and in our consumer segment with building going for back-to-school and for the holiday season coming up. But, I think it's also, as Rich alluded to earlier, certainly in the computing space. We've had very good design win momentum both in desktops and notebook computers. Also the transition to the Santa Rosa platform has given us more opportunities for parts going into that. Said in another way, we have more parts that are on average going into Santa Rosa platform notebooks than we did in Napa.

And in general, just the computing businesses, is really strong at this point. So, it’s a combination of factors, seasonality, our design win momentum, more parts per notebook computer going on that are going to help drive our computing growth.

In the consumer space it’s a number of factors as well. Again seasonality, but I would just point across the board to excellent design win momentum. We are getting excellent design wins in battery charger products, in LCD panels and so forth. So, I think it's fairly broad based in the consumer product category as well aided by the seasonality.

Dave Zinsner

And Ross, to answer to your other question, I think if you run the math and you run a fairly strong computing growth for the third quarter. It runs around 57.2% to 57.5% somewhere in that range?

Ross Seymore - Deutsche Bank

Great. Thank you.

Operator

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

Michael McConnell - Pacific Crest Securities

Thanks Dave, just following up on the gross margin guidance that you just alluded to for Q3. If we look at the trends here with consumer and PCs really being a majority of the growth and industrial seasonality kind of past this now, are you fairly confident that they can hold that gross margin at that 57% or could we, or is there any internal concerns about degradation?

Dave Zinsner

We are not concerned that it would degrade any further. But obviously if it did, it would be a sizable increase in computing, which would in operating margins grow pretty significantly.

Michael McConnell - Pacific Crest Securities

Is there anything else sort of offsetting that that we can think about that could, behind that confidence that it won’t go below 57%?

Rich Beyer

Yeah. We have – Michael, this Rich Bayer, we've got a series of activities with continued improvement in yields across corporation and various type of cost production activity that are constant and we put a lot of energy on those things. And so, yes there are lower gross margins as we've been quite candid in the computing space in general, but many of our other products lines continuing to show modest improvements in their own gross margins. So we're comfortable as David just said that the margins could deteriorate from that 58ish of level that they are at to some where in the low 57, but we're confident its not likely to drop below that.

Michael McConnell - Pacific Crest Securities

And then looking at the front half of next year would it be mostly industrial seasonality coming back that would drive the expansion from the levels will be at in Q3 and Q4?

Dave Zinsner

Beginning next year is going to be a couple of things; one that you just alluded to is that part of the normal seasonality suggest that industrial market is a little bit stronger, the Com infrastructure market is a little bit stronger from us.

But we're also taking a number of steps to continue to improve as Dave Bell indicated is focusing a lot of energy on expanding the portfolio of general purpose product families. We're in fact working diligently to extract full value from all of our products and our customers and so we see a strengthening of pricing across a number of markets, we see the return of strength seasonally and industrial in Com and products that we have been introducing already that are being designed in that are general purpose in nature that have higher gross margin. So we're confident that beginning in the first half of 2008 workflow return to sequentially expansion in our gross margins.

Michael McConnell - Pacific Crest Securities

Thank you.

Operator

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

Craig Hettenbach - Wachovia

Yes thank you. Rich in the notebook power entrant space, Intersil had little presence a few years ago. You saw some uptick with the Napa and now Santa Rosa seems to be expanding even further here. Can you just walk us through some of the execution on the sales front and then just from the product standpoint what's giving you the momentum in the notebook power space?

Dave Bell

Yes Craig this is Dave Bell, maybe I will take a stab at it and Rich can chain in a little bit later on. But as I alluded in the introductory comments, one of the things that's happening is I think that we are building closer relationships with major manufactures of notebook computers, and really there I am referring to the OEM manufacturers, the name brand companies, as well as the ODMs that are making the products in Taiwan and China. But as well, there are more opportunities as we expand our product portfolio to, kind of just expanding the footprint within these notebooks. Whereas we might have had three or four product opportunities maximum within a Napa platform product, We've got several more opportunities for parts within the Santa Rosa platform. So that's giving us some expansion there as well.

And then just I think great design win momentum. I think that our sales force, combined with leading edge parts to sell have been doing an excellent job at winning sockets in that market.

Craig Hettenbach - Wachovia

Greats And if I could ask a follow-up. Rich, at this point in the cycle, coming out of an inventory driven down cycle, anything that surprised you here that you are seeing differently than we have seen in prior cycles?

Rich Beyer

I think the main thing that has surprised us in a positive way, has been the improvement in the computing business in the second quarter. We typically don't expect to see that happen. The computing quarter is typically relatively soft and it only begins to gain momentum in the third quarter and then continue to improve in the fourth quarter. The fact that we actually grew our computing business in the second quarter, and the fact that the distributor's inventory of these parts and our checks with our customers suggest that the products are really being consumed, suggest that there is a pretty healthy return in the computing space. So, beyond that, I think it's playing out well. I don't think we are seeing any kind of stockpiling. I don't think there's any kind of negative indications at all in the second quarter that cause us concern.

Craig Hettenbach - Wachovia

Great. Thank you.

Operator

Your next question comes from the line of Sumit Dhanda with Banc of America Securities. Please Proceed.

Sumit Dhanda - Banc of America Securities

Yes, hi Dave I had a question for you. As you see the improvement of gross margins commencing in 2008 for the reasons that you cited. Ultimately, is the goal to be able to get back to that target filed as we talked about before, you know -- may be if I am researching right. And if so, what's sort of the timeframe you are looking at, or would it allow you to get back to that range?

Dave Bell

Okay. I think I heard what you said. Yeah, we are still committed to 58 to 62%, our model has not changed at all. This is just a temporary mix issue with regard to seasonality and some traction, but we believe we are going to have a continued path towards the middle to high end of the model. When that happens, it's difficult and we rarely throw out a date, just because things like seasonality does play into it. But we would expect starting at the beginning of next year that we would start to see it passed or it's getting towards that.

Sumit Dhanda - Banc of America Securities

The other question I had on gross margin. I understand the mix arguments were first in [Gainesville]. No benefit from that cost leverage type of income though?

Dave Bell

Well absolutely we had benefit this quarter. When computing can grow at 16% that is going to affect the mix. But offsetting that, in fact it would have eroded a little bit, had it not been for the fact that we had good improvements on the operations side, which lifted it back towards the 58% this quarter?

Sumit Dhanda - Banc of America Securities

On a separate note, any reasons why the free cash flow was not such a big [site].

Dave Zinsner

Well we did have one, one item within free cash flow. We got a refund from the IRS or about $10 million, that was associated with the sale of our wireless business, and it took a couple of years to kind of make its way through the IRS and through the governments, and so we just got that payment in the second quarter.

Other than that, it was just normal free cash flow management. I would say that we did a particularly good job on working capital this quarter. Inventory was essentially flat and accounts receivable was down about $6 million. So that helped out a lot as well.

Sumit Dhanda - Banc of America Securities

The last question, the [DSL] run rate of $11 million starting [would be], where to model that fairly flat going forward?

Dave Zinsner

It should come down again in the fourth quarter, and then it dig down again in the first quarter, and then we'll have again that's spike in the second quarter of next year where it will come back up. But I would say what you'll see on annualized basis, is it will come down about 5% to 6% year-over-year this year and you should probably see about 5% decline again year-over-year next year as we kind of worked off [Zicor] options expense that we had.

Sumit Dhanda - Banc of America Securities

Very helpful. Thank you.

Dave Zinsner

Thank you.

Operator

Your next question comes from the line of John Lau with Jefferies & Co. Please proceed.

John Lau - Jefferies & Co

Great. Thanks. I wanted to follow-up on your lead time commentary, and you said that PCs were very strong. I was wondering, can you support the full requirement in the computing area with reasonable lead time as you go into the third quarter. And the second question I had is, what can be done to really avoid the cyclical tendency to double book as these lead times stretches? Is there really a way to better stage that or is it unavoidable because in this particular case it's just a completely new platform. Thank you.

Rich Beyer

John. This is Rich. When we saw the demand start to pick up, we immediately began to work with our suppliers both for wafers and for back-end capacity. And as Dave indicated in his prepared remarks, we believe we will get the lead times back to a normal range before the end of the third quarter.

And the issue of, is there anything that can be done to avoid double booking. When you get a rapid platform change like we have seen from Napa to Santa Rosa, often the ODMs basically are somewhat at the mercy of some of the major players like Intel to determine when it is that they can and should make those changes.

So often they make those changes in one product well within lead times. That’s the nature of the industry and certainly that PC sector. What we try to do is, to work very, very closely with our customers as the demand picks up rapidly like that, to ensure that they are placing orders on us for the timeframes that they need and the volumes that they need and that’s the best that we can do.

I wish I could say that there was a way to magically eliminate double booking, but it's clearly not a possibility. And whenever there is this kind of rapid change from a platform to another very high volume platform, there is always that risk. We think that we have well comprehended that in the guidance that we have provided today.

John Lau - Jefferies & Co

Okay. But in terms of the transition that’s the best inputs that you've had so far for that transition, as they switch over from Napa to the Santa Rosa, and taking I guess into account the fact that the Napa could be coming down a little bit faster as the Santa Rosa goes up. Is that correct?

Rich Beyer

That’s absolutely fair.

John Lau - Jefferies & Co

Alright, thank you.

Operator

Your next question comes from Micheal Matthew with Credit Suisse. Please proceed.

Michael Masdea - Credit Suisse

Yeah, thanks a lot. Just a couple of quick housekeeping and then another question. Could you guys say what actual lead times are? I know that you've given some commentary on it. What the actual lead time is right now?

Dave Zinsner

Our average is seven to eight weeks. So, obviously there are some that are higher than that, but in the computing space than rather…

Michael Masdea - Credit Suisse

Can you get them downish to that 5ish range I think by the end of the quarter?

Dave Zinsner

Yeah. Five or six weeks is normally where we were on.

Michael Masdea - Credit Suisse

And utilization right now?

Dave Zinsner

Internally it's at about 65%, same as the first quarter really.

Michael Masdea - Credit Suisse

Right, great. And then the general purpose products percentage in the quarter, did you say that…

Dave Zinsner

General was 40%.

Michael Masdea - Credit Suisse

Great. And then just on the order shrink you guys talked about, it's clear that you are seeing those kinds of dynamics in the PC and industries areas that you talked about. But, it’s a little bit different than what some of the analog companies you are talking about broadly. Would you say that you saw that sort of healthy linearity and you are continuing order strength improvement across the board or just in those two areas?

Rich Beyer

Michael, it's Rich. It was pretty strong. Our business has been pretty strong. I don’t want to say in every single segment of the business, but it's significantly broader than simply the computing space. We've seen nice healthy business in our [AMS] business, in our consumer businesses. We did indicate the industrial is okay. So, we’ve just seen it very healthy, that’s why we are very excited about the prospects for the second half of the year. This is pretty broad based increase in demand for our products.

Michael Masdea - Credit Suisse

And then may be just a quick one for Dave Bell. I guess it's been a little while now seeing the lot. Help us understand compared to when you first went in sort of what surprised you either on the up side in terms of where you stronger than you thought or you think the real opportunities are that make a lot more hay than it’s already been done there.

Dave Bell

Well, if you it a quarter a while. Yeah.

Michael Masdea - Credit Suisse

Long time, in our world.

Dave Bell

Still learning my way around here little bit. But, no obviously I have a far better feeling at this point than I did on the last conference call when I had been here a couple of weeks. I'm very impressed with the ability of this company to rapidly respond to new market opportunities. In particular, in our ASSP business I am very impressed with the ability of our marketing guys to identify new market trends, and to capitalize on this very quickly and get products to market very quickly. So, I think that's something that I am very impressed by and I would expect you will continue to capitalize on its strength as the consumer business continues to grow and as you know a lot of the consumer opportunities turn to ASSP opportunities.

Partly what I am doing, though as you know is well, is trying to expand our general purpose portfolio. Right now it's about 40% of our business, as Dave Zinsner just pointed out. I think there are lots of opportunities to grow our general purpose business, not at the expense of ASSPs. I expect the ASSPs to continue doing what they are doing. But, I think to grow the general purpose business at least as rapidly and I think leverage some of the skills that we have developed in the ASSP business and apply those to the general purpose market.

There are lot of product families today that we do not participate in at any significant degree, so it's kind of ripe area in my opinion and we have the benefit of picking and choosing what areas we decided to play our resources in. So, I think there are lots of opportunities there to grow that business.

Michael Masdea - Credit Suisse

Right, thanks lot guys.

Dave Bell

You are welcome.

Operator

Your next question comes from line of Romit Shah with Lehman Brothers. Please proceed.

Romit Shah - Lehman Brothers

Yeah, thanks a lot. Rich, just back to your comment on computing, and why just you may be a little unique is. I guess that the earlier build you guys have seen this year and is that part of the reason why we're not seeing a sharp acceleration in revenue growth in Q3 versus Q2 or is more conservative on your part given the fact that we're still in July?

Rich Beyer

Well the transition from the Napa platform to the Santa Rosa platform has taken place quickly and to be candid I think the market is still sorting out how many Napa platforms are going to be and how many Santa Rosa platforms there are going to be and we are working with our customers on that, we want to be sure that we are in the position to supply either, whichever they want.

So we had to come up with an estimate of what we think is going to be the mix, as Dave Bell pointed out we have less content on a Napa platform, we have more content on the Santa Rosa platform. We have the model what we think is going to be like if there are more Santa Rosa platforms there is a little bit of upside to the numbers. If it’s the balance that we have it’s a little bit of, it's likely to come into where we are.

Also we do believe there is little bit of double booking that’s taking place and so we are trying to factor that into our overall assessment. Suffice to say that the order pattern that we have seen throughout the course of Q2 was strong and we pointed out that it continued to get strong as Q2 went along. So we think we are in a reasonably healthy position and it did support the guidance that we just provided of 6% to 8% for the company for Q3.

Romit Shah - Lehman Brothers

And Rich, you said that the double booking is confined solely to the computing space or..

Rich Beyer

Yes, I think so Rom. I think it's only in the computing space.

Romit Shah - Lehman Brothers

Okay.

Rich Beyer

All the other bookings seem to be quite solid, very consistent with the demand profile that the customers have.

Romit Shah - Lehman Brothers

Okay, just a question on gross margin. Dave, your old company would say that the growth you are seeing in computing is really profitless growth and you are granted to having grown it in a while, but if you look at what Maxim is doing coming down in gross margins. Are you guys asking yourself is 60% is a realistic target given your mix of business, maybe the number is closer to 58 to maximize revenue growth in ROIC or do you think that 60% is a realistic number?

Dave Bell

Well, Rom, yeah, David Bell. It’s difficult to make predictions way on the future as Dave Zinsner was saying earlier. But I think it is very realistic, obviously we have got some pressure during the second half of this year where computing is growing very rapidly and we are being affected by that mix with the product category where everybody understands that the gross margins are somewhat below our average. So, I don’t think it’s a surprise to us, nor it should be a surprise to you that we have some gross margin pressure for the second half of 2007.

Looking into the future into 2008, is it possible to achieve 60% gross margins still participating in the computing business? Absolutely, I think that there are opportunities for improving our margins throughout the company and possibly even in the computing spaces well. So, I think that’s absolutely an achievable goal. To give you more specifics on exactly what the breakdown of the products and customers and so forth to be out there of course would be difficult to do, but I am very confident that we can do that.

Rich Beyer

Hey Rom this is Rich, let me just comment on the suggestion that some people believe that the computing space has its growth, we absolutely disagree with that. This is a very profitable business for us. The fact that the gross margins are lower than the corporate average does not mean that it is not a profitable business for us. And so when that business grows healthily as we expect it to do in the second half of the year, we absolutely expect to contribute very nicely to the growth and operating profits. We model each of our product family and understand the profit and loss contributions of those product families and I can assure you computing is a very healthy profitable business for us because the investments necessary, because of the structure, the nature of this marketplace. So for us this is not at all an area where profits are not achieved and quite healthy.

Dave Bell

Yeah Ron, and let me make sure I am adding one last thing here to it, I think this is a really important topic. The things that I talked about in my introductory comments about working with our general managers and increasing the value of our products we are putting in the pipeline. I think that that ultimately is going to have a big impact on gross margins and as well making sure that our sales organization and the pricing discipline that we have here in the factory, I think that that can have an impact as well. And I think that those things can be a lift in the tide that is going to raise all the product lines. I believe that computing will continue to be lower than the company average, but on the other hand, I think that there are opportunities very realistically for all of the areas to see some gross margin improvement. And I am very confident that that can be done.

Romit Shah - Lehman Brothers

Great. Yeah thanks a lot. Just one clarification on GAAP gross margins, Dave, roughly 56.8, 56.9% of done right here?

Dave Zinsner

I had…

Romit Shah - Lehman Brothers

I am sorry.

Dave Zinsner

Hold on. I don't have it right now in front of me.

Romit Shah - Lehman Brothers

57.2% to 57.9% GAAP.

Dave Zinsner

Were you saying for Q3?

Romit Shah - Lehman Brothers

Yeah for Q3.

Dave Zinsner

Yeah, that's about right.

Romit Shah - Lehman Brothers

High 56%?

Dave Zinsner

Correct.

Romit Shah - Lehman Brothers

Okay. Thank you.

Operator

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

David Wu - Global Crown Capital

I need some help and some clarification. On the computing side, Rich, all the surprise on the upside came from the notebook side of the house or was the desktop side contributing as well? The reason I asked that question is because yesterday obviously, the microprocessor king reported and they had a surprisingly strong desktop business for a second quarter. And I just wonder whether the market this year was somewhat extraordinary and that in the Q2 results we had actual growth in desktops?

Rich Beyer

David, you are absolutely right. We did see growth in desktop as well as notebooks in the quarter and exactly as you pointed out, that is very positively abnormal. So yes, the surprise upside, we expected both desktops and notebooks, desktops to be down, notebooks to be flat slightly down, and in fact both were up and both are anticipated to be up strongly in Q3.

David Wu - Global Crown Capital

Rich, the other thing I was wondering is that your business on desktop has been more, shall we say, commoditized than the notebook side. Are you in a position to really trim some of the business aback as demand is so strong and you don't have to take all the orders there on the table and therefore within the computing group not only do we get a richer mix as Santa Rosa rolls out, but you also have a, shall we say more selective picking of the desktop business as we move in the second half.

Rich Beyer

Well these are ASSP parts David. The customers don’t have a choice. If we've designed them then we really have an obligation to the corporation to meet their needs. What we can do in an environment like this is, we are extremely judicious about price reductions. So suffice it to say that in market conditions like this, there is much less price pressure on us to reduce prices, but to literally walk away from customers who designed us in, its not part of our mantra, it's not something that we would do. But we do think that by virtue of price management, we can continue to show improvements in the gross margins of our computing products.

David Wu - Global Crown Capital

May I just stretch, I know we don’t talk about Q4, but if the second quarter is in a quirk this year, usually Q4 is also a strong quarter for the computing business. And I guess consumer business ought to have the best part of the year late third quarter and early fourth quarter. Would that pattern be similar in a year like this?

Rich Beyer

Certainly from where we sit today, we expect that we will show continued growth in the revenue stream of the Corporation in the second half of the year. It remains to be seen whether it represents higher sequential growth in Q4 and Q3, that’s typically not the case for us. Typically a growth quarter, but a lower rate of growth given the quirkiness to use your words of the computing space in Q2, it's difficult to project. But we are confident that we are going to see nice healthy growth in Q4 as well.

David Wu - Global Crown Capital

Rich, the move towards high definition television or the associated products related to that. When do you think we'll see an impact on the optical drive business really? Would we see it by the end of this year or we're really too early to think about that, it should be in '08 situation?

Rich Beyer

We are seeing a modest upset, which what we hoped for in the Blue-Ray and HD product families. But at the moment it's quite modest, Q3 will be minimal, Q4 it’s a little bit too early to tell. But our customers have told us that 2008 is the year in which it will start to kick in. So we are not modeling that it's going to appreciably contribute in the later half of this year, but we are expecting that that'll be a nice healthy growth driver for the corporation in '08 and '09.

David Wu - Global Crown Capital

Well thank you very much. Great quarter.

Rich Beyer

Thank you.

Operator

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

Tore Svanberg - Piper Jaffray

Yes good afternoon. First of all, can you talk a little bit about pricing especially in your computing business? Is pricing pretty where you would expect it to be or is it more or less competitive?

Rich Beyer

It's where we expected it to be Tore. We do not see any degradation in pricing in Q2 versus Q1, and we anticipate any significant price erosion in Q3.

Tore Svanberg - Piper Jaffray

Great, and you talked about Q3 demanding broad based, yet industrial and communications will not grow for you. Is this just purely seasonality or is there anything else going on?

Rich Beyer

Industrial is more seasonality and in the communications it’s a little bit lumpy. We don’t like lumpiness but in some of the markets, DSL sometimes, it's a little bit stronger purchases and down a little bit. We expect that would be down slightly in Q3. Sometimes the space, satellites communication, satellites are lumpy and so forth. So, the communications is associated with a couple of those different markets. Current estimates are that they will be off a bit. There is nothing to read into that about anything over the long-term.

And industrial, it just looks we had a decent growth in the most recent quarter. We expect that at best we will get a tiny bit more growth in that area in Q3.

Tore Svanberg - Piper Jaffray

Great, last question for Dave Bell. You've had these content increases in the notebook market. Could you also dissect a little bit your TV business? How does the content look today and how do you expect that to progress in both this year and '08?

Dave Bell

Sure. Well, the most obvious thing that we have growth and it's in the LCD display panels. We continue to expand our portfolio of products there. We have some major new developments. One that I alluded to were we have a partnership with a major panel manufacturer. So, I think in the LCD display area, that certainly is an area of significant business for us right now and I expect that to grow nicely during the coming quarters.

There are other opportunities as well. Things such as backlighting were we have had some backlighting parts, more for smaller displays, but I think there are opportunities for us in notebook size panels, as well as larger displays as well going forward. And I think in general power management there are opportunities of video circuits and so forth. That obviously is an opportunity for us as well.

So, I think there are lots of areas where we can potentially see some growth. Predominantly, right now though ,it's been in the LCD panel area where we have enjoyed revenue from the TV business.

Tore Svanberg - Piper Jaffray

Great. Thank you very much.

Dave Bell

You’re welcome.

Operator

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

Cody Acree - Stifel Nicolaus

Thanks guys. Rich, can we go back to the lead times and sort of do this for one more second. You did mention you took somewhat of a haircut in your guidance. Can you give any granularity as to how much of a haircut you took in the computing bookings to reach your 6% to 8% growth?

Rich Beyer

Well, I don’t want to get into any level of granularity, Cody. I’m just saying that as we looked at the bookings and the strength of the bookings in the computing space, we are working very diligently to meet that demand. But, we have factored in that some of the demand is associated with overly zealous ordering on the part of some of the customers. But, I think it’s fair to say that we have taken a modestly conservative position on that from the standpoint of our guidance and we have taken a more aggressive position on that from the standpoint of getting products to be able to deliver to the customers.

So, we want to make sure we satisfy the customer's need. On the other hand we do know that when double booking takes place, in fact there is some going on as you begin to catch up some of that drips off in to the future. And so, I think we have been aggressive in making sure we get the products staged, because if they are not consumed in Q3 they will be consumed in Q4. But, our guidance reflects certain amount of conservatism in that regard.

Cody Acree - Stifel Nicolaus

All right. Great, Rich. And then as you obviously have a supply chain that’s allowing you to expect lead times to come back, your discussions with those same customers. Have you've been able to get them comfortable that you are going to be able to meet supplies so that we are not talking about this kind of having effective lead times in order backlog that was just not quite sure through the end of the year?

Dave Bell

Yeah, I think we've been able to increase the productive capacity very quickly to respond to this demand. So that's why David Zinsner when he commented earlier said we feel we can get the lead times back, because we did react very quickly to this and have worked very diligently with our partners again across the board in wafers, in assembly capacity and test capacity and so forth. So everybody is aggressively marching towards helping us to get the output to a level that allows us to bring the returns back.

Cody Acree - Stifel Nicolaus

And you think the customer’s visibility is kind of generally onboard with your expectations getting this lead times out?

Dave Bell

Yes.

Cody Acree - Stifel Nicolaus

Okay. And Dave maybe a lots to talk about the gross margin trends, but hadn’t really talked much about operation efficiencies and how you expect those operating margins may be more importantly to turn through the back half. What kind of leverage do you think you get other than revenue growth?

Dave Zinsner

Well we think actually both R&D and SG&A percentage sales are likely to come down next quarter and operating margins will get, our target models is to be between 27% and 30% on a long-term basis. We think we will get well into the 27% range in the next quarter and then it should improve from there.

Cody Acree - Stifel Nicolaus

Perfect, all right. Thanks guys.

Operator

Your next question comes from the line of [Andrew Bannish] with Raymond James. Please proceed.

Steve Smigie - Raymond James

Hi. This is actually Steve Smigie. Just going quickly could you talk about the internal inventories and where you are hoping to have that over the next couple of quarter and how much having a significant ramp and probably, how those are going to impact your ability to get today where you want them?

Rich Beyer

Well our goal is to be 90 days ultimately. I think getting pretty close to 100 days by the end of the year, it's probably likely. I think from the ramp at Santa Rosa some of the offset problems we were having an inventory issue. Just having enough inventory, which is kind of stretched the lead times out, but again, I think that will be back to normal by the end of third quarter. I do expect though that the inventory that is in terms of number of days will come down absolute dollars in the inventory possibly likely to be up.

Steve Smigie - Raymond James

Okay. And a little follow on the previous question, just in terms of the operating expenses, you had some extra hiring this quarter to date continued to next quarter or just the improvements, I assume that you are not doing any much more haring the engineering?

Rich Beyer

Well, we indicated that we didn’t think the ramp in OpEx would be high in this quarter as it was last quarter. Actually a lot of the hiring happened towards the tail end of the first quarter and so we got a lot of expense in the second quarter.

We are going to continue to hire in areas that will drive growth for the company. We just were, I think particularly successful over a certain period of time, I think it will more or less normalize now and it will grow at some rate that’s slightly below the growth of the sale.

Steve Smigie - Raymond James

Okay, great. Thank you.

Operator

The next question comes from the line Joe Osha with Merrill Lynch. Please proceed.

Joe Osha - Merrill Lynch

Well, I made it. Question for Dave, as you look at the general purpose market and then you look at where Maxim has – now this question kind of came up, what kind of margins do you need to get out of this business for the overall non-GAAP 50 to 62 target that becomes reality?

Dave Zinsner

I am not sure I completely understand the question Joe but clearly the general purpose business if done properly is going to have higher than average gross margins and the ASSP although there are opportunities to improve the gross margins, I think on the whole are probably going to be a little bit below our corporate average. So, as we increase our percentage of general purpose products and I'd love it if we could kind of get to a 50-50 kind of balance at some point in the future. I think that having a higher percentage of general purpose products will obviously help the overall corporate gross margins. I'm not sure if that answered your question correctly, Joe.

Joe Osha - Merrill Lynch

Well, yes, kind of I guess. Here the issue would seem that lots of people are out chasing the GT business now, and it looks like you can extract Linear type margins and not grow or extract [nascent] type margins that grow. So I guess the question is, if it turns out in order to grow this business that you got to put up with, a 65% gross margin in GT business, is that going to be enough to get the overall company to the target you've talked about. Did you understand?

Dave Bell

Yeah. I think that there is going to be a spectrum in there. You gave Linear type margins and use Nascent as another example. I think that even at those two companies, there is going to be a spectrum of gross margins. One of the benefits that we have Joe is that our product families, our breadth of products is not as broad as either of those other two companies. So, we have the opportunity to kind of pick and choose to a much greater degree, what general purpose areas we invest in. And not surprisingly we are going to be putting our resources in the areas where we think there is the largest total gross profit dollars to be had. So, kind of a combination of large revenue opportunities with good gross margin opportunities.

And the gross margins are going to be higher for the guy that does a better job of defining the product right, and a better job of getting the product to market quickly. And I think that we've got a great opportunity to use some of those skills that we developed in the ASSP area that I referred to earlier, certainly to get those products to market quickly. So, I don't know what the exact number is and of course even if I did know what it was, we probably wouldn't discuss it. But suffice it to say, that the general purpose products as we increase the percentage will help our gross margins and I think there is lots of room to be selective in that.

Joe Osha - Merrill Lynch

Okay. Thanks. And then a quick one I guess for Rich, lots of cash obviously and some areas that you could go in. Are there any areas in particular that you think might make sense from a product or end market standpoints to look to sort of doing in terms of buying your company?

Rich Beyer

There definitely are, Joe. There are some areas that we've identified and with Dave Bell joining, we've taken a deeper look at that. There are some areas that we think could represent some interesting additions to our product lines, and so as we've always said, we do continuously scan the market place for opportunities for expanding the product portfolio, not just through internal development but through acquisitions. Yeah we think we've identified some things that could really contribute either in terms of adding new customers in market segments or product families that are quite complimentary to the ones we have partnered. But as I mentioned, I am not going to comment on what any of those ideas are.

Joe Osha - Merrill Lynch

Alright,A guy can always hope. Thank you very much.

Dave Bell

Thanks Joe.

Operator

Your next quarter comes from the line Louis Gerhardy with Morgan Stanley. Please proceed.

Sandeep Bashir - Morgan Stanley

Hi this [Sandeep Bashir] calling for Louis Gerhardy. A couple of quick questions, first could you give us your share count guidance for the next quarter please?

Dave Zinsner

We are expecting share to be down somewhere in the 1 million to 2 million. There was quite a bit of option exercising this quarter and with the increase in the stock price that kind of also impacted the treasury method of calculating the fully diluted shares. So we bought back about 3.9 million shares, but we had almost the opposite affect on the other side. Next quarter though, we should be buying in a similar level and don't expect the same impact again.

Sandeep Bashir - Morgan Stanley

Thank you, and a second question. Are you able to comment on any pricing trends you saw in the optical storage area, especially as the market is still kind of focusing on the red laser products? And then also, are you able to give any better sense of timing on Blue-Ray.

Rich Beyer

Yeah, the pricing in red as we are at the end of the cycle, we give modest price reductions to our customer at this stage in the cycle. The Blue we think will contribute only a little bit of revenue in third quarter or in the fourth quarter, and it will start to be the appreciable in 2008.

So we anticipate we will probably see optical to begin to grow in Q1 of next and grow steadily through out the course of the year on the back of Blue-Ray and HD becoming more available in PCs, thus lowering the overall system cost, and thus helping stimulate the overall demand for it in set-top box type of DVD recorder or players etcetera.

Sandeep Bashir - Morgan Stanley

Very good, thank you very much.

Operator

Your next question comes from the line Shawn Webster with JPMC. Please proceed.

Shawn Webster - J.P. Morgan

Hi, it's actually J.P. Morgan, anyway. Can you tell me what the actual turns were for Q2?

Dave Zinsner

The turns were close to 50%.

Shawn Webster - J.P. Morgan

Close to 50%, okay. And then what was your sequential growth in backlog or dollars as you left Q2?

Dave Zinsner

We don’t talk about that.

Shawn Webster - J.P. Morgan

Okay. Your lead times that seven to eight weeks that number threw out is that in general for all of your product categories or is it mostly compute?

Rich Beyer

Those are the average lead times across the company. Some are higher, some are lower.

Shawn Webster - J.P. Morgan

Got you. And when was the last time they were that high?

Dave Zinsner

Probably about four quarters ago

Shawn Webster - J.P. Morgan

And then, I think you said utilization rates are in the mid 60s, so what do you expect those to do as we get to another second half?

Dave Zinsner

We are expecting them to be similar for the second half of the year.

Shawn Webster - J.P. Morgan

Okay. And what was percent [adjusting] here in the quarter?

Dave Zinsner

[Adjusting] was 51% of earnings.

Shawn Webster - J.P. Morgan

Got you. Right, that’s all I have. Thank you.

Operator

Your next question comes from the line of Doug Freedman with Amtech Research. Please proceed.

Doug Freedman - Amtech Research

Thanks for taking my question guys. A lot of them have been asked and answered. Let’s see if we can. Any guidance on what you see happening with foundry prices, sounds like a lot of the growth is coming from your foundry partners and where you are in consolidating your foundry supplies?

Dave Zinsner

Doug, we have two very, very healthy partnerships, long term relationships, and then we have a number of very solid foundry partners that are not long term. The two major partners that we have, we have agreed upon pricing that shows improvement in wafer prices over an extended period of time. So, we continue to get the benefit of those agreements. And in the other foundries, there typically we are a smaller player in the grand scheme of things for them. But they perceive us as good solid partner. We have not seen them making any noises about increasing foundry prices.

Doug Freedman - Amtech Research

All right. And then, I guess with a lot of questions asked. Lunatic Fringe goes for a sort of one of first movers in digital power. What's your outlook there and what's happening in that market?

Dave Bell

Doug this is Dave Bell. The market still needs them at this point. I think that there are some players out there, some customers that are beginning to embrace digital power. I don’t know the exact numbers, but from a total dollar perspective or a percentage of the power business it's still fairly small right now.

We have I think a good beginning portfolio there. I think we have already discussed one of our products that’s aimed at digital power market. And as their market continues to expand, you can certainly count on us to be in a leadership position there. But so far the numbers really have not very significant to be honest.

Doug Freedman - Amtech Research

All right. And then just one -- I hate to beat a dead horse here. But as soon as any semiconductor company brings up double booking, the analysts run high, so or should I say get extremely scared is probably a better statement. What is your overall thoughts on what your market share is in the notebook market, and what do you guys think the unit growth in notebooks are that make you at all concerned that the bookings aren’t actually supported by this major shift that we are seeing towards notebook in the overall PC market .

Dave Bell

Doug it's too early to tell what our share is. I mean we've just seen the transition to Santa Rosa. Our growth is happening we believe because, we've talked about it for several quarters, we felt very, very good about design win momentum in notebooks. We feel very good about the fact that we have significantly more content available in a notebook, and that in no small measure. Those two factors are driving our revenue growth.

So we believe absolutely categorically that we are going to see very, very strong growth in our notebook business. Do we think that there is a little bit of excitement among customers ordering for possible year-end delivery than the absolutely need? There probably give some of that, but we feel very confident because we have been very close communication again with the ODMs and the PC OEMs to know what they want.

So we think that we are in a very solid position. We think the guidance that we have given is quite realistic, and there are not risks to that guidance associated with the problems of double bookings. And I will also say I think, it’s just a natural tendency. Each month we tend to hear in the in the marketplace about that fact that the notebook seem to be coming more and more popular, relative to desktops and that's leading to stronger growth.

We are looking at the growth that's predicted by, our customers and that’s how we built the guidance and we think it shows very, very healthy growth on the part of the customers that have designed in the Intersil products to their notebooks.

Doug Freedman - Amtech Research

All right,iIf I could, just one last clarification. Is it correct in thinking that the notebook market offers higher margin opportunity you’re your desktop products or is that representative?

Rich Beyer

True statement Doug, yes. But the notebook has some more differentiation and therefore there are these good margins associated with it.

Doug Freedman - Amtech Research

All right. Great. With that I will leave it there. Thank you guys.

Rich Beyer

Thanks Doug.

Operator

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

Craig Ellis - Citigroup

Thanks for taking the question. Just a follow up to one of Dave Bell’s prepared comments. Dave, you talked about deploying resources for general purpose revenue growth, does that mean at the margin that the company is going to be looking to hire a little bit more on that side of the business with design and field engineering and sales or are there some things you are doing internally. Just a little bit more color on that comment please.

Dave Bell

Well I think the long-term that is an area that we'd like to expand, to translate that down into specifics, at this point I’m not prepared to do that. But clearly, the sell for an ASSP which tends to be more limited number of customers versus general purpose products, which tend to be very broad-based with many, many sometimes small and medium customers does require that there be more personnel and more support in the field.

So, as we continue to expand our general purpose product portfolio, I think it is reasonable to expect that we would make some changes and additions in the field. Again specifically what that means, I can’t comment on at this point.

As far as our R&D resources are deployed between ASSP and general purpose, again I am not going to comment on the specifics there, but I would hope that as time goes on that we continue to grow our ASSP business, but in the long run we can grow our general purpose business even more rapidly. And at some point in the future, you get towards a 50-50 mix. The nature of the products are quite a bit different as you might imagine, and you need more products, broader portfolio of products in the general purpose area to achieve the same revenue than you do in a ASSP area?

Craig Ellis - Citigroup

Okay. And then just on a slightly different subject but related to gross margins nonetheless. As you talk about some of the pricing strategies and tactics and pricing for value, is a lot of the work there just day-to-day work or are there annual contracts that might come up towards the end of the year. Anything like that would be a particular trigger for some action on the pricing side.

Dave Bell

Well, it’s really all in the same. With big customers we tend to have contracts where we review pricing several times per year, but that’s really just a logistics issue. I think the point is that, we think that we have got a portfolio of products that is growing not just in numbers but in performance and value. And especially as we go after more and more general purpose, I think there is an education process and how to communicate the total value of the product and not just the product in many cases, in many cases it's the support that we provide through applications, engineers, it's the quality and reliability, it’s a total value package. I think that that’s improving at the company and we need to make sure that we are communicating that to our customers and getting paid for it.

So, a lot of it ends up just being an appreciation for that in the field and part of it is discipline in the field and the people that are involved in the pricing and coding processes here at the headquarters.

Craig Ellis - Citigroup

Great. Thanks Dave.

Dave Bell

Welcome.

Operator

There are no further questions. I would now like to turn the call back over to Rich Beyer.

Rich Beyer

Okay, thanks everybody. Let me just summarize by saying that we believe it was a very solid Q2 for Intersil with sales that grew 6%, earnings per share 7% and our order book strengthened appreciably during the quarter and very broadly, most strongest in computing, but as I indicated earlier also in consumer and many of our general purpose product families.

We think we are very, very well position for healthy growth in Q3 and Q4 and that’s top-line growth, as well as operating margin expansion, and EPS expansion. So, we think we are exceptionally well positioned. We think we can continue to outperform the general high-performance analog market in the second half of the year and hopefully for the entire year as we did in 2005 and 2006. So, we are very pleased with results and at least people are excited about the prospects for us for the remainder of the year.

Thanks everybody for your interest and we’ll see you either at a conference or at our next conference call in 90 days. Thanks operator.

Operator

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

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Source: Intersil Q2 2007 Earnings Call Transcript
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