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Executives

David Bell – President, Chief Executive Officer

David Zinsner – Chief Financial Officer

Analysts

Ross Seymore - Deutsche Bank Securities

Craig Ellis – Citigroup

[Ramat Shah] - Lehman Brothers

Craig Hettenbach - Goldman Sachs

Tore Svanberg - Thomas Weisel Partners

Steve Smigie - Raymond James

Cody Acree - Stifel Nicolaus and Company

Uche Orji – UBS

John Lau - Jeffries and Co.

Srini Pajjuri - Merrill Lynch

Kevin Rottinghaus - Cleveland Research Company

Shawn Webster - JP Morgan

Joanne Feeney - FTN Midwest Securities

Mahesh Sanganeria - RBC Capital Markets

Doug Freedman - American Technology Research

Harsh Kumar - Morgan, Keegan and Company

Tayyib Shah - Longbow Research

Intersil Corporation (ISIL) Q1 2008 Earnings Call April 16, 2008 4:45 PM ET

Operator

Good ladies and gentlemen and welcome to the first quarter 2008 Intersil Corporation’s earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Dave Zinsner, Chief Financial Officer. Please proceed.

David Zinsner

Thanks Karen. Good afternoon and thank you for joining us today for Intersil’s first quarter 2008 earnings conference call. Today with me is Dave Bell, Intersil President and Chief Executive Officer.

In a few moments we will deliver remarks on the first quarter of 2008 and provide a summary of our business outlook. After our prepared comments we will open the line to questions. We completed our first quarter on March 28, 2008. A press release was issued today at approximately 1:15 p.m. PST. A copy of the press release is available on the Investor Relations section of our website at www.Intersil.com. In addition this web cast is being broadcast live over the Internet and may also be accessed via the Investor Relations section of our website.

A replay of the conference call and web cast will be available for two weeks through April 30.

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

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

For those of you interested in learning more about Intersil and upcoming investor events, we will be participating in the UBS Semi-Cap Conference on May 15th in Chicago, the JMP Securities Growth Conference on May 19th in San Francisco and the JP Morgan Technology Conference on May 20th in Boston.

I would now like to turn the call over to Dave Bell.

David Bell

Thanks Dave. Good afternoon and thank you for joining us today for Intersil’s first quarter 2008 earnings conference call. Intersil is off to a solid start in 2008. Despite some macro economic uncertainties, Intersil achieved net revenues of $203.7 million for the quarter, an increase of 21% from the same quarter last year and non-GAAP earnings per share of $0.37 or an increase of 28% from last year.

Revenue in the computing and high end consumer businesses were down sequentially as expected due to normal seasonality. The industrial business was down slightly while communications has experienced exceptional growth.

We continue to grow our revenues at a faster pace than our major analog competitors as a group and our earnings per share continue to grow faster than our revenue growth. In our judgment our business model clearly works.

At this time I’d like to turn the call back to Dave Zinsner who will provide a financial summary. After that I will discuss the results for each of our end markets and then provide some comments on our second quarter 2008 outlook.

Dave?

David Zinsner

Thanks. Let me begin with the income statement. As Dave stated we reported $203.7 million in net revenue for the first quarter 2008, a impressive 21% increase from the same quarter last year and a decrease of 4% sequentially in line with normal seasonality.

We saw bookings grow sequentially in the first quarter with a book to bill above one. Based on the profile of our backlog we expect an order turns rate in the second quarter of slightly less than 4%. As we previously mentioned we typically end our fiscal year on the closest Friday to the end of the calendar year using 52 weeks. Approximately every five years we have to add an extra week to our fiscal year so we can end as closely to December 31st as possible. The time to make that adjustment has come again and we will add an extra week to our second quarter.

It should be noted that the orders turns rate normalized for 13 weeks is approximately 35%.

Those of you developing models on Intersil should factor in the extra week in the second quarter and remember that the third quarter will be back to our normal 13-week quarter.

Now back to our first quarter results. On a GAAP basis gross margins were 53.8% down from 57.2% in the fourth quarter. As part of our strategy to continually improve and grow our operating margin, our Board of Directors approved a restructuring plan to reorganize certain company operations. During the quarter we incurred one-time charges related to the restructure of operations and consolidation of our internal manufacturing facilities. The reorganization and consolidation are expected to be completed within the next six quarters.

In the first quarter we incurred one-time charges related to these events totaling $9.5 million of which $5.9 million was classified as cost of sales and $3.6 million was classified as operating expense. Long-term we expect to realize annual cost benefits between $4-6 million with no impact on revenue.

Excluding this one time charge and equity compensation of $1 million, non-GAAP gross margins were 57.2% down from 57.6% in the prior quarter. Gross margins were impacted in part by under-utilization of our internal FAS, increases in the price of gold and some mixed changes at the product family level.

Next quarter we expect non-GAAP gross margins to remain at similar levels.

Mix will continue to be a slight headwind since computing is expected to be our fastest growing end market exporter. On a GAAP basis R&D expenses were $35.1 million or 17.2% of sales down $400,000 from the prior quarter due to lower equity compensation offset by some increase in new product materials.

SG&A expenses on a GAAP basis were $27.5 million or 13.5% of sales down $7.5 million from the prior quarter due to lower equity compensation in part as the result of the departure of our former CEO, Rich Beyer, and a $1 million reduction in our deferred compensation plan and certain expenses in Q4 that did not repeat in Q1.

Amortization of intangibles were $3 million, down $500,000 from the prior quarter as certain planned ATE related items rolled off at the end of the fourth quarter.

As discussed above we incurred $3.6 million of restructuring expenses classified as operating expenses in the first quarter. An additional $5 million of consolidation costs are expected to be incurred over the next six quarters.

On a GAAP basis operating profits were $40.4 million or 19.8% of sales. Excluding one-time charges and tangible amortization and equity compensation, non-GAAP operating margins were 28.1% of sales down from 28.9% last quarter but up from 27.1% last year.

Looking forward into Q2 we expect non-GAAP operating expenses to be approximately $64 million, up 8% from Q1. Approximately 6% of the increase is due to the extra week and 2% of the increase is due to our annual salary increases. This excludes approximately $3 million in intangible amortization, $1 million in ongoing restructuring expenses and $11 million in equity compensation expense expected in Q2.

On a GAAP basis net income from continuing operations for the quarter was $47.7 million or $0.38 per diluted share, up 44% from $33.1 million or $0.24 per share for the same quarter last year and up 13% from net income of $42.4 million or $0.32 per share for the fourth quarter of 2007.

We had a $1 million loss on deferred compensation plans. This is neutral to earnings and the offset in gain is in SG&A expense.

During the quarter we had a loss on investments of $6.4 million related to option rate securities. We continue to monitor our option rate securities and intend to hold all of these investments until the anticipated recovery and the market value occurs.

Interest income was $4.8 million, down almost $2 million from the prior quarter. Actions by the FOMB to dramatically reduce the overnight borrowing rate has impacted our return on cash. We anticipate interest income of approximately $3 million next quarter.

Our GAAP tax provision on continuing operations included a tax benefit of $20 million related to the expiration of certain set tax statutes resulting in a net tax benefit of $9.8 million for the first quarter. We expect our second quarter GAAP tax rate to be approximately 23%.

On a non-GAAP basis primarily excluding the restructuring related items, amortization of intangibles and stock based compensation net income for the quarter was $47.4 million or $0.37 per diluted share, up 18% from $40.2 million or $0.29 per share for the same quarter last year and down 9% from a net income of $51.9 million or $0.39 per share for the fourth quarter of 2007.

Our non-GAAP tax rate was 23.7% for the first quarter, down from 23.9% in the fourth quarter. We expect our second quarter non-GAAP tax rate to be approximately 23.7%.

Now moving to the balance sheet. On an absolute dollar basis net inventory decreased by $6.5 million from the fourth quarter and our date of inventory increased one day to 97 days. Day sales outstanding was 51 days, up two days from 49 days in the fourth quarter. CapEx was $14.1 million and depreciation was $5 million for the first quarter.

Capital spending was high in the first quarter as we have been expanding our wafer output at one of our foundry partners. We expect capEx to be approximately $12 million in Q2 as we continue this expansion.

For the first quarter we generated $45.1 million in free cash flow and exited the quarter with approximately $448 million in cash and marketable investments and no debt. We used the cash flow together with a portion of our existing cash balance to repurchase approximately $80 million or 3.4 million shares of our stock. As a result of this share repurchase activity our weighted average share count decreased by over 4 million shares in the first quarter versus the fourth quarter. For the upcoming quarter we expect fully diluted total shares to decline by 1 million shares as we continue to be active in the repurchase of our stock.

In summary, we are very pleased with the company’s financial performance in the first quarter. Now I will turn the call to Dave Bell who will provide highlights into each of our foreign markets.

David Bell

Thanks Dave. As Dave mentioned I will now address our business in each of our foreign market categories beginning with the high end consumer market.

Revenue into the high end consumer market represented approximately 27% of first quarter revenue. On an absolute dollar basis revenues in the high end consumer market increased 14% year-over-year and decreased 12% sequentially. The sequential decline is due to typical seasonal softness associated with the consumer space during the first quarter.

In the first quarter we secured a significant design win for switching regular, ideal for hand held devices such as cell phones and MP3 players. This new part maximizes efficiency while minimizing external component count. It is optimized for generating low output voltages and automatically switches modes to maintain high efficiency at light loads to maximize battery life.

During the quarter we introduced our first high frequency [synchro luck] regulator designed specifically for powering the transmitter PA and cellular handsets. This regulator features a standby mode which allows for rapid start up while delivering much longer talk time. Revenue for this regulator will ramp in the second half of 2008.

In the new area of ambient light sensors, we released a digital output sensor with address and game selection options. The light sensor has excellent low light sensitivity and ideal spectral response even in sunlight providing accurate readings that are not affected by IR sensitivity. Revenue is expected to ramp in the latter half of 2008 and into 2009.

In Q1 we achieved our first design win for our SERDES product family. SERDES IC’s provide efficient connectivity by serializing high speed parallel data paths through a much smaller number of wires. Intersil’s SERDES products allow low speed control data to be sent on the same serial channel carrying high speed video data to the LCD display making them ideal for the industrial and consumer display markets. We expect to see modest revenue in 2008 for this new family.

In summary, despite the seasonal softness experienced in the first quarter in the consumer segment, we expect this segment to grow nicely for the remainder of the year with increased market share and customer penetration.

Looking ahead to Q2 we expect revenues to be down slightly before recovering in the third quarter.

Now lets look at our computing business. Revenue in the computing market represented approximately 8% for first quarter revenue. On an absolute dollar basis revenues in the computing market increased 48% year-over-year and decreased 12% sequentially. In notebooks we continue to have great success in leading market share with core power. We experienced strong ordering in anticipation of Intel Montevina ramp later this quarter and are forecasting modest increases in market share. Early design activity for Intel’s recently announced Capella platform which will launch in 2009 is progressing well.

We saw continued strong design activity with our AMD Griffin core solutions. Our latest estimates of market share for Griffin platforms confirm that we have been able to replicate our Intel success in the AMD space. The combination of modest gains in Intel space together with the new strength of AMD solutions supports a very positive outlook for the second half of 2008.

On a unit basis we maintained our content per notebook. The growth in core power should drive similar increases in the charger, system, chip set and graphics power solutions.

In the desktop and server space Intersil released and began to ship our highly efficient core solutions that support Intel’s VR 11.1 specification. We are pleased with the market acceptance and design in the momentum and the strong ramp in Q2 in anticipation of Intel’s market launch of the Eagle Lake desktop platform.

Our desktop and server core power solutions for AMD’s AM II Plus boards continue to ramp through Q1 and are now shipping in high volume. Our share in the AM II plus market and design activity supporting the future AM III socket ensure Intersil will remain the leader in the segment.

Intersil’s computing products are also enjoying considerable success in products using Intel’s recently announced Atom processors. We have several design wins for Atom based net [pass] systems which will begin shipping later this quarter and in the notebook segment we are seeing increasing design activity and anticipate Q3 shipments.

In summary, Q1 met revenue expectations and strong bookings set the stage for continued success. We are particularly excited about our continued success in market share gains in the Intel notebook space. The impending ramp in our notebook and desktop solutions for AMD platforms provide additional impetus for growth. Looking ahead to Q2 we expect our revenue in the computing market to be up strongly due to normal seasonality of the world wide computing business and the ramp of new Intel and AMD platforms.

Moving now to the industrial market. Revenue in the industrial market represented approximately 22% of first quarter revenue. On an absolute dollar basis revenue in the industrial market increased 9% year-over-year and decreased 3% sequentially. Q1 is typically a growth quarter in the industrial market however we experienced some softness in several industrial product segments. Revenues in the military business were down due to the timing of programs and orders. Our shipments into the ATE market were also down significantly as manufacturers around the world exercise caution with capital equipment purchases. However, we are predicting respectable growth in the second quarter as numerous design wins are slated to go into production.

In the video product category we continue to see strength in our broad product portfolio. In Q1 we introduced a new family of timing generators and multiplexers for HDMI and DVI applications. Our parts are the only TMDS solutions on the market that perform [both through tiny] and input switching in a single chip recreating an extremely clean signal that can easily be decoded by even the most marginal AV receivers. Our design win momentum continued to gain traction during the quarter with our energy efficient family of voltage sequencers. In the first quarter we also released a family of ultra low power supervisors. These products’ tight voltage structural accuracy ensure its systems are reliably reset and ultra low current consumption make them suitable for portable and battery product devices.

We will continue to add to our Op Amp product family as well. During the quarter we experienced significant design wins. One notable design win employed our six channel LCD pixel driver the most compact driver available in the market. We also experienced significant design wins for our high voltage general purpose amplifiers that have high band width and excellent signal to noise ratio making them suitable for industrial, automatic test equipment and medical applications.

Looking ahead to Q2 we expect the industrial market to be up significantly driven by a broad set of product categories.

Finally moving to the communications market. Revenues in the communications market represented 24% of first quarter revenue. On an absolute dollar basis revenues in the communications market increased 17% year-over-year and 19% sequentially. New product introductions were strong during the first quarter. We continue to broaden our general purpose product portfolio with our integrated [BET] switching regulators. A recently released family of highly efficient monolithic synchronous buck regulators is ideal for networking and communications infrastructure equipment. We expect production on this family to ramp nicely in the second half of 2008.

During the quarter we released the world’s smallest push button DCPs that provide flexible solutions for digital control in power conscious designs. These push button DCPs are low noise and low power and provide user adjustments without requiring a micro controller. These products are perfect for a variety of applications such as brightness control for LCD panels.

During the quarter we sampled our next generation LNB power controller for satellite TV receivers. This highly efficient integrated controller offers significant cost advantages over the currently available discreet solutions and is compliant with green energy standards. We expect to see revenue ramp in the second half of 2008 for these products.

We are pleased with our design win momentum in both the industrial and communications infrastructure markets. Several major design wins were secured in Q1 and we expect to see revenue gains resulting from these and prior design wins in 2008.

Looking ahead to Q2, we expect the communications market to be up modestly on top of significant growth in Q1.

Now lets turn to our outlook for the second quarter of 2008.

We anticipate Intersil’s revenues to increase 1% to 8% sequentially in the second quarter. This revenue guidance includes sequential growth from a solid first quarter as well as approximately 5% growth due to the extra week in the second quarter. We expect GAAP earnings per diluted share of approximately $0.29 to $0.31 and non-GAAP earnings per share of approximately $0.38 to $0.39.

Our guidance reflects our continued momentum as shown with our book to billable [one] moderated with caution due to the current macro economic uncertainties.

Before we open it up to questions I would like to close with these key points.

We continue to expand both our general purpose and ASSP product lines and we are exploiting the synergies between these two product categories. Our market leading growth is validation that Intersil’s business strategy is working and we will continue to improve the performance and pricing power of analog IC’s. These high performance products combined with culture and pricing discipline are certain to have a positive impact on our margins in the future.

Our entire company is also focused on becoming more efficient with respect to both manufacturing costs and operating expenses. Programs are now underway to reduce manufacturing costs by consolidation at our Palm Bay, Florida wafer fab operations, utilization of our new quarter micron BCD process and conversion from gold wire to copper wire to name just a few. While we expect our non-GAAP gross margins to remain in the 57-58% range for the near future we are confident that our gross margins will rise into the target 60% range once the benefits of these programs are fully realized.

During the last quarter we once again showed the leverage our business model is capable of delivering. With revenues growing 21% year-over-year while non-GAAP EPS grew 28% over the same period. With continued revenue growth, pricing discipline, manufacturing efficiency improvements and operating expense controls investors can anticipate EDS to continue growing faster than revenue.

With that I would now like to open the call to questions for either Dave Zinsner or myself.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ross Seymore with Deutsche Bank Securities. Please proceed.

Ross Seymore - Deutsche Bank Securities

Hi guys. Can you just go into a little bit more about what happened in the communications market to drive that up so substantially? It seems like that was a big surprise versus your original guidance. Give us an idea of how that all played out.

David Zinsner

We expected it to be up. But not quite to the level it has been and it was pretty broad based. There are probably 20 product families within communications I would say about 2/3 of them showed growth sequentially in the quarter. DSL grew nicely. Our interface RX 232 business grew nicely. We originally expected the satellite business to be down a bit in the first quarter and it was actually up. It was pretty broad based. Nothing specific.

Ross Seymore - Deutsche Bank Securities

Is that a segment that is very distribution heavy or no?

David Zinsner

Some of it is. It is a hybrid of direct sale and [disty].

Ross Seymore - Deutsche Bank Securities

Okay. And then I guess the one follow-up, switching topics if we go to the third quarter how do we feel about that extra week coming off and how does that fold in on both the top and the op ex line?

David Zinsner

I think the best way to look at it is we said there would be 5% or at least our forecast was based on at least a 5% increase in revenue. You’re gonna have to just [back] that out and assume normal seasonality in the third quarter or whatever you are going to build into your model. On the op ex side we anticipated 6% of our 8% increase in op ex would come from the extra week so I think you obviously take that back out and that is kind of a normal road.

I don’t think we are ready right now to tell you what Q3 is going to look like because it is too early. But as you are building your model those are the numbers [inaudible]

Ross Seymore - Deutsche Bank Securities

Okay. Thank you.

Operator

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

Craig Ellis - Citigroup

Thanks. Good afternoon gentlemen. Dave Zinsner first a question on the gross margin comments. For the quarter you said that utilization gold and mix impacted gross margins. Can you say to what extent each of those impacted gross margins?

David Zinsner

Craig I don’t actually have all of that in front of me but I think suffice it to say I feel we would have most likely been at or above the lower end of our model had it not been for those three factors.

Craig Ellis - Citigroup

Okay. And then for David Bell. On the same topic you mentioned there are a number of initiatives that will take the business towards that target range of 60% in the near term 57-58%. When hit the inflection when we go from the 57-58% towards that 60%?

David Bell

That’s a good question, Craig. Clearly as you mention I think for the near term meaning probably the next several quarters you’re going to see us in the 57-58% range. I think that is not a bad place to be and we’re going to continue seeing good leverage as we grow the top line so I think you’ll see continued rapid growth in our earnings and our EPS. But I don’t want to condition you guys to think that a lot of these programs we have initiated are going to have an immediate impact. As we mentioned we are underutilized in our Palm Bay, Florida fabs. We have a restructuring program underway there to remedy that. That program frankly is going to take 18-24 months before that will be completed so that is actually quite a ways out before we really see much impact there.

Some of the other things I really know like transition to our new quarter micron process we’re going to begin shipping in production our first product in that process during this quarter and many, many more products are in design in that process but again you can kind of roll that forward. It is going to be many quarters before most of those products are actually being offered for sale and actually start contributing with higher gross margins.

The last one and is probably currently the shortest term thing we are doing. The price of gold has gone up dramatically in recent quarters as everybody is aware and what we are doing is we have a program underway to convert the wires within the integrated SERDES from gold to copper and that is something that probably we could begin to see some impact in potentially near the end of Q3 but certainly with some of the highest running products before the end of Q4. So there are some programs again in summary that are in place to remedy and grow our gross margins but the reality of the situation is that it is going to be a number of quarters and in some cases many quarters before we really feel the full impact of them.

Craig Ellis - Citigroup

So it sounds like the full impact is something we’re looking for in the 2009 timeframe?

David Bell

That’s accurate.

Craig Ellis - Citigroup

Okay. Then on the product, thanks for all the follow-up that is happening on the individual segments. There were three things that were mentioned that the analysts say that I wanted to follow-up on. One, the company talked about a gaming opportunity this year. Two, I know the company is working on a handset PMIC. Lastly, can you just give us some color on what you are seeing out there with Blu-ray drives?

David Zinsner

Okay. So three questions. First on gaming. That socket still is retained and that is something that is going to be going to production a little bit later on this year. In fact we may begin to see some of that revenue near the end of this quarter. I think that has actually slipped down a little bit from what we explained to you guys last quarter as often times happen with these programs.

The PMIC we refer to as well…that is going into production at the end of this quarter. That too, unfortunately, has slipped out a little bit. Not due to any fault of ours but just the customer that is using that their programs have slipped a little bit so we expect that really to begin ramping at the end of Q2 but really have more of an impact on the Q3 revenues as that product starts ramping a little bit better there.

The third question, Blu-ray. That’s right. It always comes up. Blu-ray. Unfortunately with Blu-ray I think we are getting a little bit of a delay with our products there to be candid with you guys. The conversion or elimination of the HD DVD that occurred last year has pushed out some programs. A lot of our earlier design wins with the Blu-ray LDD drivers were in combo-drives and the comb-drives supported both HD DVD and Blu-ray. Many of the products are being redesigned and we feel that we are going to see some volume with that but quite honestly a lot of those volumes are going to be pushed out to later in 2008 for a ramp whereas we were anticipating some of those ramping earlier in 2008. So a little bit of a set back in the Blu-ray area just due to the timing and redesign of some of those programs.

Craig Ellis - Citigroup

Okay, so it sounds like you’ve got all those drivers but they are occurring either later in the second quarter or earlier in the third quarter so a slip of about a quarter?

David Zinsner

That’s correct.

Craig Ellis - Citigroup

Okay. Thanks Dave.

Operator

As a reminder, ladies and gentlemen please limit your questions to one per caller. Your next question is from the line of [Ramat Shah] with Lehman Brothers. Please proceed.

[Ramat Shah] - Lehman Brothers

Thanks for taking my question. Dave just on SG&A it was close to about 20% below my estimate. Could you just walk me through what happened in the quarter with SG&A?

David Zinsner

You measure it on a GAAP basis?

[Ramat Shah] - Lehman Brothers

I include stock option expense.

David Zinsner

Well most of that then was based on the stock option expense. When Rich left he basically built up an expense assuming that he would get a certain amount of options from things that vest out a year or two years from now. Also the same thing on restricted shares. So once he left and forfeited all those options and shares we had kind of an immediate reversal of all of that. That was basically the land share of the difference.

[Ramat Shah] - Lehman Brothers

So Dave is not getting all of that in Q3?

David Zinsner

We’re not going to give it to him unfortunately.

[Ramat Shah] - Lehman Brothers

And just on consumer just to clarify you guys expect that business to be down slightly in Q2 from an adjusted 13-week basis it is down closer to high single-digits. Is the…I’ve seen in previous years that your Q2 is a decent growth quarter for consumers. Is the difference this year just because of the push out in Blu-ray?

David Zinsner

It is definitely the Blu-ray. The handset business is going to be up. LCD displays is a little flat and that seems to be kind of timing around programs and when they are ramping for us but clearly optical storage is the one that is sequentially down pretty significantly as the push out in Blu-ray has occurred. It has impacted that.

David Bell

If I can answer just a little…the reason the Q2 is down is really some of the same things I mentioned to Craig earlier. We retained a lot of those programs for the PMIC’s going in and so forth but some of those things that we would have expected a ramp in Q2 are going to ramp in Q3 instead.

[Ramat Shah] - Lehman Brothers

Alright. Perfect. Thank you.

Operator

The next question comes from the line of Craig Hettenbach with Goldman Sachs. Please proceed.

Craig Hettenbach - Goldman Sachs

Thank you. Question for Dave Bell. Just to follow-up on the gaming console front. In addition to the socket that you won are you in design efforts with other console players out there or how should we view the opportunity of gaming consoles beyond the initial win?

David Bell

Craig you know the gaming consoles are looking more and more like PC’s as time goes on and so a lot of the power requirements are very similar. Not surprisingly we are following up with additional engagements with some of the other major gaming console guys. The initial win, of course puts us as one of the leading players. But you are right. We do have a lot of discussions ongoing and hopefully we’ll be able to report some wins with one or more of those other leading players at some point. But right now our forecasts are really banked on our relationship with the first guy that have a key win.

Craig Hettenbach - Goldman Sachs

Okay. Then in the computing space can you talk about any design activity you are seeing in ultra mobile PC? Do you think that could become meaningful over the next year or two?

David Bell

You know we do have good design in activity going on with the UMPC stuff. I think the biggest question is just how big is the real UMPC market going to be? Almost all the major guys in Taiwan have UMPC programs going on . We have some parts that are suitable for that. But the big question for that is just how rapidly is the UMPC market going to ramp and it’s just really unknown at this time, Craig.

Craig Hettenbach - Goldman Sachs

Okay. In terms of positioning if that market does take off are you comfortable? Are you equally positioned as you are in notebooks?

David Bell

I don’t know that I would say our product portfolio is as broad when it comes to UMPC because it is kind of a nascent market but we have products that are aimed at that market today and if it looks like it really is going to take off you can count on us devoting even more resources to filling out a full portfolio. A lot of our products though apply to either one. The power levels are lower but I think there is going to be some overlap in some of those product categories as well.

Craig Hettenbach - Goldman Sachs

Okay and then one last one for Dave Zinsner staying on the computing front. In terms of lead times – where they are today and where you think from a time where they might come back down again?

David Zinsner

Lead times in total are 6-8 weeks. Obviously they are 10+ weeks in computing. Our expectation is we can really expect to bring them in by the end of Q2. They should come close to what we normally see. We have been ramping at our foundry partner. Their volume is up considerably and now it is just a matter of getting those wafers out to the customers.

Craig Hettenbach - Goldman Sachs

Great. Thank you.

Operator

Your next question comes from the line of Tore Svanberg with Thomas Weisel Partners. Please proceed.

Tore Svanberg - Thomas Weisel Partners

Thank you. I mentioned some referenced designs for the Atom processor. What is the content profile there versus lets say Montevina?

David Bell

That’s a good question, Tore. To be honest I don’t know the details on what we’ve got for the Atom processor line. I guess I would point to the fact that our computing product line the guys there spend a lot of time working with Intel, working with our OEM customers here in the states and ODM’s in Asia. I know they have got this on the road map. It has been there for quite some time. I know they have a number of products that are designed to support Atom but to be quite honest with you I don’t have that information in front of me and I can’t answer that question for you.

Tore Svanberg - Thomas Weisel Partners

That’s fair. You did also mention you expect to gain some share on the Montevina platform. Can you elaborate a little bit more on that? Is it meaningful share or just somewhat more share?

David Bell

Well as you recall about a year ago we gained quite a bit of market share when the Santa Rosa platform took hold and we believed at that point in the notebook space we gained a dominant share in the notebook core power space. We think we are going to retain that and probably even increase the market share a little bit. I wouldn’t lead you to believe that given the fact that we’ve already got a dominant share it is going to go up hugely but based on the information we are getting from the field we think it will inch up a little further as Montevina takes off here at the end of this quarter.

Tore Svanberg - Thomas Weisel Partners

Great. Thank you very much.

Operator

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

Steve Smigie - Raymond James

Great thank you. I was wondering if you could comment on the impact of switching to copper from gold will have it any impact on the performance of the circuits at all?

David Bell

Yeah Steve we don’t believe it will have any impact whatsoever. If anything for the engineers in the crowd copper has a lower resistivity than gold does so for the same dye on the wire the resistivity of copper is actually better. It takes a little bit of difference in the way you bond it to the silken dye, and a unique kind of forming gas that you use but it is a pretty well understood technology right now. It’s not like we are kind of breaking entirely new ground here. There are quite a number of manufacturers in the industry that are already using copper wire extensively. It just didn’t make sense for us to make that conversion earlier on since gold was kind of the standard. But now given the price of gold up in the range of $1,000 per ounce it clearly does make sense. If we start converting kind of the highest runners on the Pareto chart it can actually have a pretty significant impact on our gross margins. So we think the risk is really low. Again, other manufacturers are already using it today and anticipate no performance impact whatsoever on the IC’s.

Steve Smigie - Raymond James

Okay. I just…in the computing, not that you have been significantly involved as CEO but now that you’ve had a chance to have the CEO hat on for a little while any thoughts on how you might handle the computing business? It seems to be a pretty big portion of the business to keep growing it as quickly as possible. Just your comments on that and then any thoughts of integration – integrating consumer controllers with other [inaudible] products?

David Bell

So let me talk about the computing business. The computing business obviously is a fairly large part of our business and has driven a lot of our growth during the last year. We plan to remain in the computing business. But we’re going to be maybe a little bit more selective in that we’re going to focus on the opportunities where we think we can differentiate ourselves. I think there are a lot of those opportunities out there because we believe we have the best switching regulator technology and if customers really value having the lowest power translated into the highest battery life, most compact solutions, the best transient response which also translates into smaller lower cost solutions, I think we can continue to differentiate ourselves in a lot of those sockets out there. The ones where we can’t we’re just not going to focus as much energy on it. So I think you can count on despite the fact it is a very competitive market we are going to focus our energies in areas where we can differentiate ourselves and it will continue to be a driver for growth in the quarters to come.

When it comes to integration that is something we continue to do in a lot of different areas. When it comes to integrating more and more functions on a chip we are doing that. We talk about our PMIC and other functions like that where we put more and more functions in a dye. When it comes to switching regulators, putting the boss fits on ship and perhaps that is what you were referring to we have released a number of new products during the last quarter that are integrated [FET] switchers and you’ll see many, many more products coming in the quarters to come that also integrate the switching [FETS] on the same dye with the controller. That offers cost and size and efficiency benefits for the user.

Steve Smigie - Raymond James

Great. Thanks very much.

Operator

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

Cody Acree - Stifel Nicolaus and Company

Thanks guys. Dave you talked of a few customers that may have pushed a few things out and whether that be a technical push out or for macro reasons, can you maybe talk of the tone of end market? I know book to bill is above one, but it still sounds like there is a healthy amount of caution out there. So can you maybe give us an overview of what you’re seeing there maybe on an anecdotal basis?

David Bell

Let me start out and Dave Zinsner can jump in with his thoughts on it. I think it has been a little bit confusing because when we talked with our OEM customers and the ODM manufacturers we get a fairly bullish view of what the rest of the year looks like. So those companies in general seem like they are planning on modest growth through 2008. On the other hand it is becoming more and more apparent we’ve got some macro economic issues here that could certainly dampen things. So there is a bit of a disconnect I guess in my view, Cody, about how do we blend in the concerns over macro economic effects along with the reasonably decent forecasts we look at when we roll them bottoms up from our customers. You saw that in our numbers. We’re being perhaps a little bit more cautious than we normally would because we know there is some factor there but it is really not clear exactly what kind of an impact that is going to have certainly on the second half of the year.

Dave?

David Zinsner

I would just add that because of that and I think you’ve seen that in our op ex numbers. We’ve taken steps to manage spending through these couple of quarters to ensure that we maintain our profitability. We’ll see how the back half looks. If our customers are correct and things are looking positive in the back half of the year we’ll start to invest more heavily in R&D and developing new products.

Cody Acree - Stifel Nicolaus and Company

Great. Great. Any discussions of inventories out in the channel with OEM’s?

David Zinsner

Well the best vision we have is actually in the [disties] as you know we get a report from every distributor on a monthly basis. Some of them we get on a weekly basis. Inventory at [distie] dried a little bit in the first quarter. We’ve exited with a higher inventory balance than we started with. But I would say kind of on a year-over-year comparison or compared to peak it was down pretty significantly – double digits it was still down. Days of inventory is relatively flat. So we’ve always maintained over the last 4-5 quarters that inventory in the channel has been lean and that still seems to be the case. At the ODM level we look at little snippets of what they are talking about and they clearly, particularly in the computing area, see inventory at very, very low levels. So our read on the channels as best as we can determine it is that inventory continues to be lean and very, very healthy.

Cody Acree - Stifel Nicolaus and Company

Dave when you say [distie] levels did rise a bit is that a material rise or is it a market rise?

David Zinsner

I guess it would depend on your definition but it was up kind of mid single-digits.

Cody Acree - Stifel Nicolaus and Company

Okay great. Lastly, tax rates…do you get to carry this kind of 23 and change through the end of the year?

David Zinsner

I do unless the R&D tax credit gets approved and then it would drop probably 100 basis points. If that doesn’t happen this is our rate for the year.

Cody Acree - Stifel Nicolaus and Company

Okay. Thanks guys.

Operator

Your next question comes from the line of Uche Orji with UBS. Please proceed.

Uche Orji - UBS

Hi. This is [Parat Uje]. Just wondering if you could comment on the [computing enterprising – inaudible] and I was just wondering if you are seeing serious competitive players [other than tighter in share]?

David Bell

Yeah this is Dave Bell again. Well as I alluded to earlier it is a very competitive market and there is some pricing pressure out there and I think one or two of our competitors are out there using price as a tool to try and gain some market share. What that makes us do is focus on a higher value of opportunities. If there is a place where we think we are not significantly differentiated and price is a primary determinate that is going to be one that we are going to be more cautious about. On the other hand one of the good things that is going on particularly in notebooks is that every successive generation seems to have more product requirements. One example now as you are starting to see the conversion from CCFF backlights to white LED backlights for LCD displays and that creates new product opportunities for us. We have what we believe is the best white LED driver for notebooks in the marketplace and that gives us an opportunity to sell that. A product like that is much more differentiated and gives us much more pricing power than just going head to head with, for instance, a system DC to DC converter. So, I think the computing business despite the fact that especially in certain sockets is becoming more competitive because more and more new functions are being added to notebook computers it creates opportunities for us to focus on those, continue to grow our business in computing and continue to have some pricing power and achieving decent gross margins.

Uche Orji - UBS

Okay. I missed your earlier comment about this quarter’s gross margins being impacted by…could you elaborate on that please?

David Zinsner

Dave mentioned that the mix was a factor. In reality it was really at the product family level. So, for example, in computing notebooks was down more significantly than desktops. I’m sure you know notebook carries a higher gross margin than desktop so that impacted us. In the communications area, areas that we did particularly well were in DSL and interface and some of those product areas…those gross margins are below the corporate average so that makes impacted us.

Operator

As a reminder ladies and gentlemen please limit your questions to one per caller.

Your next question comes from the line of John Lau with Jeffries and Co. Please proceed.

John Lau - Jeffries and Co.

Great. Thank you very much Dave. We spoke about some of the push outs and the dynamics there and you also mentioned something about constraints and longer lead times. I was wondering if you could give us a flip side of the story and some details on that?

David Bell

In the computing space in particular we’ve seen really rapid growth during the last year and in response to that we have added significant capacity at our foundry partner who makes most of the wafers for computing products. Dave alluded to that in his monologue about our increased capEx expenditures during Q1 and as well in Q2. We’ve been adding capacity to allow us to keep up with that demand and it is just a consequence of our very rapid growth in the PC business. Despite some of those capital increases the growth has kind of kept pace with that so it remains a challenge for us to keep up with the demand but we think with the amount of additional capacity that we’ve put in place during the last quarter or so that we’ll be able to keep up with the demand throughout the second half of 2008.

John Lau - Jeffries and Co.

Alright. Dave are you still constrained on some of those products?

David Bell

There are some products where we are challenged. Yes. Trying to keep up with the demand. It is a good news, bad news situation obviously. We’ve seen very high growth in our computing business. It frankly is higher than we would have anticipated. We saw the beginnings of that back about a year ago when we transitioned from Napa to Santa Rosa in notebooks and were left with a dominant market share in the notebook computer space. As I mentioned earlier in the call as we transition to Montevina we think we probably will continue to pick up a little bit more market share in power for notebook computers. So it is really the result of some very, very good news that we continue to gain some market share in that space along with notebooks just growing much more rapidly than desktop computers. That said it has challenged us to try and keep up with that very rapid growth and we’ve been adding capacity and I think we’re going to be in fine shape once all of that capacity is online here during Q2.

Operator

Your next question comes from the line of Srini Pajjuri with Merrill Lynch. Please proceed.

Srini Pajjuri - Merrill Lynch

Thank you. Dave just a clarification for us. You said the extra week would add about 5% points of growth. Just wondering…I was expecting a bit more because if you do the math I guess it comes out to about 7-8% per week so I’m wondering what I’m missing here?

David Zinsner

Well basically we used our sales directors came in and we went through the numbers. A lot of these guys they are researched mainly on a monthly basis. They get kind of a monthly forecast. I think that drives some of it and that is how they build their business. So I think the 7% number is basically taking 13 weeks and adding one extra week and you get 7%. We took a little bit more of a detailed level analysis of it. Could it be 7%? It could. But we’re building into our forecast today that it will be 5%.

David Bell

I would add just a couple of things to that as well. In the U.S. keep in mind that the extra week is a fourth of July week so it is going to be a very soft extra week in the U.S. On top of that our distributors, no surprise, tend to have a very strong last week in their quarter so the week after their quarter ends which will be our last week in Q2 tends to be a fairly weak one. So those are a couple of other considerations we looked at which mean it really won’t be the 7%. But something a little bit less than that.

Operator

Your next question comes from the line of Kevin Rottinghaus with Cleveland Research Company. Please proceed.

Kevin Rottinghaus - Cleveland Research Company

Thanks. On the consumer side could you maybe give us any more clarity on why the push out? Do you feel like that was macro related at all or whether it was all just kind of OEM specific decisions?

David Bell

I think it was just all OEM specific stuff going on. It’s really not an unusual event. It is fairly common place that programs at our customers will get slightly delayed which is the case here. As mentioned earlier we still have the socket with our major gaming customer and that is going to ramping at the end of this quarter. The PMIC program which is going into a smart phone – that actually did have about a one quarter delay. That is nothing to do with our product it is just a normal delay in the release of that product at our customer. So no there really is nothing customer specific or product specific there it’s just kind of normal delays that happen frequently in the industry.

Operator

Your next question comes from the line of Shawn Webster with JP Morgan. Please proceed.

Shawn Webster - JP Morgan

Good afternoon. Thanks for taking my question. What were your actual terms in Q4?

David Zinsner

Our actual terms…

Shawn Webster - JP Morgan

I’m sorry…Q1?

David Zinsner

Q1 our actual terms on a percentage basis were a little over 35%.

Operator

And your next question comes from the line of Joanne Feeney with FTN Midwest Securities. Please proceed.

Joanne Feeney - FTN Midwest Securities

Thanks. A quick one on the computation of the chips…if you switch them from gold to copper do they have to be requalified at your customers?

David Bell

That’s a good question. In general the answer is going to be no. It is an industry proven process and what we would do is we would speak to our customers and let them know we are going to start shipping with alternate construction on these IC’s. Some of the major customers that we work with may want to get more information. Certainly we’re going to be doing our own internal quals to make sure there are no performance or reliability issues but in general because it is a proven technology here if we can simply communicate to them that we’ve done the proper homework here I don’t anticipate that it is going to be a big problem with any of our customers.

Operator

And your next question comes from the line of Mahesh Sanganeria with RBC Capital Markets. Please proceed.

Mahesh Sanganeria - RBC Capital Markets

Hi guys. This is Casey calling for Mahesh. I want to focus on the computer segment. Is it fair to say that compared to the expectations for Q1 that you folks were having back in the [feb] time frame that the actual numbers will come in softer than what you were thinking and why?

David Zinsner

The answer to that is yes we actually expected it to be down mid single-digits and it was down 12%. We thought we would make a little bit more progress on production. In other words getting more capacity to be able to meet the demands and we fell short of that goal. So it wasn’t anything at the end market level or the customer level. It was more about our ability to supply the product and we just didn’t get to the level we thought we’d get.

Operator

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

Doug Freedman - American Technology Research

Thanks for taking my question. My one question I guess is going to be focused on the military product. Can you guys talk a little bit about this segment and what your outlook is? I know it is an important contributor to gross margins or at least has been in the past. How should we think about it going forward?

David Bell

Doug it certainly is a very profitable business for us so we’re interested in continuing to grow that business. Last year we had the completion of one major program – the Minuteman 3 program – that came to termination and that is one of the reasons that during the second half of 2007 you saw some of those numbers decline in the [Rad] hard and the military business there.

Long-term the future is very bright for it. We are actually investing far more than we have in the past in R&D for new products in the [rad] hard and military area. So even though we are in what I guess I would characterize as a bit of a lull right now I think the long-term future for that business is very bright and as I said once we start getting out some of these products we’re investing in now I think we’ll see some continued growth in that business. In fact there is some business that is going to be coming along in the next quarter or so that we think will help weight the numbers as well based on some design wins that we obtained in the last few quarters.

Operator

Your next question comes from the line of Harsh Kumar with Morgan, Keegan and Company. Please proceed.

Harsh Kumar - Morgan, Keegan and Company

Thanks for taking my question guys. Quick question. Do you think Dave X combo drive situation and gaming push outs that you might have been actually up in consumer in the second quarter?

David Zinsner

Well there are a number of factors with consumers. I mentioned that we also had the PMIC program which was delayed by roughly a quarter. There were some issues with some LCD programs as well in Asia. So I think it was a number of things that caused consumer to be a little bit lower than we had anticipated. The good news, again, is that we are really well positioned for a lot of that stuff we thought was going to happen in Q2 to actually come home and help the Q3 numbers.

Harsh Kumar - Morgan, Keegan and Company

Let me rephrase the question.

David Zinsner

I guess you’re not going to get the chance.

David Bell

Let me answer a question I hope you would have asked. One of them is regarding the Blu-ray again. Earlier in the call here there was a bit of a set back where we were expecting to see some ramp earlier in 2008 with the Blu-ray laser [dive] drivers. We think that we’re actually going to be well positioned with some of the new Blu-ray stuff that we’re going to be getting some new design wins a little bit later on this year so that again I would characterize as a delay. A little bit longer delay in that what we were expecting was going to be a ramp in 2008 really is going to turn into a ramp I think by the end of 2008 and into 2009 with Blu-ray laser drive drivers.

Operator

Your next question comes from the line of Tayyib Shah with Longbow Research. Please proceed.

Tayyib Shah - Longbow Research

Hi guys. Can you talk about how your revenue content in the Montevina generation improves over the Santa Rosa platform? What is the difference there?

David Bell

Well I can’t provide you a whole lot of details. What we do believe is that we’re going to build a little bit further on our dominant market share that we obtained in Santa Rosa back about a year ago. Frankly some of this stuff is kind of hard to tell until it all shakes out and you actually start shipping in volume. Some of the stuff we are beginning to ship already and some of the stuff is still a little bit undetermined. But again based on the best roll ups we have got we think we gain a little bit of market share. Beyond that I can’t give you any specifics.

Operator

Ladies and gentlemen I would now like to turn the presentation over to your host for today’s call, Mr. David Bell, for closing remarks.

David Bell

Alright. Well thanks for joining us on this conference call. As you heard I think we are going to be building on a very solid first quarter. We have a lot of new products that we introduced during Q1 that we believe are going to continue to build both our general purpose and our ASSP product portfolio. One of the strengths of Intersil is the diversity of our business and we continue to invest in both of those areas.

Also as we mentioned earlier we have a number of programs that we have embarked on that we are confident are going to increase the profitability of the company and we will continue looking for opportunities to increase both gross margin of the company and continue with the leverage that we have been demonstrating in recent quarters with growing our EDS even faster than sales. Looking forward to a good Q2 with a projected 5% to 8% growth and although we’re not going to give any specific commentary also optimistic about a very good second half in 2008.

Again I thank all of you for joining us on the call today. Have a good day.

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Source: Intersil Corporation Q1 2008 Earnings Call Transcript
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