Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Intersil Corporation (NASDAQ:ISIL)

Q1 2012 Earnings Call

April 25, 2012 4:45 p.m. ET

Executives

Brendan Lahiff – Senior IR Manager

Dave Bell – President, CEO, and Director

Jonathan Kennedy – SVP and CFO

Analysts

Sameer Kalucha - J.P. Morgan

Ross Seymore - Deutsche Bank

Craig Ellis – Caris & Company

Joanne Feeney - Longbow Research

Terence Whalen – Citi

Patrick Wang – Evercore

Steve Smigie - Raymond James

Chris Caso - Susquehanna Financial Group

Operator

Ladies and gentlemen, welcome to Intersil Corporations' First Quarter 2012 Earnings Conference Call. I will be your coordinator today. I would now like to send 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 Tahisha. Good afternoon and thank you for joining us today for Intersil's first quarter 2012 earnings conference call. Today with me is Dave Bell, Intersil's President and Chief Executive Officer; and Jonathan Kennedy, Intersil's Senior Vice President and Chief Financial Officer. Today we'll deliver remarks on the first quarter 2012 and provide a summary of our second quarter 2012 business outlook. After our prepared comments, we'll open the line for questions.

We completed our first quarter on March 31th 2012. An earnings press release was issued today at approximately 1:05 pm Pacific time. Copy to press release and supplementary slides to accompany the 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 also be accessed by the Investor Relations section of our website. A telephonic replay of the conference call and webcast will available for two weeks through May 9th. Questions for the call may also be submitted online via the webcast but 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 risks factors are discussed in detail in our filings with thee Securities and Exchange Commission.

In addition during this call, we may refer to financial measures that are not prepared according to generally accepted accounting principles. We sometimes use these measures because we believe they provide useful information about reforms of business and should be considered by investors in conjunction with GAAP measures reported. Our agenda for the call today is thus follows. Dave Bell will discuss key highlights in the quarter, Jonathan Kennedy will review the quarter from a financial perspective, and Dave will follow up with additional commentary on each of our three key markets as well as our forward times. The Q&A session will follow. I would now like to turn the cal 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 first quarter 2012 earnings conference call. I'll first quickly review the results of the first quarter and then I'll make detailed comments about each of our end markets after Jonathan Kennedy's financial report. We reported first quarter revenues of $156.0 million, a 22% decrease from 198.9 million in the first quarter of 2011 and a 6% decrease from 165.8 million in the fourth quarter of 2011. We continue to generate steady free cash flow, paid out our long-term debt, and reduced inventory. Jonathan will provide more financial details in his remarks.

Although the overall market conditions in the first quarter remained weak, orders steadily improved and our book-to-bill ratio remained above 1 throughout the quarter. We believe the first quarter was the bottom of the cycle for Intersil and we expect to see steady growth in the second quarter as channel inventories stabilize at low levels and demand begins to recover.

During the quarter, we modified the composition of our reported end markets to better reflect the different characteristics of the market we serve. The industrial and communications markets have been combined and together with our computing server business now form the industrial and infrastructure end market. The new I&I end market category includes applications such as base stations, network switchers and routers, network attached storage and servers. It continues to include traditional industrial categories such as automotive, security surveillance, military, medical and factory automation. The average margin profile for the industrial and infrastructure market is above our corporate average, with product lines such as radiation-hardened and military delivering gross margins about 80%.

The former computing end market has been renamed personal computing and is now comprised of notebook computers, ultrabooks, desktop PCs and PC peripherals. With servers moving to the I&I market, this segment now accurately represents Intersil’s participation in the highly competitive PC market and as expected, it delivers gross margins below our corporate average.

The consumer market will remain the same as before and includes smartphones, tablets, displays and gaming. Gross margins in the consumer market are at or slightly below our corporate average.

In just a few minutes I'll go over the percentage of sales in each end market as well as an apples-to-apples comparison with the fourth quarter of 2011. We've included historical detail of our revenue since 2007, allocated to the adjusted end markets, which is available in the press release on page nine and in the Investor Relation section of our website. ir.intersil.com.

We are passionate about building a great company where our employees are inspired to create innovative products that will deliver shareholder value. Our Board of Directors is also committed to sustaining shareholder returns and is authorized a quarterly dividend of $0.12 per share of common stop.

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

Jonathan Kennedy

Thanks, Dave. Let me start with the income statement.

We achieved $156 million in revenue for the first quarter, a 21.6% decrease from the first quarter last year and 5.9% sequential decrease from the fourth quarter of 2011. Revenue declined in all end markets, but weakness in optical sensors to certain smartphone customers combined with seasonal trends led the largest decline in our consumer end market.

Our lead times remained normal throughout the quarter, with no significant supply constraints. Our internal utilization was significantly below optimal level at about 53%, as product levels continued below consumption. Our first quarter turns were 37%, and we expect Q2 to be about the same as a midpoint of our guidance. Our gross margin was 54.6%, 210 basis points below the previous quarter, and lower utilization and unfavorable product mix were the primary driver.

You should recall that we expected to reduce inventory as we had built a large buffer inventory in advance of the fab consolidation we completed in late 2010. Continued demand weakness during the first quarter led us to accelerate the inventory reduction, which contributed to lower utilization and lower gross margins, but we decreased net inventory by 8%, or $7.7 million.

Looking to Q2, we expect gross margins to improve slightly, as production levels increase closer to consumption. Q1 operating expenses were slightly lower than guidance, as we continued to manage operating expense in this weak environment. R&D expense was $44.4 million, or 28% of revenue, and SG&A expense was $34.2 million, or 22% of revenue.

Our Q1 R&D expenses were higher than Q4 due to higher outside spending, while SG&A was just below the Q4 rate. During Q2, we expect R&D expenses of about $48 million, and SG&A expense of approximately $35 million. Our Q2 R&D is higher than Q1, driven by the cost of two deep submicron 300 millimeter tape-outs. Our total operating expenses are expected to decline from Q2 levels during the second half of the year.

Amortization of intangibles was $7.2 million during the quarter, and Q2 amortization is expected to be about the same. Again, these should start to decline over the second half of the year. We incurred $1.5 million in restructuring costs during the quarter, and our Q1 operating margin was a 1.4% loss on a GAAP basis. The gains on deferred compensation investments were $0.7 million during Q1, and increased SG&A expense by a similar amounts.

Interest income was $0.2 million for the first quarter, and interest expense was $2 million, and we expect Q2 interest income and expense to be slightly lower than those in Q1. During the quarter, we reduced our debt by $25 million, and we ended the quarter with $389.7 million in cash, and $175 million in debt. Our Q1 GAAP tax rate was 0% due to certain discrete tax items, and our non-GAAP tax rate was 23%, without the R&D tax credit. We expect our Q2 GAAP effective tax rate to be approximately 30% and our non-GAAP to be approximately 23%. This increase in tax rate is primarily due to that expiration of the R&D tax credit and on certain tax expenses relative to very low domestic pre-tax income. Equity compensation was $5.3 million for the quarter.

Our Q2 equity compensation is expected to be about $9.3 million as annual grants are issued in Q2. As a result, Q2 equity compensation is typically the highest quarter during the year. We expect equity compensation expense to run approximately $7.5 million per quarter for the second half of 2012. Q2 equity compensation by classification is expected to be approximately .7 million in cost of sales, $4.2 million in R&D, and about $4.4 million in SG&A. On a GAAP basis we reported a net loss of $3.3 million, or $0.03 per diluted share for the quarter.

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 additional to unusual items and intangible amortization and the related impact on income tax expense. As always we continue to publish and maintain our primary focus on GAAP financial results. Our non-GAAP operating income was $12.7 million dollars and our non-GAAP operating margin was 8.1%. Non-GAAP net income was $8.2 million, or $0.06 per diluted share for the first quarter. A reconciliation between GAAP and non-GAAP measures can be found on page 8 in today's press release.

Now for the balance sheet and cash flow statements. For the first quarter we generated $20.4 million in free cash flow or 13% of revenue. Our cash and short term investments decreased by 20.5 million during the quarter primarily due to the reduction of long-term debt. We existed the quarter with about $390 million in cash and $175 million in long-term debt. Dividends paid were $15.4 million for the first quarter. Our days of sales outstanding remain steady at 36 days for the quarter. Our net inventory decreased $7.7 million from the fourth quarter to $90.2 million. And our days of inventory decreased to 121.

Looking ahead to Q2, we expect inventory dollars to be down another $6 million to $8 million and inventory days to decrease to about 104 days on higher revenue and lower inventory. Our Q1 ending worldwide distributor inventory was 71 days on lower revenue while inventory dollars declined slightly. Our Q1 depreciation was 4.9 million down slightly compared to the fourth quarter and CapEx was $1.5 million. We expect Q2 CapEx to be between $2 million and $3 million. Our weighted average diluted share count was 126.6 million shares for the first quarter and we expect second quarter weighted average diluted shares to be about the same. Now I'll turn the call back over to Dave.

Dave Bell

Thanks Jonathan. I'll now address our business in each of our three end markets beginning with industrial and infrastructure. Revenue in the industrial and infrastructure market represented approximately 56% of first quarter revenue and decreased 4% sequentially. While most product lines saw moderate decreases, our radiation harden business increased sharply in the quarter. We've been increasing the market for our rad-hard products by releasing dozens of parts qualified for low dose radiation requirements. The ELDRS facility we recently constructed in Palm Bay, Florida has cemented our place in the market as the radiation quality assurance leaders. We now have the ability to provide low dose radiation qualification on a wafer by wafer basis, which is being very well received by our satellite customers and dries up ASPs.

In the coming quarters we expect to release our first rad-hard quad op-in. built on a proprietary PR 40 process. This part has an order of magnitude less parameters shift due to radiation than competing parts. As mentioned earlier, many similar parts are in the development pipeline. Our security surveillance video product line continues to have strong acceptance of our SAM expanding products. We received initial orders for our revolutionary fish-eye processor IC, which flattens a high resolution fish-eye image and allows a system installer to replace four cameras with a single fish-eye camera that has a 360 degree viewing angle.

Sony is our partner in promoting the security link over coax or SLOC protocol and we've joined forces to create and industry alliance around this protocol. Sony won a Best in Show award for its SLOC-based cameras at the recent ISC West Security Industry show and other manufacturers are now developing products using Intersil parts.

Our Zilker Labs digital power prize continue to ramp with revenue growing 11% sequentially to achieve a record sales level. Digital power management is rapidly gaining traction in infrastructure applications because of its telemetry features and ease of programming. Intersil's digital power modules based on Zilker Labs technology are expected to ramp rapidly during the second quarter due to numerous design wins. Over $1.25 million dollars of digital modules will be shipped to a single customer in the second quarter just for prototype infrastructure equipment builds.

Looking ahead to the second quarter, we expect sales in the Industrial and Infrastructure market to be up significantly. Now let's look at our personal computing market. Under the new market alignment, the PCM market loses server products, which more appropriately fit into the industrial and infrastructure market. The PCM market is comprised of traditional notebooks, desktops, and the emerging ultrabook category. Revenue in the PC market represented approximately 25% of first quarter revenue, and declined 2% from the prior quarter. We maintained our roughly 70% VCOR market share in the Sandy Bridge notebooks. Sales into notebooks increased by 4%, while the desktop market remained weak. Demand gradually increased during the quarter as the disk drive market continued to recover.

Design activity on upcoming Ivy Bridge platforms has been strong, and we're confident that we've retained market share leadership despite increasing competition and dropping ASP's. We believe our market share in Ivy Bridge platforms has declined slightly to around 60%, as previous market participants have reentered the market.

Intersil continues to deliver the highest performance power management solutions, along with the best service and delivery in the industry. This has positioned us for early design-ins and continued dominance in notebooks. However, I believe Steve Jobs was right. We're witnessing the gradual demise of the traditional PC. Just as tablets changed the way we consume media, we believe ultrabooks will rock the world of notebook computers.

We also agree with Intel that once users experience the obvious benefits of ultrabooks, there will be a rapid shift to embrace these thin and light devices. But this poses significant design challenges, with very limited printed circuit board area, no fan cooling, and smaller batteries. Intersil's addressing these challenges with a highly integrated power management chipset specifically designed for ultrabooks.

Feedback from ultrabook designers confirms that this is the industries most compact and most cost-effective power solution, and will begin sampling parts later this quarter. This chipset significantly increases Intersil's dollar content per ultrabook, and will drive substantial revenue growth as ultrabook sales surpass those of traditional notebooks.

Looking at the second quarter, we expect PC sales to increase moderately, as inventory levels stabilize throughout the channel, Ivy Bridge PC's launch, and the disk drive supply chain continues to recover. We believe that sales growth in the second half of 2012 will be driven by the launch of Intel's Ivy Bridge platform, Microsoft's Windows 8 release, and the rapid growth of ultrabooks.

Now let's look at our consumer market. Under the new market definitions, the consumer market remains unchanged, including handheld devices, such as smartphones, tablets, gaming, and displays. Revenue in the consumer market represented approximately 19% of first quarter revenue, and declined 16% from the fourth quarter. Revenue decline in the first quarter was primarily due to significantly lower sales in optical sensors to a key smartphone customer.

At CES in January, Intersil demonstrated a complete solution for pico projectors. Pico projector technology evolution has been dramatic during the last year, with huge improvements in image brightness, resolution, power efficiency, and size. More than three years ago, we recognized the potential for pico projectors and began investing in product development. Last summer we identified pico projectors as one of our top 10 growth drivers and just yesterday we presented our liquid crystal on silicone, or el a cost, pico projectors solution at the global press conference.

Tomorrow morning, the Pop Video iPhone accessory for Micron, which incorporates and Intersil's pico projectors solution will go on sale for an incredibly low $99 price point. We have long said that as cost and size decrease pico projectors will absolutely take off. First with accessory devices such as the Pop Video and later with embedded solutions in smartphones and other handheld devices. Today you're witnessing the beginning of this trend.

In the display market, we're currently sampling a new, highly integrated programmable gamma buffer aimed at the notebook, ultrabook and tablet markets. Power savings are dramatic compared to competing solutions and we believe this will help reinvigorate sales into the portable display market beginning in the second half of 2012.

Looking ahead to the second quarter, we expect sales into the consumer market to be down moderately. Even so, we anticipate consumer revenues to grow significantly in the second half of 2012 as specific programs across all major consumer product groups ramp into production. Now let's turn to our outlook for the second quarter. Booking has continued to improve throughout the quarter and we maintained a book to bill ratio above one throughout the quarter. So far in the current quarter our book to bill ratio remains above one.

Although we haven't yet seen a snap back in our business, we believe the first quarter was the bottom of the cycle for Intersil, and that we expect steady recovery in the second quarter. We expect our second quarter revenue to be in the range of $162-$170 million as the sequential increase of 4% to 9% from the first quarter. Gross margin is expected to increase slightly due to increased manufacturing utilization resulting from higher revenue. On a GAAP basis, we expect first quarter earnings per share to be in the range of minus $0.02 to plus $0.01.

As a reminder, stock compensation expense is unusually high in the second quarter when Intersil issues its annual stock awards. Excluding one time charges, amortization of intangibles and equity-based compensation, we expect non-GAAP earnings per share in the range of $0.08 to $0.11. We're very confident that the heavy R&D investments of the last several years will create strong revenue growth through our top 10 growth drivers. The Pop Video pico projector that goes on sale tomorrow is just one example of our R&D investments materializing into exciting new products.

We hope to see many of you at our Analyst Day on May 8th. During that presentation, we'll explain the reasons for our growing confidence by focusing on our top 10 growth drivers. And to further underscore our confidence, we will be making more exciting announcements that demonstrate the results of our recent investments. With that, I would now like to open the call to questions for either Jonathan or myself. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Your first question comes from the line of Christopher Danely from J.P. Morgan. Please proceed.

Sameer Kalucha - J.P. Morgan

Hi, guys. This is Sameer Kalucha calling in for Chris. Just wanted to get a sense of the end markets in terms of you mentioned industrial was strong on Sony and security, but how does it trend going forward as we look at the second half? And if you were to rank order the markets in terms of sort of second half growth that you're expecting? How would you rank them?

Dave Bell

Well, left me first start and say that we're not giving any specific guidance for the second half, but Industrial was down slightly from the fourth quarter, but we do expect that to rebound nicely in the second quarter.

Now some of the things we talked about with regards to the security surveillance, we have a great ongoing business with Techwell product line and I think that that's going to show us some nice growth as we go throughout the year.

However, keep in mind that the SLOC, the SLOC products, Security Link over Coax products. Those are right now I'm kind of shipping in prototype quantities. So, I don't think that we're necessarily going to see that particular product line, even though it's now becoming embedded in so many cameras and digital video recorders. I don't think that that particular item is necessarily going to be a big driver of revenue in the second half.

Sameer Kalucha - J.P. Morgan

Got it. And, then, in terms of second half frank order of the end markets, if you were to sort of hazard a guess in terms of how it's going to look? CCTV is rebounding like really strongly.

Dave Bell

I'm going to be cautious about that, but let me talk a little bit about typical market characteristics. Typically, the Industrial market tends to move a little bit slower, whereas the consumer and PC markets tend to move much more quickly. I think there's a potential for some pretty good growth for instance in the PC market. As I mentioned, we've got the Ivy Bridge-based notebooks and PCs that are going to be releasing coming up pretty soon; you've got Windows 8, you've got Ultrabooks, so I think there's a lot of good reason along with a recovery from the disk drive shortage and so forth. So, there's pretty good expectation I think that we'll see some pretty strong growth in the PC business.

I think as we start getting towards the end of the year, we've got a number of really interesting programs that I think could drive some nice growth in the consumer business, as well and you'll hear a little bit more about some of those in more specific ways at our Analyst Day.

Sameer Kalucha - J.P. Morgan

All right. Thank you. And, then, just a small other question on the foundry side of things. You, actually, probably have some idea on how much of the percent (inaudible) are outsourced and if you're seeing any shortages that lower notes that you're shipping?

Jonathan Kennedy

Sure. This is Jonathan. Internally we produce about 20% of our wafers and outside 80% and no, we don't see any unusual shortages.

Dave Bell

There has been a lot of talk lately about shortages at 28 animated, for instance. Fortunately, we don't have any products at 28 animated so those shortages are not impacting us.

Sameer Kalucha - J.P. Morgan

Okay. Great. Thank you.

Dave Bell

You're welcome.

Operator

You're next question comes from the line of Ross Seymore from Deutsche Bank. Please proceed.

Ross Seymore - Deutsche Bank

Hi, guys. Just a question first on the revenue side, specifically in consumer you talked about the optical sensor side of things. Is that going to be done with this bleed down in the second quarter or is that something that will impact the second half as far as the head wind there as well?

Dave Bell

Yeah, Ross. I think we're going to see some of that persist. You guys can probably guess where some of the pinpoints are in the smartphone world right now and we're certainly being impacted on that. The biggest drop in Q1 in the consumer business was in smartphones and I think some of that will linger.

On the other hand, we've got some great new business development activities going on with a number of Asian smartphone companies that I think, as the year progresses, that's going to start replacing some of that lost revenue from other smartphone makers.

I don't know though necessarily think you're going to see much of that kicking in the second half so that's why in my prepared remarks I said that the consumer business, unlike the other two markets, will actually continue to go down in Q2.

But second half of 2012, I think there's some reason for optimism, not because necessarily recovery with the customer we're having problems right now but because we've got some other customers that are coming online.

Ross Seymore - Deutsche Bank

And is that, following up on that question, is that an Intersil specific dynamic or more the customers that you have not necessarily being the winners in the smartphone space?

Dave Bell

It is not an Intersil specific dynamic.

Ross Seymore - Deutsche Bank

Right, then I guess is my one follow up then separate from that. On the OPEC side of things, you talked about the [OPEC] itself declining as we got into the second half of the year. How should we think about the magnitude of that decline? And is it just because of the stock-based comp coming down? Is there something above and beyond that?

Thank you.

Jonathan Kennedy

Sure.

The stock-based comp is one of them and I gave you pretty specific guidance on there and then, the other one was, we have a couple of [mask sets] that are tapping out this quarter in Q2 that are a couple million dollars higher than we normally see so, the sum of that plus the equity comp should drive it down. You can look at past quarters and see the trend. Q2's always the peak and just how I got so that just extrapolate that to ramp from Q1 to Q2 I think that continues, it will definitely come down.

Dave Bell

It does end up being a little lumpy, Ross, specially as we start doing more products that are deep set Micron, 300 mm mass sets. Those are expensive mass sets so, like Jonathan mentioned, we've got about $ 2.5 million dollars just in two mass sets that are in the number in Q2, so when those come along and they line up, they do bump up the number. But we're absolutely committed as we said on previous calls to control our OPEX and disregarding the kind of normal seasonal ups and downs and bumps from assets and stuff, we're committed to holding that basically flat on the OPEX line.

Ross Seymore - Deutsche Bank

How do we think about on the gross margin side of things, that 53% utilization that's incredibly low, especially as you guys have not added aggregate supply to make that ratio come down. How should we think about incremental gross margins going forward and just the general utilization math going into 2Q and then second half.

Jonathan Kennedy

Well, you know, we're never going to be at 90% utilization. It's just not the nature of how we stand. And typically fluctuations in utilizations don't affect our gross margins too much, but when you kind of get the perfect storm of low revenue, low utilization, that can make a big difference. I mean, for us at a $156 million in revenue, you know, a $1.5 million in COGS will drop 100 points. So as we work production back up to normal levels, which will happen over Q2 and Q3 time frames and work off the high priced inventory that we built in Q1/Q2, you should see margins come back up slightly, but certainly over the next three to four quarters. And as revenue gets closer to the 200 mark, you'll see us get back into the 57 to 58 range.

Ross Seymore - Deutsche Bank

All right. Thank you.

Operator

Your next question comes from the line of Craig Ellis from Caris and Company. Please proceed.

Craig Ellis - Caris & Company

Yeah, thanks for taking the question and thanks for all of the historical data on the new segment reporting, although my fingers are now black and blue. I just wanted to follow up a little bit and dig into the comment on ultrabook dollar content, Dave. It sounds like you content there could be uniquely higher than where it is on notebooks. Can you quantify what the variance might be?

Dave Bell

Yeah, absolutely, with the big caveat that we don't really know exactly how rapidly the books are going to ramp. But I personally believe that they are going to ramp very, very quickly and probably even faster than what Intel has said. But if you look at the dollar content we might have in a typical notebook versus what it might be in an ultrabook, I think it could be probably in the range of three times higher than it is in a typical notebook because, unlike a notebook today, where we might have, say the V core power controller, maybe one or two other sockets, this chip set, which today is a five chip set, for ultrabook, like I said, could be around three times as much. So, I think, as you could hear me saying in the prepared remarks, Craig, that once people really start to experience how much more convenient these thin, light ultrabooks are, especially in the commercial world, I think that they're going to take off very rapidly. So I think that positions us extremely well.

Craig Ellis - Caris & Company

And, and is some of that dollar content gain coming from somebody else, Dave? You know, Intel, I think, with their messaging is targeted at a price (inaudible) for ultrabooks and so far most of the models that we've seen have been well above that price. So how do we think about the ability to maintain a bond cost significantly when folks like Intersil might be picking up 3X more dollar content per system?

Dave Bell

Well, we're a pretty insignificant part of the total bond cost for a notebook computer or ultrabook so I don't think us going up in our content is going to have a big impact. And by the way, even though our dollar content goes up, it ends up being a lower cost total solution than their present alternatives right now when we have to implement that entire power system for an ultra book.

Craig Ellis - Caris & Company

Okay. Well, that makes sense. Good luck with it. As a follow up question, but on a similar topic. If this is targeted at ultrabooks and if per Intel's commentary there's a 100 designs that they have, should we start to see a meaningful ramp in this product line in the back half of the year, or given it's development, is it more of 2013 opportunity for you?

Dave Bell

I think it's probably going to be more a 2013 ramp for us and the reason I say that is not because I don't believe that ultrabooks will ramp but I think that a lot of your first generation ultrabooks are being based on more traditional notebook power system designs. But like I mentioned this quarter we're going to be sampling our chip set to a number of ultrabook makers and those will be designed in the products that we'll probably be ramping in early 2013.

Craig Ellis - Caris & Company

Okay. Fair enough. And then lastly, just on the gross margins point Jonathan. You mentioned the 200 quarter level is magic for the middle of the gross margin target range. As we think about the new segments that you have, the three segments, how should we think about the way you look at the relative growth rates of those three segments over the longer term, a 2-3 year period?

Jonathan Kennedy

The I&I, I think you look at growth rates that are somewhere just at or above market rates. On a consumer space, that could grow quite strongly with wins in specific consumer products over a multi-year period. Wins in key smartphones and key tablets, things like that can drive that up and down quite significantly, so that one's kind of hard to predict. In the PC space, I think wins there given our market share content, I think that grows generally in line with the PC space.

Craig Ellis - Caris & Company

Okay. But it's consumers the highest growing and if you mentioned that's slower corporate average, how do we think about getting back to that 57.5% range if industrial and infrastructure sounds like it would grow at a slower rate than a lower margin business?

Jonathan Kennedy

Well, it does grow slower so you're correct in pointing out that the relative nicks of PC and consumer does weigh in on our gross margin, but from where we stand today, the lower utilization is really what's causing the margin to be where it is. So I think we can maintain it. But as we've said, many, many times in the past, we aren't targeting to get above 58%. That's kind of the line at which we would oscillate around. So just size and scale up to about 200 million pushes our ability to stay in 58 because the consumer, while it is lower than average, it isn't that much lower. It actually on today's average, it's probably a lit bit higher, but lower than the 57-58 average consumer comes in typically in the mid to higher 50s, so it doesn't really play that much of a role in diluting the margin.

Dave Bell

Craig, let me jump in as well. What we've been doing with our top ten focus, we'll talk more about this at our Analyst Day, but we're really trying to pick our battle carefully. We're trying to pick our battles where we think we've got unique highly differentiated products and where we've got technology and resources where we can win. And what that means is that even in markets like consumer, I think you're going to see probably the average margin from some of those products as they become more targeted and more differentiated, starting to drift up a little bit. And although it maybe a little too early to count our chickens in ultrabook, I think the same thing could happen in ultrabook there as well. As we come out with highly differentiated solutions that we have the opportunity to drive margins up in those areas as well.

Jonathan Kennedy

Craig, in the near term, production volumes and returning revenue up close to the 200 will definitely play a big role in returning the margins. So it isn't a case that we get no benefit from higher volume, we definitely do get some even though we're primarily outsourcing that product we still get some absorption and slightly better margins on higher volume.

Craig Ellis - Caris & Company

Thanks for the detail and we'll see you at Analyst Day guys.

Dave Bell

Great, thanks Craig.

Operator

(Operator Instructions) Your next question comes from the line of Rick Schafer from Oppenheimer and Company. Please proceed.

Unidentified Analyst

[inaudible] in for Rick. Just a follow up one more time on the ultrabook question. Just curious if you're seeing anyone else out there with a similar chip set today? And if not, who do you expect? Is it predominately going to be everybody that you see out there today? Or any new competitors there in chip set for ultrabooks?

Dave Bell

Well, it's a really good question. We think that we're today out there with the best chip set for ultrabooks. And to further clarify a point that I made with a previous question, really aimed at the Haswell generation so it something that's going to be ramping in the first part of 2013. Are others likely to be developing ultrabook targeted chips? I'm sure they are, but we're they first out there and we're being told by our customers that we've got the best performing, the most integrated, the most compact and cost effective solution, but I'm sure we will have competition at some point down the road probably from the usual suspects.

Unidentified Analyst

Okay Thanks. And can you just remind us where we stand on the mandate for the back up camera in the auto market? And what the step function there is expected to be over the next couple of years? And where your average dollar content per car goes as a result of that? Thanks.

Dave Bell

Well, let me do the best I can with that. There's this transportation safety act and the government decided to delay the final enactment date of that a little bit. It was going to be the end of 2014 for all passenger vehicles and light trucks. That looks like it is being pushed out, perhaps by a year. That has caused a little bit of a lull with the makers of the rear-view mirrors that have the built-in displays and cameras.

And we have about 99% market share of the LCD display controller that goes into those intelligent rear-view mirrors with the displays. That did cause a little bit of a lull. But as you probably know, you might have one of those already in your own car or rental cars and so forth, there are still some sales out there that are growing, independent of the government requirements. But because the government requirements pushed out, it did cause a little bit of a lull and a delay in probably the lower-end vehicles that can less afford to put in those features.

As far as the actual dollar content, I'm sorry I can't give you specifics on that. It's several dollars when it comes to the rear-view mirrors specifically.

But for our overall automotive business we've got a lot of other opportunities. There are other displays in the car: in the rear headrest, in the dash and so forth. We've got other power applications. We've got lithium ion cell balancing functions. There's a lot of other stuff that's going in automotive besides the LCD display business for back-up cameras.

Unidentified Analyst

Okay thanks, if I could just sneak one more in. If you could help us think about how you're prioritizing the use of cash going forward, how you think about M&A or the dividend, and or paying down debt. What percentage of your cash flow is actually onshore versus offshore?

Jonathan Kennedy

Sure, this is Jonathan. In terms of use of cash, you laid out just about all of them. We can pay off debt. We can do M&A. We can buy back shares. There are a couple of different things. But in terms of priorities for us, number one is dividend support. Our dividend is at a decent yield and in a very comfortable range for Intersil to pay it. We've got almost $400 million in cash. The dividend is up $60 million a year.

Dividend support where it stands today is probably priority number one. Number two would be to pay down debt, assuming that's efficient. Three and four would be M&A and share buyback.

You asked a question about cash flow offshore. There's a very complex answer, but suffice to say that the majority of our cash flow does get generated offshore, and there are usually discrete events that allow us to bring cash back to the US in a tax-efficient manner. It's rare that you could just have a nice steady stream of cash coming from offshore back to the US. Generally speaking, we don't have any capability of major US or domestic use of cash beyond the dividend. We do need to generate cash in the US to pay the dividend, so that's the strategy on cash use.

Unidentified Analyst

Great. Thank you.

Operator

Your next question comes from the line of Joanne Feeney from Longbow Research. Please proceed.

Joanne Feeney - Longbow Research

Hi. Thanks guys. A question more on the near term PC situation. I know we've heard a lot about ultrabooks, but in the second quarter, we see a little bit of a lull here with the Intel notebook chips not really coming out until later. Can you give us some detail on your exposure to dual-core versus quad-core platform, then on the AMD side, where you note that you have 80% share? Can you tell us whether that is mainstream, Milano based stuff or whether that is lower end, Brazos-based stuff, and how you expect that to change this year when they switch over to their new chips?

Dave Bell

Boy, Joanne, you're asking tough questions. I have to say I can't answer all of those in detail. Let me start with your question about the notebook market. I think there are probably a few factors for that. One is the whole disk drive supply chain problem. It is largely done, but not completely done. I think that as well, the transition from Sandy Bridge to Ivy Bridge, the Intel platforms, as you know, that's been delayed a little bit. I think that's slowing things down a little bit, as well as the overall economic conditions. There has not been a snapback yet; it's kind of a gradual recovery.

As far as how we differentiate between dual-core, quad-core, and so forth, I apologize, I can't give you those details. Perhaps our PC guys could give you more clarity there. Suffice it to say, like I said, when you're looking at the Intel Sandy Bridge platform, we've got about 70% share of V core power. Sometimes there is an apples to oranges kind of comparison there, where some others would say, 'Well, we've got 70% share,' but they're including system power and other more commodity parts in there as well. If we just talk strictly about V core, we've got about 70% there. We think in the upcoming Ivy Bridge generation, it probably declines a little bit down into the range of 60%.

As far as AMD, I apologize. I couldn't tell you exactly which processors that is on, but our percentage sharer I do know is higher. It's up more in the 80% range.

Joanne Feeney - Longbow Research

That's helpful, Dave. Sorry to make you play 'Stump the CEO'.

Dave Bell

I'm not afraid of admitting ignorance.

Joanne Feeney - Longbow Research

Pick it up at the Analyst Day. Maybe you could give us some hint as to what's going on in the inventory side in the channel. Do you see the PC, OEMs, and ODMs starting to build up inventory in advance of those notebook builds towards later in this quarter and later in the year? More generally, do you see inventory being rebuilt elsewhere among your customers?

Dave Bell

I would say in general, we're not seeing a whole lot of inventory being rebuilt right now. In the supply chain that we contract ourselves, inventory was flat, even slightly down in the channel during the last quarter. I would say there's not a real rush. In fact, I think if you look at this cycle, and we've all seen a bunch of these cycles happen, typically what starts the beginning of the next cycle is a little bit of uptick, and then people get worried about deliveries. They start placing backlog way ahead of demand, build inventory, and then here we go again for another cycle. I've not seen that. From what I've heard from others, they're not seeing that kind of behavior yet. There's kind of the gradual uptick. Could it turn into a snapback where people really start stockpiling inventory? I suppose so, but so far we have not seen that behavior.

Joanne Feeney - Longbow Research

Okay. Great, thanks so much.

Operator

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

Terence Whalen - Citi

Good Afternoon, thanks for the opportunity to ask a question. The first question is regarding some of the dynamics going on with regard to Ivy Bridge versus Sandy Bridge. Can you explain, among the three factors that you mentioned, including increased competition and a few others, why your market share is declining? Is there a technical reason? Perhaps is there more digital power management taking share in that generation of product? Thank you.

Dave Bell

Yes, I think it's competitive in nature Terrance. I wouldn't single out any particular one. I think we're seeing some other competitors that are coming in there that were not as competitive in the Sandy Bridge platform. You know there's always ASP pressure when a new entrant or somebody is trying to gain market share. We try and be somewhat disciplined there as well. So I think it's a whole bunch of factors that are driving that. I would not say that digital power is a big factor yet. We are starting to see some digital power suppliers in there, but frankly it's been more in the desktop area so far initially, and not in the notebook area.

Terence Whalen - Citi

Okay. Terrific, and then my follow up is regarding Zilker. Can you just

give us an idea of where you really see Zilker attaching most. Is Zilker also going to potentially provide you a roadmap for your analog power control to eventually become digital power control for ultrabook and notebook as well? Thank You.

Dave Bell

Well, the initial growth in Zilker products is really gained at the infrastructure market, and that's where the vast majority of our sales are right now, and that's where we expect the growth to come from. In my prepared remarks I talked about we have one particular customer that we've referred to before where we're going to shift over $1/4 million dollars worth of modules just for a prototype build.

We've got a number of other infrastructure customers that are now starting to embrace digital power, either in the separate discreet controller form, or in our module form. So that's where I expect most of our growth to come from. Second part of your question is do we expect to leverage the Zilker technology more broadly into kind of core power? Because right now our focus has been on what she calls Point Of Load, or POL power.

We have not really been utilizing our digital technology to date on core power, but yes, it's a natural thing for us to do. We focus on Point Of Load initially, but we absolutely will be utilizing our technology. We think we've got some pretty impressive new technology, and we're going to be sampling some time during the next quarter or so as well. We think that can play a big role in the core power down the road.

Terence Whalen - Citi

Okay. Thanks, look forward to the Analyst Day.

Operator

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

Patrick Wang - Evercore

Great. Thanks for taking my question. Hey, Dave, you sound pretty excited about the Haswell platform next year, and I use the third gen ultrabook. I'm just curious what your perspective is when you look at the competitive landscape, because clearly it's something that you guys are looking for, pretty high expectations, and pretty good confidence there. I'm just curious what it is you're seeing out there from your peers.

Dave Bell

Well, so far, in dedicated ultrabook solutions for the Haswell generation VR 12.6, we're the only guys that I'm aware of that are out there with a dedicated chip set for that application. As I said earlier in reference to another question, I think that we'll certainly have competition, but it's really good to be at the leading edge of this, lock up sockets at customers, and become incumbent in their designs. And it's a lot harder when you're number two or number three and trying to dislodge a solution that's working well. So, yeah, we are very excited about it. We're excited about the solution that we've got for VR 12.6, and we're very excited about our own gut feel about how quickly ultrabooks could take off. They are initially going to be more expensive than a standard full-sized notebook, but I think that not so much so that you won't see a lot of uptake in the commercial world. I think a lot of people like you and me would much rather carry around a thin and light ultrabook than a big, heavy, full-sized notebook, and I think that's going to take hold really quickly.

Patrick Wang - Evercore

There's no question about that. And I know it's really early to make these types of predictions, but does your early position on the Haswell design give you confidence that maybe perhaps you could go from the 68 backup toward the 70 percent market share when it arrives?

Dave Bell

Yeah. I hope so, Patrick, but it is too early to make those predictions right now. I think one of the things, though, that also is exciting about this transition is that today, if you take apart almost any full-sized notebook computer, regardless of who's name's on the outside or what the skins look like, the architectures are pretty much the same. So there's really very little opportunity to differentiate with the power management solutions in a full-sized notebook, and hence, it just becomes a price battle.

Today, with the ultrabook market, it kind of opening up, and I think there's going to be a spectrum of solutions between tablets, and ultrabooks, and ultrabooks where the screen flips around backwards beneath the keyboard, and you can have a hybrid device, it's not going to be quite so consistent with their architecture. And wherever there's that kind of variability, even in processors -- for instance, it's not going to be just AMD and Intel anymore -- there's going to be other processor arm-based products, as well. That opens up a lot more opportunity for us to differentiate, and we like that kind of an environment.

Patrick Wang - Evercore

Got it. And that actually leads to my other question. As we look into next year, there should be products driven by arm-based processors. How well-conditioned are you with that when those products actually do come to fruition?

Dave Bell

I think we'll be very well positioned, but the arm-based products from a power management standpoint, aren't quite as tightly spec'd, with the VID codes and things like that, that Intel and AMD have today. So I think there's going to be more ability to use more general purpose products for powering ARM-based notebooks, you name it, then there is in the Intel and AMD world.

Patrick Wang - Evercore

And then this last quick question. You said that digital power is more prevalent on desktop platforms right now. Is it a key component for the Haswell designs that you have a product for?

Dave Bell

Well it's a little too far out to comment on specifically, but we will absolutely have not only point-of-load power devices, digital power devices, that we're focusing on today, but eventually we will be in there with the core powered solutions as well. But beyond that, Patrick, I don't want to comment specifically about that development activity.

Patrick Wang - Evercore

Okay. Great. Thanks so much.

Operator

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

Steve Smigie - Raymond James

Thanks a lot. Could you talk a little bit more about the pico projector market and how you see the timing of adoption on that and how you guys or sort of thinking, in terms of the size of that market?

Dave Bell

Sure. I'm surprised it took this long for someone to ask me about pico projectors. It's obviously a market we're pretty excited about. I think a lot of people out there are still kind of scratching their head, either saying, what in the heck is pico projector? Or saying, yeah, I know what they are, but I'm not sure why they're going to be big. We think they will be big.

In our press release that we put out yesterday morning, we referred to a market study from a consultant that predicted that there would be 57 million pico projectors shipped in 2015. Now we all know how skeptical we can be about any kind of market forecast, but I think that you're going to see it start, with products like this new pop-video pico projector, which, starting tomorrow, you can order on line for 99 bucks.

There's something like 400 million iPhones and iPods out, in the market today, that that product can plug into. I think there's going to be a very rapid uptake in that. But the big driver is going to be when the pico projector light engine and the electronics get small enough, and low cost enough, that you can actually put it into smart phones and tablets and products like that. But of course I think the real driver that will cause really huge growth in the number is when it starts getting embedded into smart phones and tablets.

I can remember back a decade ago, or so, when I saw the first cell phone with a camera in it, and I thought it was kind of a novelty, like, boy, that's interesting, but I'm not sure why anybody would need a camera in their phone. You can't buy a cell phone without a camera today. I'm not going to claim that it's going to be quite that prevalent with picoprojectors, but I think it will reach a tipping point in the next year or two, where you're going to see a lot of pico projectors in a lot of hand held products.

Steve Smigie - Raymond James

Great. And the just a follow-up on that. Texas Instruments is one of your competitors in that space. When they release their OMAP 5 applications processor they put out a video in which they had sort of a demonstration where they showed the apps process working together with a pico projector and some gesture recognition technology to sort of basically do some sort of computing on a smart phone without having to have any sort of keyboard or so forth.

So, just curious the extent that you guys have sort of worked in a similar type collaboration between, say, some sort of gesture recognition application. I know you guys have a bunch of light sensing products, as well, relative to the picoprojectors, is that still pretty far out?

Dave Bell

Yeah, we absolutely are working in that area. At CES we demonstrated some gesture recognition using our proximity detector products. We've also talked before about long range proximity sensing products that can sense in the range of 1 to 2 meters. So, absolutely that is something that we are working on.

What I would also point out is that you can start doing some fairly sophisticated things with picoprojectors. Especially, if you have a scanned laser pico projector. You can start displaying a keyboard, for instance, on a tabletop and detect when you're touching the table. So, there's a lot of pretty interesting things you can do when you start combining picoprojectors and gesture recognition.

Steve Smigie - Raymond James

Okay. All right. Thank you.

Dave Bell

You're welcome.

Operator

Your last question comes from the line of Chris Caso from Susquehanna Financial Group. Please proceed.

Chris Caso - Susquehanna Financial Group

Yes, hi, thanks. I wonder if you could go back to the Ultrabook for a second and you'll probably talk about a little of this at the Analyst Day, but, I guess, the last Analyst Day you had you guys had a strategy of kind of keeping the computing segment sort of flattish going forward and growing some of the other segments. Should we look at this as a bit of a change in strategy for you guys? Or is it just opportunistic on your part?

Dave Bell

Well, it's a really good question, Chris. Our strategy still is that we plan to hold our revenues in the PC market roughly flat. I think that if there is an inflection point here, though, with Ultrabooks and where we can release highly differentiated parts to the marketplace and maintain very good gross margins, there is the possibility that we could grow that business.

Certainly if you start thinking about what I said earlier where we've got maybe three x the dollar content, that opportunity at least with our solution in Ultrabooks. If Ultrabooks really takes off, yeah, I think that that could be a possibility. But predictions are very difficult to make, especially, about the future to quote Yogi Berra. So, I don't think we're willing to say necessarily that at this point we're going expect our revenues in the PC market to tip up. It's still kind of our strategy to hold those flat. But if the market dynamics were to change from the way they are today, there might be an opportunity going forward for there to be some additional growth there.

Chris Caso - Susquehanna Financial Group

Right. Predictions are tough for us, too. And follow on with that, with the margin structure of that business as you look. If ultrabooks really are successful longer term, do you see the potential where either competitive dynamics, or fundamental technology behind is different than the existing V core power management business so you could see better margins and would you be able to get those margins more closely in line with the corporate average.

Dave Bell

Yeah, I think there is that possibility and I think that's one of the things that would motivate us to grow the revenue if we felt we could actually increase the margins from the levels we are today closer to corporate levels. And then frankly it's just one of the regulators that keeps us from growing the PC business today is we could clearly grow the number of units and probably even dollars if we were willing to cave margins. So it's that dynamic that keeps us from doing that today. If that were to change, and the margins go up, yeah, there's the possibility we could grow the revenue.

Chris Caso - Susquehanna Financial Group

Okay. Understood. One more quick one before we go. It's been a while since you guys have increased the dividends and the yield is good but it hasn't been growing in a while. What are the factors that would allow you guys to increase that dividend.

Jonathan Kennedy

A 5% yield is not good enough, which I agree.

Chris Caso - Susquehanna Financial Group

I'm sure you guys hope the spot goes up, as well.

Jonathan Kennedy

Well, the real practical answer is domestic cash flow. We need domestic cash to pay dividends in the U.S. To pay 35% tax on repatriated earnings doesn't make the dividend so efficient so it's really a matter of increasing domestic cash flow. And right now our domestic cash flow is comfortable enough to pay to dividend, but not so much that we would rate the dividend. And quite frankly, the yield where it is today is one of the highest yields in the market so when we see a yield as high as it is with a practical limitation of foreign versus domestic cash, it's just not an appetite to increase it.

Dave Bell

I think, Chris, you touch on one of the key factors as well as if the stock price were up at $30 or something like that, then our dividend yield comes way down in a more typical range and then it might something that makes sense. But with it where it is now, like 4.3% yield or something like that, obviously we're not motivated to increase it.

Jonathan Kennedy

Got it. Thank you.

Dave Bell

You're welcome.

Operator

And ladies and gentlemen, I'd like to turn the conference back over to Mr. David Bell for any closing remarks.

Dave Bell

Well, thank you for joining us today for Intersil's First Quarter Earnings Conference Call. From today's discussions I hope that each of you are as excited as we are about our top ten growth drivers and that we're positioned for exceptional growth in earnings leverage as these investments begin to bear fruit. We look for to updating may of you on our progress in two weeks at our 2012 Investor and Analyst Day on May 8th, in Burlingame, California and at the JP Morgan Annual Conference on May 16th in Boston, Massachusetts. With that, thank you and have a good evening.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Intersil's CEO Discusses Q1 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts