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Intersil Corporation (NASDAQ:ISIL)

Q4 2005 Earnings Conference Call

January 25th 2006, 4:45 PM.

Executives:

Susan Hardman, Vice President of Corporate Marketing

Richard Beyer, Chief Executive Officer

David Zinsner, Vice President and Chief Financial Officer

Louis DiNardo, President and Chief Operating Officer

Analysts:

Ross Seymore, Deutsche Bank

Craig Ellis, Citigroup

Craig Hettenbach, Wachovia Securities

Doug Freedman, American Technology Research

Tore Svanberg

Steve Smigie, Raymond James

Rohit Pandey

John Lau, Jefferies & Company

Bill Lewis, JP Morgan Chase

Michael Masdea, Credit Suisse

Ambrish Srivastava, Harris Nesbitt

Sumit Dhanda, Banc of America Securities

Yequi (Ritchie) He, RBC Capital Markets

Krishna Shankar, JMP Securities

Cody Acree, Stifel Nicolaus

Operator

Good day ladies and gentleman, and welcome to the Intersil Corporation Forth Quarter 2005 Earnings Conference Call. My name is Samuel and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of this conference. If at any time during the call you require assistance please key “*” followed by “0” and coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

I will now like to turn the call over to today’s host Miss. Susan Hardman, Vice President of Corporate Marketing. Please proceed ma’am.

Susan Hardman, Vice President of Corporate Marketing

Thank you, Samuel. Good afternoon and welcome to Intersil’s fourth quarter earnings conference call. We completed our fourth quarter on December 30, 2005. We issued our earnings announcement at approximately 1.30 PM Pacific Time. A copy is available on the Investors Relations page of our website at www.intersil.com. This call is also been broadcast live over the internet and can be accessed through Intersil’s web address. A conference call replay will also be available for one week through February 1. Joining me on today’s call are Richard Beyer, Intersil’s Chief Executive Officer, Lou DiNardo, President and Chief Operating Officer and David Zinsner, Vice President and Chief Financial Officer. In a few moment Rich, Lou and Dave will deliver remarks on our fourth quarter 2005 and provide a summary of our business outlook. After our prepared comments, we will open the line for questions.

Before turning the call over to them, please note that some comments made during this conference call may contain forward-looking statements. I would like to remind you that all these statements reflect our 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 Security and Exchange Commission. In addition, during this call, we may refer to pro forma or other financial measures that are not prepared according to GAAP. We use these non-GAAP measures because we believe they provide useful information about the performance of our businesses 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 at the Investor Relations section of our website. For those of you interested in learning more about Intersil in upcoming conference, we will be presenting at the Thomas Weisel Technology Conference on February 6 and the Raymond James Conference and the Morgan Stanley Conference both on March 6.

I would now like to turn the call over to Rich.

Richard Beyer, Chief Executive Officer

Good afternoon and thank you for joining for our article on our fourth quarter earnings conference call. This afternoon just prior to our Q4 earnings release, we announced the promotion of Lou DiNardo to President and Chief Operating Officer of Intersil. I am truly excited about this important step for Lou and for Intersil and I am confident that this will further strengthen our company as we pursue our goal of being a premier high performance analog company.

Lou spent the first 20 years of his carrier at analog devices and linear technology, in a variety of managerial and executive rolls. In late 2000, Lou left LTC to become President and CEO of Xicor, a long time memory IC Company with a modest step of analog product families. Over the in serving 4 years, he transformed Xicor into a high growth analog company. In July 2004, Intersil acquired Xicor. At that time, we absolute to take responsibility for Intersil’s power management business. Since then he has had a dramatic impact on this business. In 2005, several of our power management businesses were key revenue growth engines of the company and they contributed significantly to our profit growth as well. At the same time Lou, with his deep extensive analog experience, helped Intersil in numerous other areas. He has assisted me and the rest of Intersil’s senior staff in implementing several analog best practices that have also contributed to our success over the past year. Again, I am delighted to announce Lou’s appointment as to President and COO of Intersil.

With that let’s turn to our financials. 2005 was a break-through year for Intersil. This was only our second full year as the pure high performance analog company. We achieved quarter-over-quarter revenue and earnings per share growth in each of the quarters of 2005. Our revenue growth has been very broad based across many products and many geographies, our disciplined investments to expand our product portfolio to over 40 product families are enabling us to reduce the seasonal effects of our, on our quarterly revenue.

We have introduced 100s of new products in each of the last few years including several new product families that have significantly expanded our serve to available market. Through solid execution our results have been impressive. The oppositions specific standard product family, have allowed us to grow our revenues faster than the analog industry. We’ve also continuously added higher margin, general purpose proprietary products. These families of products are growing at a rate similar to the overall semiconductor market, and they will help us to achieve and maintain our target gross margin levels in the future. We are also generating significant cash flow, which enables us to reinvest in the business, and to provide returns to our shareholders in the form of dividends and stock repurchases. For 2005, we have also shown great progress in operating margin and EPS expansion. For 2006, we expect to further expand gross margins throughout the year. We are very excited about our achievement in 2005 and even more excited about the prospects going forward.

Now let’s briefly touch on the results for Q4 and the full year ’05. The fourth quarter marked our fifth consecutive quarter in terms of growth in revenue and non-GAAP net income. We posted revenues of $175.6 million and non-GAAP earnings per share of $0.27, surpassing the high-end of our increased revenue guidance of $171.7 million and EPS of $0.25 for the quarter.

For the total year 2005, we reported revenue of $600.3 million, a 12% increase over 2004. Additionally, we reported non-GAAP net income increase to $108.9 million, an increase of 26% over 2004. This past year, we clearly demonstrated results consistent with our long-term goals. That is to grow our revenue faster than our analog peer group and at the same time to expand our net income at faster revenue at rate than our revenue growth.

In Q4, we experienced sequential revenue growth from 3 of our 4 end markets. Our computing market experienced the strongest growth quarter-over-quarter. Our consumer market also showed very strong growth, driven by our expanding portfolio of handheld and display products. The industrial market experience healthy growth driven by previous design wins that began production in the second half of 2005. And lastly, the communications market experience a modest sequential decline as expected due to seasonality. Lou will talk in more detail in a moment about these end markets.

We continue to show strong cash generation, delivering over $157 million in cash flow from operations during 2005. And we exit at the year with over $715 million in cash and marketable securities. As a result of Intersil’s strong positive cash flow and balance sheet, the company’s Board of Directors authorized and declared a quarterly dividend of $0.05 per share of common stock. At this time, I would like to turn the call over to David Zinsner, our Vice President and Chief Financial Officer who will provide a financial summary, after that Lou will discuss the results from each of our end markets. And then, I will provide some comments on our first quarter outlook. Dave?

David Zinsner, Vice President and Chief Financial Officer

Thanks Rich. Let me begin with the income statement. As Rich stated, we reported $175.6 million in revenue for the fourth quarter of 2005, up 38% from the same period last year and up 12% from a particularly strong Q3. We were pleased to close the quarter at a book-to-bill slightly greater than 1, in a quarter that seasonally trends below 1.

Based on the profile of our backlogs, we require an order churns rate during the first quarter of a little less than 40%.

On a GAAP basis, we reported net income of 28.7 million or $0.20 per diluted share for the fourth quarter of 2005. Included in our fourth quarter GAAP results, was a previously announced one-time charge of 6.6 million or $0.05 per share due to the repatriation of 150 million in accumulated foreign earnings during the quarter. For the same quarter last year, net income was 15.6 million or $0.11 per share and for the third quarter of 2005, net income was 27 million or $0.19 per share.

On a non-GAAP basis excluding the amortization of acquisition related cost, and other unusual item net income for the quarter was 39.3 million or $0.27 per diluted share, up 144% from 16.1 million or a $0.11 per share from the same quarter last year, and up 28% from net income of 30.8 million or $0.21 per share for the third quarter of 2005.

We saw an increase in gross margins for the quarter from 56.2% to 56.6%, the increase was driven by lower wafer cost, reduce back-end cost, lower depreciation and slightly higher volumes in our internal FAS. For the full year of 2005, our gross margins were 55.9%. As a percent of sales fourth quarter R&D expenses were 15.9% of sales down from 78.8% in Q3. In absolute dollars R&D expenses were basically flat with the prior quarter. Our SG&A expenses for the fourth quarter were 48.6% of sales down from 16% in Q3. In absolute dollars the increase of 400,000 from the prior quarter which due to higher employee incentive and sales commission cost on higher sale.

As a result of our rapid sales growth, gross margin leverage and cost containment, our non-GAAP operating income for the fourth quarter was 26.1% of sales. This represents over a 370 basis point improvement from the third quarter. For the full year of 2005, non-GAAP operating income was 20.8% of sales. Looking ahead into the forward first quarter, we expect operating margins to be similar to the fourth quarter, as gross margin improvement will be slightly offset by a modest increase in OpEx spending. Our tax-rate was 24% in the fourth quarter, for Q1 the estimated non-GAAP tax rate is approximately 26% which is based on the current tax law and has not assumed reinstatement of the Federal Research Tax Credit, which expired at the end of 2005.

Now moving to the balance sheet. For the fourth quarter we generated 59.5 million in cash-flow from operation, an Intersil record high. And we exceeded the quarter with 758.5 million in cash and marketable investments and no debt. We also continued to focus on our working capital our inventory turns improved from 3 to 3.4 turns as we continue to work down end-of-life inventory. Day sales outstanding was 48 days in the fourth quarter which reminded approximately flat with the third quarter.

During the quarter we repurchased approximately $37.5 million or 1.5 million shares of our stocks. For the full year the company returns more than 150 million of cash to its shareholders in the form of stock repurchases and dividend. In terms of weighted average share count for the upcoming quarter, we expect approximately a 145 million, in fully diluted total shares outstanding.

Now I’ll turn the call over to Lou DiNardo, Intersil’s President and Chief Operating Officer.

Louis DiNardo, President and Chief Operating Officer

Thanks Dick, let me said I’m very excited about my new role at Intersil, after driving the power management business for the past 18 months, continued diverse talent in expertise the company has, I’m confident that we will be able to achieve our vision to becoming a premier high performance analog company. Our financial performance in 2005, was a result of our focused investments and our commitment to execution. We now have a growing product portfolio the very best analog solutions in the market.

Let me discuss the highlight from each of our end markets. I’ll start with a few comments about high-end consumer. Our sales in the high-end consumer market represented approximately 30% of fourth quarter revenue. Our products within the handheld, display and optical storage market, continued to be successful, and have propelled our high-end consumer business throughout 2005. We are the number one battery charger supplier for several of the top cell phone manufactures in the world. In Q4, we secured design wins with yet another top tier handset manufacturer. We are now engaged with five of the top six cell phone manufactures in the world. Our strong battery charger business enabled us to more than triple our year-over-year revenue for handhelds.

Last quarter we mentioned our new family low drop out regulators that are targeted for handhelds that we can use in many applications. We secured our first design wins in handsets and LCD TV; this demonstrates our continuing to expand our silicon footprint with existing customers. In the handheld market we are seeing increasing using of organic LED’s and small panel display applications. In Q4, we release the family of organic LED drivers and secured our first MP3 design win. This product family is another great example of how we are leveraging existing capabilities, in creating new opportunities.

In addition to cell phones, applications now using Intersil products include digital still cameras, PDA’s GPS systems, Bluetooth headsets, wireless keyboards, MP3 Players, pagers and portable media players. Our handheld customer base continues to expand exceeding 400 customers across the broad range of handheld application and evenly distributed across geographies. In the area of displays we've made tremendous progress over the past year. We continue to work very closely with the leading panel manufactures on next generation platforms, supplying them with cutting edge products. Our joint developments have enabled our customers to improve your viewing angle provide faster response time improved yield and decreased total systems cost. With the additional display power DCPs and video line drivers in 2005, we saw our revenue growth, of a 250% 2004.

A good example of our innovation in this product area is new level of shifter for TFT/LCD displays. This product supports a new low cost engagement panel architecture which dramatically reduced the film material cost for panel manufactures. 2006 will be a very exciting time for the LCD display business. Display industry has expecting to see significant growth from LCD TV and large flat panels. Intersil has strongly positioned to benefit.

We are continued to be a leader in the optical storage market. While revenue in Q4 was down sequentially, as expected unit demand for DVD Writers are projected to grow in 2006. In Q1, we anticipate closing design wins with several manufactures for the next generation product, HD or BluRay. This revenue will be modest in the first half of 2006 and begin ramping during the second half. In 2005, the high-end consumer market was the major catalyst for revenue growth, up 43% year-over-year our growth has been across numerous product families and application. Going into 2006 we will continue to deliver innovative products to this market and expect to see exciting growth.

Turning now to computing. Our sales to the computing market represented 26% of revenue in the fourth quarter. We saw robust growth in both our notebook and desktop businesses; in the area of desktop we continue to be the market leader for core power. During the quarter we released our first digital controllers, these new products allow us to offer complete of suite of CPU core solutions in both analog and digital technologies. We have already secured design wins for the top tier customer and revenues from these design will begin to ramp in Q1. We continue to believe the digital power will be small percentage of our overall computing power revenue.

Going into 2006, we continue to be engaged with major OEM’s and ODM’s on next generation design. The major inflection point is to release of Intel dual-core CPU, which is expected to launch in Q2. We expect to maintain our leadership position on the new platform based on the design wins we’ve already secured. We are maintaining our focus, of cost reductions improved margins.

For Notebooks, we made tremendous progress, over the course of business. In the most recent quarter we continue to be escalating demand for our core power solutions with many key customers. In addition to our success for core power we are seeing great momentum for other functions such as battery management, system and DDR power and graphics power. We more than tripled the number of new product introductions in 2004. We significantly grew our revenue year-over-year and execute the year with an all time high record quarter in bookings.

2005 was a great year for our notebook product family. The stage is set very nicely going into 2006. Looking ahead into the first step of 2006, major OEM’s and ODM’s are set to launch their first platform based on the next generation of Intel Centrino and AMD Mobile Processors. Intersil’s solutions will be used across many platforms and we expect to see further revenue growth as a result.

In summary Intersil continues to be a market leader in power management solutions for the computing marketplace. As next generations platforms are deployed in desktop, notebook and server power we are well positioned to benefit.

Moving to the communications market, our sales to this market represented 21% of fourth quarter revenue. Revenue from this market was down sequentially as expected due to seasonality. In the area of DSL, inventories remained relatively low and demand is healthy and geographically broad-based. Several promotions from service providers are from discount to DSL service of clearly driving positive demand in the marketplace and we’re benefiting from this anyway. We’re continued to be the leader in central office line drivers as we were engaged with all of the major customers and chipset suppliers. Looking ahead into Q1, we expect DSL revenues to be flat slightly up.

Other families within the communications infrastructure market experienced a solid design activity and revenue growth, including our power controllers and RS-232 interface products. In Q4, our power management controllers were designed in by Tier-1 customers such as Samsung and LG. Applications include IP phones wireless LAN cards, routers, LCD TVs, set top boxes and network infrastructure modules. Revenue from these design wins were ramped throughout the first half of 2006. For 2005, revenue from this family was up by approximately 50% to 2004.

2005 revenues from the communications segment were approximately flat with the previous year. However, we continued to work with leading networking and communications customers to develop new and innovative products. We’ve grown and diversified our product portfolio to more than 11 product families within this market. Looking forward, we plan to capitalize on opportunities we’re looking at to most value and capture other higher margins that help us to achieve our model.

And finally, moving to the industrial market, our sales in the industrial market represented 23% of fourth quarter revenue. Within this segment, we family of voltage monitors data converters, RS-485 interface products, switches and multiplexers, op-amps and video products all experience sequential revenue growth as previously secured design wins went into production.

We’re proud that Intersil was again recognized as an innovative leader with 2 products awarded product of the year from analog zone in online technical publication. This passed year Intersil entered the light sensor market with an innovative product that provides good linearity in a single package. Our ambient light sensor won best potential in optics, our single part solution was called a dream.

In the past, several of video products have been awarded Product of the Year; this year is no exception, as our Video Triple Delay Line product was named a best solution. In the area of high-resolution switching, most the major switch and KVM companies are adopting our solutions for Video Over CAT-5 Cable. Our customers now have deployed systems in such diverse place as airports, train stations, financial trading floors and educational institutions. We’ve recently expanded our interface products for the family of Dual Protocol, RS-485 and RS-232 Transceivers, these new Transceivers provide industry leading speed, reach, data integrity, reliability and the flexibility that designers need to met today’s high performance demands.

Our industrial design wins have increased sequentially each quarter as we remained committed to growing this part of our business. Our design wins cover a broad range of applications, including security systems, spectrum analyzers, train brakes, broadcast video and gaming machines. Most of our industrial revenues generated from general purpose proprietary products. We’re pleased that this revenue grew year-over-year at a rate similar to the overall semiconductor market. We expect our industrial revenue to be seasonally strong in Q1, we expect industrial segment to be our second fastest growing market during 2006.

Now I would like to turn the call back over to Rich.

Richard M. Beyer, Chief Executive Officer

Thanks Lou. Let me discuss our outlook for the first quarter. The first quarter is a quarter in which we typically see a sequential decline in total sales due to normal seasonality of our business. However, due to our continued success from the breadth of our product portfolio and our design win momentum, we expect our first quarter revenue to be approximately flat with the fourth quarter. I’ll point out that at this projected revenue level, Q1 of 2006 will be up more than 35% over Q1 2005. We believe this indicates that our strong 2005 growth will continue into 2006. And for Q1 we expect non-GAAP earnings per share to be approximately $0.26 to $0.27 per share.

Before we open up for questions, I would like to summarize with these key points. This is the fifth consecutive quarter in which we grew revenue and non-GAAP earnings. We believe our fourth quarter results truly demonstrate the power of our strategy and business model. Our balance sheet continues to be pristine and our product and operation strategies enable us to consistently generate sizable cash flow from operations each quarter. The broad based strength that we are experiencing should result in the long-term success that will produce consistent results, increase our profitability and enhance shareholder value.

With that, Dave, Lou, Susan and I will be happy to answer any of your questions. Operator?

Questions-and-Answer Session

Operator

Thank you. Ladies and gentlemen, if you wish to ask a question, please pres “*” “1” on your touchtone telephone. If your question has been answered or you wish to withdraw your question, please press “*” “2”. Questions will be taken in the order received. Please press “*” “1” to begin. Our request from the speaker has been made to limit your questions to one only and one follow up. Thank you.

Your first question comes from Ross Seymore from Deutsche Bank. Please proceed.

Q - Ross Seymore

Thanks and congrats on a great quarter and congrats Lou to the new role. Just a quick question, Lou, you gave a little bit of color on the direction at the industrial segment we deal in the first quarter; I know you said flat overall for the business. Can we get at least a directional comment on the other segments of the first quarter please?

A - Richard M. Beyer

Yes. Ross, this is Rich, we expect the industrial business to be up that seasonally normal and straight to the design momentum suggested it will be, we believed that consumer business will continue to grow the LCD business is strong, the handheld business continues to be strong, communications we expect to be up slightly flattish to up slightly in the computing business as you would anticipate is likely to be down a little bit.

Q - Ross Seymore

Great and then one follow up is Dave. On the margin side, I think, in fact a little bit about the trade up with gross margin going up and OpEx going up a little bit. Can you give us a little more color on the balance how much you need to those to, and then what you’ve already hit your long-term operating margin goal, what should we start to think about the potential operating margin that Intersil can deliver?

A - David Zinsner

Let me answer that second one first, in my part. Our stated goal for R&D tends to be 17% to 18% of sales and SG&A to be 14% to 15% of sales of our long-term and as you noted R&D is actually below that. We’re expecting next year to be around 16% of sales for R&D throughout the year. SG&A is in the midpoint of our range of 14 to 15, but we’re expecting it to approach the bottom end of the range, about 14% by the end of next year. I think you got magnitude for Q1 other than to say that gross margins will be up nicely because of the industrial strength OpEx will be up modestly, but it should stay within our stated ranges.

Q - Ross Seymore

Great, congrats again.

Operator

And your next question comes from Mr. Craig Ellis of Citigroup. Please proceed.

Q - Craig Ellis

Thank you and congratulations overall and Lou, on the promotions. The difficult impact to understand the fourth quarter a little bit better, it looks like there was about $11 million in revenue outside for the original revenue guidance. Can you just highlight what in terms of the key areas of strength were relative to original and your updated guidance on the Analysts Day?

A - Richard M. Beyer

Sure Craig we saw even better growth in our handheld business, we saw the LCD TV business which is supported by our buffer amplifiers, our DCPs, our DC-to-DC converters, our analog front end, just a very broad base of products that we have designed into those systems that Samsung and L.G. Philips and other major players in Taiwan as well as in Japan. So that’s was a major role driver, our notebook business came on very, very strongly, our desktop business performed quite admirably and as we would tell the industrial business, some of the industrial business actually grew a little bit more than we anticipated it would be.

Q - Craig Ellis

Okay and then a question for Dave. Dave, we picked up about 120 basis points of gross margin expansion in ’05. Can you just talk about the view that you have towards the low end of the 50% to 52% gross margin target, is it reasonable to get there by the end of 2006? Or it’s strength of consumer really gaining with that front end that we should look for in 2007?

A - David Zinsner

No. I think you can expect it at the end of the 2006, but there is two things that are driving our margin improvement. One is net and the other cost improvement, despite what happens on the mix side, will still get cost improvement which are better wafer pricing better, better back-end pricing and lower deprecation, those things will still come next year. So we feel pretty comfortable that we will get to the low end of our 58% to 62% gross margin model, by the end of this year.

Q - Craig Ellis

Great thanks guys.

Operator

And your next question comes from Mr. Craig Hettenbach with Wachovia Securities. Please proceed sir.

Q - Craig Hettenbach

Thanks, I’ll have congrats to Lou, and also congrats to Intersil management team for continuing to retain key employees through acquisitions, very nice to see. First question is given the momentum Intersil is enjoying now, can you discuss what type of impact that’s having on your ability to attract and hire engineers and FAE’s in the marketplace?

A - Lou DiNardo

Hi, this is Lou. I think actually we are very, very positive effect, we, virtually on a weekly basis of bringing in design engineers, applications engineers, field sales engineers, the, I think luster of a high performance analog company is going to the type of growth that we are going to and the reception that the wall street community has given the companies, is really helping us to attract good talent and certainly has been and also part of our ability to retain the design engineering and engineering community overall that we have.

Q - Craig Hettenbach

Great and then the second question area that initially you have spoken, two of them about is, now the automobile end market, particularly with the increase in entertainment out there is that something that you see, the potential for increasing design activity as we go through the next year or two?

A - Lou DiNardo

Absolutely Craig, we’ve identified about 18 months ago, that this was an area years ago, at Harrison, Intersil had a pretty sizeable position in some of the areas like the drive train and breaking systems and so forth. As the company made a strategic decision long time ago not to participate in those areas that the design cycles were so long, and so we moved out of it. But about 18 months ago, we decided that overall this is a very attractive market in the entertainment arena. The product lifecycles are much closer to the lifecycles in the consumer space and then if you put a DVD player or recorder, in a minivan, you can’t put a CD player from 1996 and into one of these things and have it have any success. So, we saw this is an opportunity for ourselves; we are in the process of getting all of the quality systems in place which remained toward to serve that market. We still have a reasonable business in the automotive space and have great customer relationships, so this scenario that we are investing in and envision it will be a contributing part of the portfolio in the future. Having said that, it does take time to get into this market again and so while we see a little bit of potential growth in the second half of this year. We’re really thinking much more about this is in 2007, and strategically way beyond that contributing for the company.

Q - Craig Hettenbach

Understood, thank you.

Operator

And your next question comes from Mr. Doug Freedman with American Technology Research. Please proceed sir.

Q - Doug Freedman

Thank you, once again echo my congratulations, if you guys could dig into a little bit of the change in seasonality, I think it could be helpful as I could understand what do you think that the June quarter seasonality is going to sort of look like now that foreseeing a shift in the company’s make up? Seeing in the past if I looked back over the last several years, we are seeing anywhere from 4% to 9% growth in the June quarter just having trouble understanding what that seasonality is going to look like?

A - Lou DiNardo

Well, Doug we cant we don’t have much greater insight into a quarter out and we’ve had in recent past, our backlog is helping these days, we’ve pointed out lead times have only moved out modestly in a couple of different areas. So we don’t have great insights into Q2. Having said that, just looking at the picture, we will expect computing to continue to be rather week in the second quarter as it typically is, the consumer market is okay, in that quarter there are no central drivers of purchases in that quarter. The industrial should continue to see some modest sequential growth in Q1, in our comp business. So probably see some modest growth as well. So, we believe that will grow in Q2 as we’ve clearly will not be seasonally down. But at the moment, we are going to be cautious about anticipating relevantly modest, Q1 and Q2 growth.

Q - Doug Freedman

Great that was very helpful, if you could comment on, I know you guys during the past you’ve been very exposed to the DVD end market? We’re about to see the DVD market grow through a transition here. Can you help us to understand sort of the agnostic nature of your content and then the incremental content that might be available to you as we moved into these next generation players, maybe a little bit about the ramping timing of that incremental revenue as well?

A - Lou DiNardo

Sure, we’ve got Mohan here, who obviously as our grand master is there, who’s willing to answer to that question now.

A - Mohan R. Maheswaran

Doug the two, two real key points and things with the DVD market, first of all the attach rates continue to increase. So we expect certainly slim drives, the AV market is continues to drive growth in the DVD driven market. And another key transition as I think you’re alluding to is the transition to Blu and HD, the good thing there perhaps was that there is potentially more content no one is able to buy drivers but also sort of diode and IC that we had been on for some time and we begin to start to see, good traction with those new products. The Blu and HD markets going to be relative to be modest, for 2006, we’ve really the volume in that 2007. But we will start to see, momentum in second half of this year.

A - Richard M. Beyer

We are seeing Doug, just a comment, so we are seeing at least one of the major PC OEMs that is requesting codes from major optical drive suppliers for Blu laser drives to be put into I guess their high-end that drive sometime middle of this year. So, this is the year that just beginning as Mohan said but it does indicate that 2007, we are going to see a pretty sizeable ramp in Blu-ray and HT.

Q - Doug Freedman

Okay and your total content in the red laser versus blue laser?

A - Richard M. Beyer

In red, it’s simply laser diode driver typically $0.50 per dollar and in blue it could be anything up to $2.

Q - Doug Freedman

Great thank you so much guys and nice quarter.

Operator

And your next question comes from Tore Svanberg. Please proceed sir.

Q - Tore Svanberg

Yes, good afternoon and congrats to everybody. Couple of questions, first of all you have a pretty strong business momentum now. Yet your inventories were down 6.1 million last quarter. Do you feel you are running a little bit too tight here? Or do you think we had a good level?

A - Richard M. Beyer

Our state of goal is to get to 90 days in inventory and today we are at a 103 days of inventory 106 days anyway surpassed so, I think the inventory levels are in pretty good shape and should actually come down as we lower our end of license which are we still have $9 million of end-of-life inventory what has to be digested. Having said that lead time try and have just pushed out a little bit. We are at about six weeks right now. But overall, we feel pretty good about what we are at.

Q - Tore Svanberg

Very well and can you also just give us a capacity update, where you are on your internal manufacturing front and backend?

A - Richard M. Beyer

Yeah sure, capacity right now is we are at about 83% utilization that’s up a little bit from the prior quarter which was about 80%, from an internal, external perspective about 45% of our revenue came from internally produced wafers and about 55% came from external.

Q - Tore Svanberg

Great just a last question for Lou, just looking at some of these high-end consumer market, could you just talk a little bit more about, ranges of content you have in lets say a Smart phone and LCD TVs, some of these faster growing areas?

A - Lou DiNardo

Yeah sure we are touched down on our few calls, the handset businesses is starting to blossom nicely, as we move from battery charging as our core competency into switching regulation, buck mode synchronous switches, I mentioned the LDO product family, a very nice family of low dropout regulators, was very high power supply rejection which is really critical factor for, getting the kinds of performance. We were not in a handset just required as in LDO; we have wide variety of protection ICs and authentication ICs that are finding themselves to be productive choice by the leading cell phone manufacturers. There is a big concern about blowing up batteries, people charging them with the wrong charger. Our ability, frankly to deliver both high voltages as well as do that in economical process is that the situation where we developed the process technologies with our foundry partners, what are leading this process is, I used to corner the costs which that would cancel and move outside foundry partners. In the display business, is, nearly is, it’s a very, very nice momentum in additional content increasing silicon in that particular footprint we’ve gone from, having displayed buffers to programmable buffers and we’ve got the analog front-end, we have power management ICs of a wide variety that are, that are part into the display market. I mentioned a level shifter that I think there’ll be trends towards that gate and panel design, I think really a fore front-end technology that we, we’ve been able to source partner and with the display panel manufactures. In both takers its, its kind of growing on our front, its moving from one or two core ICs to three, four, five as many as six ICs.

Q - Tore Svanberg

Great, thank you very much.

Operator

And your next question from Mr. Steve Smigie with Raymond James. Please proceed.

Q - Steven Smigie

Great, thank you, congratulations also to Lou and on several good quarters here. The first question is, just regard to the desktop, in computing business in general, this tradition has pursued its been a little bit lower gross margin, but you guys obviously have very nice market share there. Anything that you are doing possibly to drive the market share proceeding, drive that gross margin a little bit higher, or maybe it has got you in the past couple of quarters, just something you can talk about that little bit?

A - Richard M. Beyer

We have a tremendous effort in place in a very seasoned group of folks to manger our computing business in the desktop arena, certainly were been in a little bit more picky about the business, we’ve made great strives in moving to processes as well as levels of integration for the IC itself, which allow us to sweep up more and build material into a single IC and as a result keep a little bit more of the process for ourselves. So I think, we’ve already stared to enjoy that we’re seeing a great success with the integrated driver versions of our desktop core power solutions that’s where we integrate the drivers with PWM controllers. So I think, in the desktop business, we’ve clearly set a course that stays, to maintain and enhance our market share, year at the same time reduce cost and include gross margins, coupled that with our participation in server business which is far less price sensitive and more form experienced and again couple of that was wonderful traction we have in notebook business with platform, does not quite as stable, its still a bit of a moving target and differentiation that’s still something at a sophisticated IC supplier can bring to the table. And overall, the computing business is a very nice business, can enjoy it with the levels that we do.

Q - Steven Smigie

Okay and would you, in the future be integrating the fact in addition to the prominent progress that are?

A - Richard M. Beyer

Yeah Steve, there is a lot of traders there is again, on a circle back to one of, one of the strength of our strategy, I think a favorite company and is that we can use the best process technologies available to meet particular challenge. So we, we certainly know how to integrate the best we’ve had, we have integrated best controllers for other applications that tend to be lower current applications where tenants are, something on that order is required out of the power device. We have the capability and we know how to integrate higher power sets, its really questionable whether that’s economic and whether standpoint of layout in thermal issues, whether an expense in all end-markets on computing, is one of those question we mark, but we know how, in those areas where sense that we will go ahead and do that.

Q - Steven Smigie

Okay and if I could, just one last, a general question, obviously you had a very nice growth to your several quarters in a row, just if you could talk a little bit about, the stability of, of revenue going forward I mean, does everybody bought MP3 players and the new handset now and I just need a few comment now, that’s just a sort of a general question?

A - Richard M. Beyer

Sure. We think, when we looked at and developed our plans for 2006 we obviously looked at the applications inclusions of our products are being designed and we feel very comfortable there’s still a huge markets for additional cell phones, additional MP3 players, digital still cameras, Bluetooth headsets, LCD TVs are not going to stop with Samsung and LG Philips bringing on their next generation fabs this quarter and actually accelerating it to get, I guess LCDs and has a people before the World Cup match this summer and so forth, in there and just fundamental reasons why those markets aren’t seasoned close to saturation and then we look at how we’re adding content in all of those major types of applications, we see there’s a continued opportunity for very strong growth by Intersil in these markets and the broad based industrial and comm infrastructure markets that we developed products that are percolate in the long. So, we feel very good that there’s plenty of room for growth in the markets that we’re in; in the markets that we tend to be have.

Q - Steven Smigie

Great thank you very much.

Operator

As a reminder ladies and gentlemen, please limit your questions to one and one follow up.

Your next question comes from Mr. Rohit Pandey. Please proceed sir.

Q - Rohit Pandey

Thank you, congratulations guys. As I look at 2005, I see the revenue that you had was mostly driven by consumer, about 14% revenue growth there and I suppose that was all single digits. So looking into 2006, do you think this will be more balanced or should we expect a similar profile?

A - Richard M. Beyer

Well, there’s no question to consumer market is a market where, I mean we categorize the, all of the handheld devices in that market, the LCDs in that markets and it just a tremendously strong growth area, but we, and so we did grow very healthily last year and we do envision to better grow healthily in 2006 as well. But we think, as Lou said, that the industrial sector is going to show second greatest growth for us, this year with a great number of products that we introduced, you can see the design win momentum that has accelerated over the course of the last 4 quarters and we think industrial is going to play a nice role and it will help gross margins as well as revenue growth. And we’re planning on the computing business driven; the growth will be driven in large measure by notebooks and servers and in the comm space, we’ve got a number of things that are going on in that area and one of them is huge, our DSL business with great health will provide modest growth, our interface products are healthy, they provide modest growth, DCPs, real time clock and so forth. So we expect all of our segments to grow in the upcoming year. Highest growth is likely to be in high-end consumers, second industrial and third and fourth will be computing/comm infrastructure.

Q - Rohit Pandey

And I have a quick one for Dave, if I look at your total cost from a sort of employee basis, just despite not be the best rate occurred but if I look at your OpEx per employee, it comes to about US$50 to US$1000 and this is about double of what we would see at Linear and National. So do you consider more cost efficiencies in the models from that point of view?

A - David Zinsner

And of that cost efficiency, right, I think that when we look at our model we were looking at it more on a percentage of revenue basis, certain people outsource more of what they do and certain people put everything internally but what we’re trying to do is maximize or minimize, I guess the cost of both of those relative to our sales and I think we are much more competitive when you look at it from that perspective, we’re not looking to take a lot of cost out of what we’ve got there and then go as a little bit of low hanging crew, what we are trying to do is get a lot of leverage up of what we’re spending today.

A - Richard M. Beyer

Yeah, operator?

Operator

And your next question comes from Mr. John Lau with Jefferies & Company. Please proceed sir.

Q - John Lau

Great. Thanks and congrats everyone again. Rich, Lou, on a higher level was there any incremental changes with regards to backend tightness such as assembly and test? And, are there any changes in that lead times, are they stretching so much general, was there any constraints, which resulted in delinquencies exceeding Q4, thank you.

A - Richard M. Beyer

There were some constraints in some package types in assembly, there were some constraints also in test, they did not result in significant delinquencies but, yeah, there’s pretty strong demand going on, I mean we’ve seen this earnings season and unit volumes have been pretty healthy for a number of companies, our sell-through included so, yeah, we’ve seen some constraints but we did a reasonable job in projecting what kind of demands we were going to deliver on and we’ve had some agreements since obliged to be in a position to respond to upside and just slow while there are obviously a couple of different areas where there was a little bit of tightness nothing that was done in the ordinary.

Q - John Lau

And I guess as a result of that, corollary do you believe because of the tightness in the marketplace right now for efficient market, do you believe that inventory levels are at reasonable level and are there any excess that you could possibly see?

A - Lou DiNardo

Hi there, this is Lou. I don’t think that we have anything that’s substitute in the way of inventory build, with the exception of thinking through when distributors and channel partners, ODMs and sub-contractors brought the product in January, so just they have it before the Chinese New Year, between their New Year. Our expectation is that we’ll burn off in orderly fashion and nothing that could turn off into our inventory build.

Q - John Lau

That was great, thank you very much.

Operator

And your next question comes from Bill Lewis with JP Morgan Chase, please proceed sir.

Q - William Lewis

Great, to Dave, on gross margins from the, throughout the year, you said that to be really smooth or is there kind of step function things around, transitions which you look for?

A - David Zinsner

I think that it would be relatively smooth throughout the year.

Q - William Lewis

Okay and then a question Lou, could you mentioned that this little part design win, could you elaborate a little bit on that market?

A - Lou DiNardo

Yeah, as for us, it is, we expect for the foreseeable future to be relative to this minor portion of our overall computing revenue and we’re successful player in the desktop computing core powers as well as a wide variety of power management functions within the desktop, the server and the notebook space. Today we have multi-space, digitally controlled and digit control with switching regulator placed very well, I mean graphics arena plays very well and then server arena floor. Nearly, those applications where you need to deliver a step function of a 120 amps, measured in milliseconds of response time, that transient response is something that digit controllers has held a promise for hoping to reduce the bill of material costs, its really not, its really not a question of how you do it? It’s a matter of how much capacitance you can take off the board and still maintain the kinds of transient response, this type of end customers that has large swings than load current. So, from our perspective, I mean, we’re seeing this time and time again and we’ve passed a few years, since every time, we start to think digital controllers are the solution of choice, our guidance in analog controllers, which solve the problem in a good old analog fashion and frankly on a cost basis, our analog controllers are likely to be a better solution going forward and we have devices now which we standstill, which compete, with her own digital controllers quite nicely and can allow customers to take that book passing us before it maintain the transient response, but it really is a moving target. Our analog controllers continue to push the on blow, yet we are the only major power management company as it has both analog as well as digital topology services demand.

Q - William Lewis

And we think that’s an, a material portion of revenue, at some point this year?

A - Lou DiNardo

No, I don’t think so at all.

Q - William Lewis

Okay, all right well thank you.

Operator

And your next question comes from Michael Masdea with Credit Suisse. Please proceed sir.

Q

Yes, sure, this is Ralph (ph) calling for Michael Masdea, for Credit Suisse, I was wondering if you can discuss how much of your Q4 revenue growth came from new product introductions versus organic?

A - Lou DiNardo

Well, we don’t report that externally, suffice it to say that the LCD market, the handheld market, the computing market really have such short life cycles anywhere from 9 to 12, that’s 18 maybe 24 months, that if we measure new products in terms of what’s been introduced over the last 24 months, clearly sizable chunk of the growth that’s arrived from that. So if we look at this externally, we don’t report it, we look at it internally, we don’t report it externally, but there is no question, the new products that our engineering teams have developed over the last couple years are really hitting the market, they are very well designed they are clearly the right set of features and functions of the customers want, and there is no question in Q4, but all of 2005 was the growth that we saw was the result of some continued growth in all the products which we love, because they really high margins, and very stable demand, but a lot of the growth came through very great profit from new products and different products I was but to articulate this afternoon.

Q

Got it and then one follow up also, I mean you had numerous number of new products introduction during 2005, do you expect that rate to continue at the same rate going into 2006? Accelerate or maybe steer back a little/

A - Lou DiNardo

On my expectation they will little accelerate as I think we are applied to one question, virtually every week, there seem to be finding our way to hire more design engineers, apps engineers, field sales engineers, we mentioned in the model of, that in the notebook space alone, we tripled the number of new product introduction from 2005 versus 2004, I knew we have a wide variety of new designs in the parts, I expect acceleration of new product introductions throughout 2006.

Q

Great thanks. Good quarter guys.

Operator

The next question comes from Ambrish Srivastava with Harris Nesbitt.

Q - Edward William

Ed William is here, for Ambrish. The first question I have on, if you can update us on the breakout between your applications specific versus general purpose for the fourth quarter. And also you mentioned about, being able to hit the 58% gross margin target at the end of ’06, would that assume a 60:40 or 50:50 type of that you had talk about before?

A - David Zinsner

As of Q4, we’re 65% application specific 35% in general purpose and that’s due to the seasonality that associated with a lot of the applications specific products. Our ultimate goal is to try to drive it towards 50:50, but I don’t think we have a specific number to get the 58%. The 58% more comes from our cost reduction initiatives, and the mix both within general purpose and on the mix within applications specific, there is a lot of our applications specific products that are hitting strives that would actually carry margin above the corporate average.

Q - Edward William

Okay thanks. And a quick follow-up, regarding computing market, I was just wondering with even the relative share, market share position you have in Intel versus AMD, if there is any significant changes in the market share between those to in ’06? How would that impact your, I guess your growth outlook for computing, so take for example if AMD or Intel of more share than market expected? Do you see that will provide some outside the price you’re computing revenue growth for ’06 or considering the matter too much between the 2 share gains or between 2 companies? Thanks.

A - David Zinsner

Certainly the potential is, the challenges are worth to take more market share, we have a really well positioned portfolio of product. I don’t think it’s really material to our success whether AMD or Intel wins, the reality as we have a really wide portfolio of PWMs with integrated drivers a whole suite and portfolio of products that addressed both applications for both that’s practice as well as for mobile applications. We are in pretty good shape in that OEM.

Q - Edward William

Thank you.

Operator

And your next question comes from Sumit Dhanda with Banc of America Securities. Please proceed.

Q - Erik Gennadi

Hey gentlemen, the Erik Gennadi (ph) for Sumit Dhanda. Just a question on gross margins, your top line is 57% right now, you said the gross margins will expand quarter-over-quarter nicely in Q1, I assume that implies at least 7 basis points so about 58. But in some of the analyst meeting you’ve talked about gross margins of 56 to 58 in next 12 months. Can you reconcile this goal now with your comments regarding the smooth increasing gross margins that you expecting 2006?

A - Richard M. Beyer

I don’t think Q1 we believe we had that gross margins will be at 58%. What I said is there are 56.6 today and that they should be within the model by the fourth quarter of next year.

Q - Erik Gennadi

Okay.

A - Richard M. Beyer

We have it at this year guidance. Do you think next year what I mean Q4 of ’06.

Q - Erik Gennadi

Okay. Can you just recap what you said about R&D for this year in terms of as a percentage of revenue, Sorry I missed that?

A - Richard M. Beyer

Yeah we expect it to be about 16% in sales throughout last year.

Q - Erik Gennadi

16% throughout the year?

A - Richard M. Beyer

Yes.

Q - Erik Gennadi

And the again on operating margin last time you talked about 22% to 25% goal for next 12 months….

A - Richard M. Beyer

Right.

Q - Erik Gennadi

And then your 26 right now do you expect in operating margins to be vertically flat sequentially in current quarter. Can you again reconcile that with your 12 months goal?

A - Richard M. Beyer

Yeah, we expect to steadily improve our operating margins over the next few quarters obviously the first quarter I said it would be relatively flat and then it will start to improve throughout the year, can be well within our 27% to 30% goal by the fourth quarter.

Q - Erik Gennadi

Okay. So, shall we assume like not the low end but little higher low end by the Q4 ’06 in terms of as a percentage of sales?

A - Richard M. Beyer

Yes.

Q - Erik Gennadi

Okay. Just in….

Operator

And your next comes from Yequi (Ritchie) He with RBC Capital Markets. Please proceed sir.

Q - Yequi (Ritchie) He

Yes, hi congratulations. Just want a follow up on the comment on the mix between Intel purpose and these SP products. Do you find yourself something to bounce to make I think in terms of revenue growth of margins?

A - Richard M. Beyer

We are trying to develop all of these products families and get them designed in we get them designed in we obviously shift the products to customers. So we don’t anticipate that we are going to micro manage these things such that the general purpose goes in specific direction at a specific velocity quarter-on-quarter. We don’t think that’s the right to way to manage customer expectations or build the business. So we will have quarters like we just did were the ASSP product lines grow much more significantly and become a little hit the greater portion of it. As you know, the general purpose of goals very, very steadily over an extended period of time seldom you see any short declines in it. So we believe over an extended period of time on general purpose product families will continue to grow in passive, I mean they are growing in absolute terms and we think that continue to grow in relative terms. But there will be probations up and down relative to the overall percentage total revenue and we are not trying to manage it at a level of, in order to have one or the other appeared to be greater than at the name what other lines be able to do with micromanagement.

Q - Yequi (Ritchie) He

Okay thank you.

Operator

And your next question comes from Krishna Shankar with JMP Securities. Please proceed.

Q - Krishna Shankar

Yeah congratulations to everybody from our end, just a quick question, can you rank order the gross margin for the four key end-market, can you give us the sense how that gross margins range with the four different end markets?

A - Richard M. Beyer

Well, we clearly not going to be describing at a great level of detail, but I think its fair to say that the industrial in the calm infrastructure segments of the market yield higher gross margins for us, as they are likely be new for other. Tax from this analog company, the consumer market is at approximately the corporate average in the computing market in aggregate is a big below it but, even in that segment, as Lou pointed out when he was discussing it, there are number of sub segments that are quite good with that positively contributed to computing and the company gross margins. So that’s I guess Krishna is much detail as I’d like to in through on that.

Q - Krishna Shankar

And within the industrial you said that would be the second fastest growing market and can you talk a little bit on some of the new product initiatives which are given success in the industrial segment, your products are seeing reflection with?

A - Richard M. Beyer

To develop the whole range of interface products, we have RS-485, we dual protocol, we have DTPs are going into this market, we have real-time clocks that are getting traction in this market, we have old references in getting traction in this market, we have video amplifiers that are getting traction in the market, we have general purpose operation amplifiers, we’ve got a great general purpose business, that in our power areas that blew quick renew amp as its on the synergy for global power management, so its PWM sort of going into the broad market, we plan to integrate that, controllers going into the market, its really pretty broad base of our product sales and its probably somewhere between 10 to 15 product families, but serving at least of industrial customers and we have strength in our sales and our field applications teams here in North America as well as in Europe and focus a lot of energy on the industrial market and in seasons organization and marketing, we’ve done a lot of targeting with ads, through the industrial sector, through simple with customers and the factor become much more familiar with Intersil, its all holding together and that’s why we believe this year going to be a really positive year for us for the industrial sector.

Q - Krishna Shankar

Great thank you.

Operator

We have one final question from Cody Acree with Stifel Nicolaus. Please proceed.

Q - Cody Acree

Well thanks for putting me in guys, and congratulations for your promotions. Your guidance, Rich you can talk to this, your guidance in the Q1, obviously strengthen orders, it sound like its generally across the board, are you taking more credit for this, internally because of your earning share gains, or your growth in dollar content, are you seeing general health across the board, that’s giving you a little better than normal seasonality?

A - Richard M. Beyer

I think it’s a bit of the product mix that we just fetched upon, the strength in industrial that we actually saw a little bit of, were positive from up tick in the fourth quarter. We think that’s going to carry on into the first quarter, but also we are seeing in a number of different areas where we just getting more content in the given segment. Or which is designed to more platforms, well positioned in more platforms and Smart phones and our platforms in MP3 players, that are allowing us to get more revenue on the sequential basis than, if we were not seeing that and therefore even though there could be some down tick in terms of the unit of volumes of the systems sold in the marketplace we just get more revenue in some of these applications. So its really that combination that’s giving us a better sense that we are not going to see despite the fact we think computing will for example, PCs were down and we think that there will be some bit of them up. A down tick in demand for some of the applications in the consumer space, that we think we are going to be just better positioned than we’ve been in the past.

Q - Cody Acree

And Rich you mentioned I am not sure one of your gentlemen mentioned that we had fairly same inventory channels our there, it sounds like maybe that was occasional, a quarter long as demand is but, had some lead-times stretch out, not just believe but really throughout the rest of the industry, we’re having some probably tightness in the supply chain overall. Do you feel like maybe some of the first quarter strengths is a catch-up from the fourth quarter demand, it didn’t caught of guard, or this flipping kind of guard level stronger than expected demands?

A - Lou DiNardo

Acree, this is Lou, I think they’d be marketplace-to-marketplace, but high end large, I think Rich touched on it. We have so many new platforms coming into play, whatever the hangover is from fourth quarter to first quarter, is probably far outlaid by the proliferation of our content, in these really fast growing markets. When we look at what’s going on in display and we have 4 or 5 ISPs compared to 1 or 2 a year ago and we look into handsets and we are doing business with 5 of the top 6 cell phone manufactures in the world. All of those things that take a far more part into our growth, that any hangover or license fee in managing inventories to channel partners.

Q - Cody Acree

Great thanks guys.

Operator

We have no further questions in the queue; I’ll turn the call back over to Rich Beyer for any further remarks.

Richard Beyer, Chief Executive Officer

Okay, and thanks very much and thanks everybody for participating in this call. Let me just sum up by saying that, fourth quarter 2005 was really a superb quarter at least that’s our view of it, 12% growth what has doubled that 12% growth in revenue more than doubled that in net income and earnings per share, the year was a great year, we grew our business probably 2 times to rate of the growth of the analog piers, we believe that we positioned our selves exceptionally strongly, we believe that 2006 promises to be another fine year, we have great people, we have a very powerful strategy, we have leadership team that I think really understands this market, and understand how to exploit this market, today and tomorrow are for newest years to come. So we think we are on a role, and we think that momentum is going to continue and continue in a very healthy fashion in 2006. Thanks very much for your interest; we will see again in 90 days.

Operator

Thank you ladies and gentlemen, for your participation in your today’s conference, this concludes the presentation and you may all now disconnect. Have a great day.

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Source: Intersil Corporation Q4 2005 Earnings Conference Call Transcript (ISIL)
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