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Executives

Brendan Lahiff – Senior Investor Relations Manager

David Bell – President, Chief Executive Officer and Director

Jonathan Kennedy – Senior Vice President and Chief Financial Officer

Analysts

Ross Clark Seymore – Deutsche Bank Securities Inc.

Craig A. Ellis – Caris & Co., Inc.

Gabriela Borges – Goldman Sachs & Co.

Joanne Feeney – Longbow Research

Tore E. Svanberg – Stifel, Nicolaus & Co., Inc.

Sumit Dhanda – International Strategy & Investment Group

Christopher Danely – JPMorgan

John W. Pitzer – Credit Suisse

Harsh Kumar – Stephens, Inc.

Steven Eliscu – UBS Securities LLC

Chris Caso – Susquehanna International Group

Steve Smigie – Raymond James

Cody Acree – Williams Financial Group

Intersil Corporation (ISIL) Q2 2012 Earnings Call July 25, 2012 4:45 PM ET

Operator

Ladies and gentlemen, welcome to the Intersil Corporation Second Quarter 2012 Earnings Conference Call. I’ll be your coordinator for today.

I'd now like to turn the presentation over to your host for today's call, Mr. Brendan Lahiff, Senior Investor Relations Manager of Intersil. Mr. Lahiff, please proceed.

Brendan Lahiff

Thanks, Jenely. Good afternoon, and thank you for joining us today for Intersil's second quarter 2012 earnings conference call. Today with me is Dave Bell, Intersil's President and Chief Executive Officer; and Jonathan Kennedy, Intersil's Senior Vice President and Chief Financial Officer.

Today we will deliver remarks on the second quarter 2012, and provide a summary of our third quarter 2012 business outlook. After our prepared comments, we will open the line for questions.

We completed our second quarter on June 29, 2012. An earnings press release was issued today at approximately 1:05 pm Pacific Time. A copy of the press release and supplementary slides to accompany the earnings conference call are available on the Investor Relations section of our website at ir.intersil.com.

In addition, this call is being webcast live over the Internet, and may also be accessed via the Investor Relations section of our website. A telephonic replay of the conference call and webcast will be available for two weeks through August 08. Questions in the call may be also submitted online via the webcast, but will be answered via email after the call.

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

In addition, during this call we may refer to financial measures that are not prepared according to generally accepted accounting principle. We sometime use these measures because we believe they provide useful information about the performance of our business, and still be considered by investors in conjunction with GAAP measures reported.

Our agenda for the call today is as follows: Dave Bell will discuss key highlights from the quarter. Jonathan Kennedy will then review the quarter from our financial perspective, and then Dave will follow with additional commentary on each of our three key markets as well as forward-looking guidance. A Q&A session will follow prepared remarks.

I’d like to now turn the call over to Dave Bell, President and CEO of Intersil.

David Bell

Thanks, Brendan. Good afternoon, and thank you for joining us today for Intersil’s second quarter 2012 earnings conference call. I’ll first quickly review some significant events and results of the second quarter, and then I’ll make detailed comments about each of our end markets, after Jonathan Kennedy’s financial report.

One year ago, we introduced our top ten growth drivers for the first time. Since that time, they’ve provided clarity for our investors about the areas where we’re confident we can win in an increasingly competitive semiconductor market. But it has also been a catalyst for focusing resources within Intersil.

At our Analyst Day on May 8, we updated our top ten growth drivers, and provided a rough estimate for the growth trajectories in each area. We reaffirmed our conviction that these ten growth drivers will create an incremental $700 million in sales by 2016, five years from when that goal was first introduced last July.

At this point, nearly all of our development resources are focused on our top ten growth drivers. These are the carefully chosen product areas where Intersil has the technology, the talent and the customer relationships to much larger rival. During our Analyst Day, we also indicated that we were about to make significant operating expense reductions. We explained that these OpEx reductions amounting to $40 million per year in savings would allow Intersil to reach a non-GAAP operating profit margin of 24% at a $200 million per quarter revenue rate. In light of the soft economic conditions, we believe this reduced revenue goal is more achievable during the coming year.

Nearly all of these OpEx reductions were implemented during the second quarter, so the third quarter's profitability will be significantly improved. We’re now a lean, mean and focused product development machine, and expecting several of our top 10 growth drivers to begin generating significant growth in 2013.

I’d now like to talk briefly about the business conditions in the second quarter. Recovery from the latest semiconductor cycle began in the first part of the second quarter, however bookings weakened again in June, and as a result we closed the quarter with a book-to-bill ratio slightly less than one. Worries over weakness in the global economy, particularly in Europe had weight on all our end markets.

We reported second quarter revenues of $163 million, a 22% decrease from $209.1 million in the second quarter of 2011, and a 4.5% increase from $156 million in the first quarter of 2012. We also reduced our inventory and our long-term debt during the quarter, positioning the company for profitable growth in the coming quarters, Jonathan will provide more financial details in his remarks.

Regardless of the economic cycles, our Board of Directors is committed to sustaining shareholder returns, and has authorized a quarterly dividend at $0.12 per share common stock. At today’s closing price, that translates to a yield of approximately 5%.

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

Jonathan Kennedy

Thank you, Dave. I'll start with the income statement. Today, we reported $163 million in revenue for the second quarter, a 22% decrease from the second quarter last year, and a 4.5% sequential increase from the first quarter of 2012. Revenue increased sequentially in both industrial and infrastructure and the personal computing market, but was offset by decline in the consumer market, where weakness in optical sensor sales to certain smartphone and display customers accounted for most of the decline.

Our lead times remained normal throughout the quarter with no significant supply constraints, and our internal utilization remained below optimal level at just under 70% as production continued below consumption, and inventory levels were reduced.

Second quarter churns were about 36%, and we are expecting Q3 churns to be about the same at the midpoint of our guidance. Our gross margin was 54.5% in Q2, 10 points below the previous quarter driven primarily from unfavorable product mix.

Looking to Q3, we expect gross margins to be approximately flat to slightly down, driven by unfavorable mix that is typical in the third quarter. During the second quarter, we completed a previously announced restructuring plan that resulted in a one-time restructuring charge of $8.3 million, and a reduction of our annual operating expenses by about $40 million.

R&D expense was $46.2 million or 28% of revenue, and SG&A expense was $36.4 million or 22% of revenue.

During the third quarter, we expect R&D expenses to drop to about $40 million, and SG&A expenses to drop to about $32 million as we realized the benefits of the restructuring. Amortization of intangibles was $7.2 million during the quarter, and Q3 amortization is expected to be slightly lower at $7.1 million.

Our Q2 GAAP operating margin was a negative 5.7%. We incurred a loss on our deferred compensation investments of $0.5 million, which was offset by a similar amount in SG&A. Interest income was $0.1 million for the quarter, and interest expense was $1.8 million, and we expect Q3 interest income and interest expense to be approximately flat to Q2.

Our Q2 GAAP tax rate was negative 27% due to certain discrete tax expense items and our non-GAAP tax rate was 25%. We expect our Q3 GAAP effective tax rate to be approximately 50% as our GAAP tax rate is affected by certain tax items that are not dependent on pre-tax income, and can therefore result in an unusually high tax rate when pre-tax income is relatively low. Our non-GAAP tax rate is expected to remain stable at about 25%.

Equity compensation was $8.7 million for the second quarter, and Q3 equity compensation is expected to be approximately $6.4 million, broken out as follows: about $0.5 million in cost of sales; $2.9 million in R&D; and about $3 million in SG&A. On a GAAP basis, we reported a net loss of $14.5 million or $0.11 per diluted share for the quarter.

Now on a non-GAAP basis, we present non-GAAP measures, because we believe they add additional analysis, that when considered with GAAP information can help investors more thoroughly understand the results of our normal ongoing operations.

Our Q2 non-GAAP estimates exclude equity compensation, restructuring costs, intangible amortization, the related impact on income tax expense for these items and other certain discrete tax items.

Non-GAAP operating income was $14.4 million and our non-GAAP operating margin was 8.8%. Non-GAAP net income was $9.6 million or $0.08 per diluted share for the second quarter. And a reconciliation between GAAP and non-GAAP measures can be found on page 8 in today's press release.

Now the balance sheet and cash flow statement. Free cash flow during the quarter was a negative $35.2 million, which included a one time tax payment of $46.6 million to settle our 2005 to 2007 tax year's audit. Long-term debt was reduced in the second quarter by $25 million to $150 million. Our cash and short-term investments decreased by $73.6 million during the quarter, primarily due to the reduction of long-term debt and the previously mentioned tax payment.

Our balance sheet continues to be very strong, with over $316 million in cash and $150 million in long-term debt. And we expect our domestic cash position to be approximately two thirds of total cash by the end of this year. We paid about $16 million in dividends during the second quarter. Our days of sales outstanding declined two days, to an industry-leading 34 days for the quarter.

Lagging demands during the second quarter led us to continue our inventory reduction. Net inventory decreased $4.7 million or 5% from the first quarter to $85.5 million and days of inventory decreased to 108.

Looking ahead to Q3, we expect inventory dollars to be down another $4 million to $6 million and inventory days to decrease to about 104 days. Our Q2 ending worldwide distributor inventory was down six days from Q1 to approximately 65 days.

Second quarter depreciation was $4.8 million, down slightly compared to the first quarter and CapEx was $3.1 million. We expect Q3 CapEx to be between $3 million and $4 million. Our diluted share count was 127.5 million shares in the second quarter and we expect third quarter shares to be slightly higher.

Now back to David.

David Bell

Thanks Jonathan. I’ll now address our business in each of our three end markets beginning with industrial and infrastructure. Revenue in the industrial and infrastructure market represented approximately 59% of second quarter revenue, a 10% increase from the first quarter. While most product line saw moderate increases, the general purpose portfolio products we built over the last several years’ far outperformed INI market, with 20% sequential growth.

Products such as our large family of precision amplifiers, switch muxes, switching regulators, bridge drivers and many more parts that go into thousands of industrial products help drive this increase. It’s encouraging to see results from the investments we made in horizontal products during the last four years.

Our security and surveillance product line continues to accumulate design wins because of our investments in SAM expanding products, diversifying our business away from the price challenged video decoder market. As we explained during our Analyst Day presentation, we will soon be able to deliver almost every piece of silicon in a digital video recorder. This increases our DVR dollar content from today’s $4 to $10, up to $30 to $50 and it’s expected to be a key growth driver for Techwell products in the coming years.

Our Security Link over Coax technology or SLOC continues to gain traction as security system customers increasingly demand HD video. Our partner Sony launched their first SLOC enabled cameras in July and they will maintain in-camera exclusivity for SLOC through the remainder of 2012. Other security manufacturers have also been adopting SLOC technology via dongle add ons. And we now have over 100 customers working on designing SLOC IC’s into their security platforms.

We are now in volume production with our revolutionary fisheye processor IC, which flattens a high resolution fisheye image allowing a system installer to replace four cameras with a single fisheye camera. A variety of non security applications were also cropping up for this impressive technology. Techwell‘s fisheye processor is still the only dedicated ASSP in the market. They can do fisheye lens' correction, image signal processing and provide simultaneous HD and standard definition analog outputs.

Our Zilker Labs, digital power controllers continue to accumulate design wins both in controller and module configuration. We’ve previously talked about Zilker based digital power module is being designed in at a major infrastructure customer. During the second quarter, over $140 million of digital modules shifted its customer just to prototype equipment build.

Production volumes are expected to exceed $15 million per year beginning near the end of this year. As predicted other major infrastructure customers are now beginning to follow suit. Another major infrastructure customer is designed in our modules and should represent $20 million in revenues over the next few years. More big deals are in the pipeline as the infrastructure market begins to embrace digital power.

Looking ahead to the third quarter, we expect sales into the industrial and infrastructure market to be approximately flat to slightly down due to ongoing macroeconomic concerns.

Now let’s look at our personal computing market. As a reminder the PC end market is comprised of traditional notebooks, desktops and the emerging Ultrabook category. Revenue in the PC market represented approximately 25% of second quarter revenue and increased 2% sequentially from the prior quarter. We maintained a stable market share in notebook power management and we expect our market share to slowly transition to a lower yet still market leading share as the market transitions from Sandy Bridge to Ivy Bridge processors.

Sales into notebooks remained essentially flat while sales into desktops increased significantly. Overall demand gradually increased during most of the quarter, weakened as we entered the market boom.

Design activity on the next generation has grown notebook and Ultrabook platforms has been strong. We’re confident that we’ll maintain market share leadership in 2013 and the next generation has rolled Ultrabook platforms where we’re promoting an integrated power management chipset that drives a much higher dollar content than in pervious notebook platform.

Intersil continues to deliver the highest performance PC power management solutions along with the best service and delivery in the industry. This has positioned us for early design end and continued dominance in notebook Vcore power. In fact, during the second quarter we recaptured a large piece of market share from a PC customer that had not used Intersil power management devices for several years.

Looking at the third quarter, we expect PC sales to be slightly down as the transition to Ivy Bridge continues. We believe that sales growth later in 2012 will be driven by the gradual uptake of Intel’s Ivy Bridge platform to release the Microsoft’s Windows 8 and the growth in Ultrabook platforms.

Now let’s look at our consumer market. As a reminder, under our new definition the consumer market remains unchanged and includes handheld devices such as smartphones, tablets, gaming and displays. Revenue in the consumer market represented approximately 17% of second quarter revenue and declined 9% from the first quarter.

Revenue decline in the second quarter was primarily due to significantly lower sales in optical sensors to a key smartphone customer. The tethered gaming business again began its seasonal ramp providing strong revenue growth to help offset the previously mentioned product decline. Sales in the tablet displays also recovered nicely during the quarter.

We expect a seasonal gaming builds to grow in the third quarter. But we’re also excited to report that the ramp of one of our handheld revenue drivers will begin in the third quarter. As you might recall from our Analyst Day presentation, we have several projects in the handheld arena, which we believe will drive rapid revenue growth in the consumer end market in 2013. Next quarter, the first of these design wins based on our new Buck-Boost switching regulator will begin mass production and help the teleconsumer revenue growth throughout the remaining of this year, and into 2013.

In early May we introduced our Thunderbolt active cable solutions. The industry’s first 40 nanometer active cable IC plus as Companion power management IC. Intersil’s two chip solution provides two bi-directional channels with an aggregate data transfer rate of 20 gigabits per second. Users can easily interconnect Thunderbolt enabled products with a single thin cable and daisy-chain up to six devices.

As data rates in cables reached 20 gigabits per second and beyond, the physical properties of thin cables cause significant signal impairment. When you drive a signal at these speeds down a thin 2 meter cable, the signal coming out at the other end is barely recognizable. In order to correct through such signal impairment complex high speed transceiver ICs must be packaged within the connectors at each end of the cable. Thunderbolt active cables are the first consumer examples of this trend, which will become prevalent for high speed interconnections in the coming years.

We recognized the approaching need for active cables several years ago and that was the primary motivation for acquiring Quellan in 2009. Quellan possessed the world’s best technology for correcting cable signal impairment and that IP has enabled Intersil to create the world’s best performing lowest power and smallest Thunderbolt solution. The potential returns on these investments are enormous as the Thunderbolt protocol is adopted by Ultrabooks, tablets and eventually even smartphones.

Looking ahead to the third quarter, we expect sales into the consumer market to be up moderately based on seasonal builds of gaming platforms and the ramp in handheld products.

Now, let’s turn to our outlook for the third quarter, as mentioned during my introduction bookings improved during the first part of the second quarter, but began to weaken in June. The quarter end book-to-bill ratio was slightly less than 1. However inventories throughout the channel remain at low levels and any uptick in demand will quickly result in growing short lead time orders. Even with sub-seasonal revenue forecasted for the third quarter, the aggressive restructuring actions we took during the second quarter will result in strong EPS improvement in the third quarter.

We continue to focus nearly all of our development resources on our top 10 growth drivers, and we're confident that they will begin to deliver exceptional growth in 2013. However, near-term growth will be more closely aligned with the overall market growth and as a result we're setting modest revenue goals for the third quarter. Consequently, we expect our third quarter revenue to be in the range of $156 million to $163 million flat to minus 4% from the second quarter. Gross margin is expected to be flat to slightly down. On a GAAP basis, we expect second quarter earnings per share to be in the range of $0.02 to $0.04. We expect non-GAAP earnings per share in the range of $0.10 to $0.13.

With that, I would now like to open the call to questions for either Jonathan or me. Operator?

Question-and-Answer Session

Operator

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

Ross Clark Seymore – Deutsche Bank Securities Inc.

Hi, guys just a question on the guidance, the source of the weakness everybody knows what's going on macro wise, but any more detail you could give by specific end markets, whether you think its excess inventory build through demand and any sort of initial color at least on visibility or lack thereof into the fourth quarter it would be helpful. Thank you.

David B. Bell

Sure, Ross, this is Dave, as you can see as the [union finance] has come along, we're kind of right, where a lot of our key competitors are in fact, our largest competitor and [also] pretty closely aligned with our guidance for the third quarter. It’s largely just the overall malaise that we see in the economy around the world, but Europe of course is the worst area. I would say that the weakness that we see is broad based. You said, is it inventory build, no, it’s certainly not inventory build. If anything, I think that the cautiousness that we are seeing by our customers mean that already lean inventories maybe being depleted even further.

So I think the one area that I would point to, even though it is broad based, whereas I think the one area that I’d point to that is probably showing as a greatest would be in the PC area. And I think that we’ve heard from a number of ODMs that are saying that shipments are going down from June to July. And I think there is just a lot of cautiousness there. I think these guys are holdings their breathe until they figure out what direction their customers are headed, and as we hear from many of them shipments into Europe are extremely weak. So broad based, but most acute geographically in Europe and from a market standpoint most acute in the PC business.

Ross Clark Seymore – Deutsche Bank Securities Inc.

I guess as my follow-up to you then, you talked about the top 10 growth drivers kicking in 2013, et cetera, given that two thirds of those, if I recall are more consumer oriented. Is it something where we would have to wait until the back half of 2013 or is there specific design wins that can ramp earlier than that?

David Bell

Well, first of all, I wouldn’t say that two thirds of them are consumer oriented. Just looking at the chart in front of me, security surveillance is one of them, it’s clearly not consumer; automotive, I think most people would not call that consumer; cloud infrastructure, it’s really not; dense power conversion, that’s kind of broad market based; Rad-Hard that is not consumer. So a lot of these probably half of them are really not consumer based, the other half yeah, I think are more consumer driven, but when I also looked at those top 10 growth drivers and as I said, we’re anticipating that several of those are going to start driving some growth in 2013, I think it’s about half of those top 10 growth drivers that I am looking at have started driving some growth specifically security surveillance, some of the things that I talked about in my prepared remarks, I think we’re going to start seeing some payback there with growth.

Our Dense Power Conversion, I’ve talked about Zilker Labs digital controllers and power modules, this is gaining a lot of traction, and it’s going to start turning on by the end of this year. Handheld devices, we expect that to grow nicely in 2013, optical sensors coming down or growing up from what I should say is a trough with one of our customers there, and then active cables with Thunderbolt, those are five of the 10 that I would point to as areas where I think we can start seeing some material growth emerging from those.

Ross Clark Seymore – Deutsche Bank Securities Inc.

Great, thank you.

Operator

Your next question comes from the line of Craig Ellis representing Caris & Co. Please proceed.

Craig A. Ellis – Caris & Co., Inc.

Thanks for taking the question. Dave, as you look at the outperformers in the industrial and infrastructure business, (inaudible) broad based catalog. Can you just give a little bit more detail in terms of what’s driving that 20% quarter-on-quarter increase and how sustainable is that, are you seeing power in the third quarter or is the initial strength you’re seeing (inaudible) ramp some of the products we’re seeing in order activity (inaudible)?

David Bell

Okay, well, couple of questions in there. What’s driving industrial is fairly broad based, but I touched on some of the key ones, I think things like our precision amplifiers, our switch muxes, our switching regulators. Those are some of the products that are driving some of that growth, but it’s really the result of an investment that we’ve made during the last four years, so I pointed out at our Analyst Day Craig, we have released 727 new products as of Analyst Day in this broad-based horizontal product category and those in turn are going to over 20,000 of our horizontal customers, it takes a long time because a lot of these design wins are in small pieces, small quantities, but in aggregate they are starting to grow. I think one other thing that I would point out as well, is when we look at our data and design win registrations, from our distributors back, about a year ago we saw a sharp uptick in the number of registrations that we're seeing basically that's how we've registered design wins with our distributors, so I think the funnel has some nice product growth in design wins that are moving through it as well.

Then I think the second part of your question was as we go forward in the Q3, kind of what's happening with industrial. I think that the macro effects are going to weigh on industrial as they are in other areas, down it’s acutely as it is on a PC market as I said to Ross earlier, but the broad-based market there is a lot of conservatism and caution going on there as well, so I think that some of that growth that we saw in Q2, I think is going to be flattened as we go into Q3.

Craig A. Ellis – Caris & Co., Inc.

Okay, thanks for that David, I’ll talk to Jonathan, you guys are making good progress with cost-reduction, but could you specify growth how much of the cost saving benefit we saw in Q2, how much will we definitely do and then is there any follow on incremental benefits in the portfolio?

Jonathan Kennedy

Yeah, for the second quarter we had maybe three weeks of benefit in there, there were still some remaining actions that didn't take place until the last day of the second quarter, so I would say it kind of imperceptible amount of benefit in Q2. In Q3, you've seen virtually all of it now going into Q4 we typically have pure workdays more vacation in the fourth quarter so you'll see the fourth quarter operating expenses come down sort of as they do traditionally, maybe down a couple of million dollars or something in that range from Q3, but by and large most of the operating expense reductions are fully incorporated into the third quarter.

Craig A. Ellis – Caris & Co., Inc.

Thanks guys.

Operator

Your next question comes from the line of James Schneider representing Goldman Sachs. Please proceed.

Gabriela Borges – Goldman Sachs & Co.

Hi, guys thanks for taking my question. This is Gabriela Borges on behalf of Jim. I was hoping you could expand on your commentary about bookings deteriorated in the month of June. Could you give us a little more color on order linearity in the quarter, and then maybe what are you seeing so far into July, thanks.

Jonathan Kennedy

Well, you’re right. We saw bookings strength in the first part of Q2, so in April and May, but a fairly clear drop off in June and that’s something that we’ve heard similar stories from many of our other competitors in this marketplace, so I don’t think that’s unusual, it’s unfortunate, but I think it’s something that everyone is seeing.

We continue to see weakness at this point, but I believe that we’re going to see resurgence coming along because I think yeah, the overall demand while perhaps down slightly is not down as dramatically as some of the bookings were.

So I think what you’re seeing is, you’re seeing – your customers being very cautious, being uncertain about the future and holding off on their bookings as much as they can, but what that will eventually result in is when their inventories get down to very low levels, or they start getting new orders from their customers, we’re going to start seeing some very short lead time orders.

So we’re doing our part as well, since in many of these areas, we know the parts that our customers are going to begin ordering when they start giving us these short lead time orders.

So we’re making sure that we’re prepared, our inventory has actually gone down during Q2 as Jonathan said, nevertheless we’re making sure, we’ve got adequate inventory in the key part types that we know are very likely to rebound.

Gabriela Borges – Goldman Sachs & Co.

That’s very helpful, thanks. And then as a follow-up if I may, could you give us an update on the competitive environment broadly, with the pause in cyclical growth, are you seeing any change in competitive dynamics, particularly from competitors that maybe trying to reduce utilization and channels out? Thanks.

David Bell

Well, yeah, I think any time when the market gets really, really tight like this, the competition intensifies. There is always an ASP reduction pressure, but in times like this when everybody is struggling to grow, those competitive pressures go up. And there is – in some cases some more severe ASP erosion. It just means that we need to at the top of our game, every opportunity, the significance that we see, we’re fighting hard for and making sure that whether we win our fair share, it’s just the nature of the competitive environment when the market gets soft.

Gabriela Borges – Goldman Sachs & Co.

That’s very helpful. Thank you.

Operator

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

Joanne Feeney – Longbow Research

Hey, thank you. A question on the audio side and video in general, so you remarked earlier in your comments that you are trying to diversify away from some of the more commoditized video decoding business, and I was hoping you could clarify the applications where that commoditization is going on, and whether their rear facing cameras was one those and – perhaps give us an update on the opportunity in autos and in particular contract your market share with rear view mirrors, which I think is near 100% to that application in-dash versions of the technology? Thanks.

David Bell

Sure. Well, let me go back in history just a little bit to when we acquired Techwell, a little bit more than two years ago. When we acquired Techwell, almost all of their business was really driven what are called the video decoders, and there has been a fairly remarkable transformation of their business as well during the last couple of years. I touched on some of the new products that we’ve got now are slot products or fisheye products, products going into the DDRs and so forth. But what happened specifically in these video decoders, which by the way are primarily going into security surveillance system. There’s just been intense pricing pressures. So the ASPs of those products has dropped to less than half of where they were a couple of years ago when we acquired Techwell. So, well, they still represent a good chunk of the business with Techwell, an increasing portion is rapidly becoming into these more integrated, more sophisticated chips that I spoke about in my prepared remarks.

Now with regards to the back-up camera, we as you probably know, Joanne, we have about a 99% market share in the video LCD driver that goes into these rearview mirror applications, the small LCD displays in rearview mirrors. So we clearly have dominant position there in securing that even further with some new product introductions. But we’re also growing our market share with the alternative solution, which is put to display in the dash, the navigation display today is largely in higher-end vehicles, but kind of working its way down into mid-range vehicles too. So, well, we don’t have the same 99% market share, I would say that we probably are in the 50% ballpark with that and growing our competitiveness in that area as well with some new product introduction. So whichever way it goes, I think we’re going to be well-positioned with these video products in the car.

Joanne Feeney – Longbow Research

And do you guys have a sense of proportions currently being involved rearview versus in-dash and how do you see that adoption rates at this time?

David Bell

No, I don’t. We could probably get back to you with some sort of estimate on that. I don’t have a number for your – percentage breakdown of the top of my head. But clearly, those are the two places that the back-up camera display would go either in the rearview mirror or in the navigation display. I think what you’re probably seeing is in a lot of cars that already have the navigation display; obviously, they’d rather not spend the extra money in the rearview mirror, so they may go that way if they are already a high-end vehicle with the navigation display. On the other hand, if it’s a vehicle that doesn’t already have the navigation display, it’s cheaper to include the small display in the rearview mirror than put a navigation display in.

Joanne Feeney – Longbow Research

Okay, that’s helpful. And then on the computing and server power management side, could you perhaps source in on the details of your exposure to the – I guess the so called white box server, the build-it-yourself servers that the large data centers are starting to use. Do you know how involved you are in power management for those servers and if you are seeing that, what kind of pace or build are you seeing there, pace of sales are you seeing there?

David Bell

You’re coming up with tough questions Joanne. I know that we’re involved with some of those products. I couldn’t tell you what the percentage is. We’re involved certainly with all the brand named server guys, as well as some of the white box guys. One other thing that’s happening though is it was just kind of new emerging category of micro servers, that is coming along, very low power servers and we’re clearly well engaged with the company, sort of working on those.

Joanne Feeney – Longbow Research

Okay, great. Thanks a lot.

David Bell

You’re welcome.

Operator

Your next question comes from the line of Tore Svanberg representing Stifel Nicholaus. Please proceed.

Tore E. Svanberg – Stifel, Nicolaus & Co., Inc.

Yes, thank you. First question was on the cash flow, it looks like you had a tax payment. Jonathan, I was just hoping you could elaborate little bit more on that and is that it for now or is there anything else that’s building?

Jonathan Kennedy

If you remember a couple of years ago, we had booked significant reserve of about $80 million to reserve our 2005, 2007 tax liability. And this was the final combination, end of that audit resulted in us paying $46.6 million in a cash payment to IRS. The good news though that, we just settled that audit, a company of our size, any U.S. company is always under continuous audit. So I would never say it’s ever over, but the 2005, 2007 audit is over, and that’s the end of that.

Tore E. Svanberg – Stifel, Nicolaus & Co., Inc.

Very good. And you also mentioned you expect two-thirds of the cash to be domestic by the end of the year. I was just wondering why you mentioned that, are you doing something to generate more cash in the U.S. or…

Jonathan Kennedy

Well, why I mentioned it is, we get questions frequently about ability to pay dividend, ability to do different things that typically require domestic cash. So I point that out as a useful metric for those who measure those sorts of things.

So by the end of the year, we’ll have repatriated significant amount of cash. A lot of it has to do with the way we settle with the IRS for the ’05, ’07 audits, so it’s a relatively new event for us to have that. But our general normal cash flow would typically be offshore. But I point out that the domestic balance is at a very, very healthy level, and provides us with flexibility to do pretty much whatever we need to do with cash.

Tore E. Svanberg – Stifel, Nicolaus & Co., Inc.

That’s very helpful. And last question for Dave; Dave, some people have talked about the visibility beyond August being extremely limited. I was wondering what would you see as far as the month of September and maybe some backlog starting to build?

David Bell

Right, you’re right. The visibility is very, very poor at this point. It’s frustrating I think in the semiconductor business if you look at the last several years, we’ve had semiconductor cycles that are basically annual with the downturn in the summer over the last three years. So maybe there is some amount of predictability, maybe we just not start counting on a downturn in this summer, I hope it doesn’t stay that way. But trying to – predicting beyond the current quarter is really, really a tough story.

But what I would say is that, right now in the position that Intersil is in, where our top 10 growth drivers have not really started to delivery yet, we are kind of at the mercy of the market. So we are going to kind of go up and down with the tide of the semiconductor cycles, which is precisely what you are seeing right now. But what we will be able to do as we start getting in the 2013, as these growth drivers, which are much less coupled to the overall semiconductor cycle, is going to allow us to kind of breakout of that strong tie to the overall macroeconomic conditions. And some of these top 10 growth drivers, things like active cables Thunderbolt, the market is virtually zero right now. So it's a brand-new market, if you look at here at the Pico projectors, things like that again a brand-new market.

So that’s our plan, but right now until we can really start seeing those deliver as we're expecting around the beginning of 2013, we're going to be facing largely growth that is impacted by the world wide macroeconomic conditions. I wish I was clear about where we’re headed with that, but unfortunately, I’m no more clear than you are Tore.

Tore E. Svanberg – Stifel, Nicolaus & Co., Inc.

That’s right. Thank you very much guys.

Operator

Your next question comes from the line of Sumit Dhanda, representing ISI Group. Please proceed.

Sumit Dhanda – International Strategy & Investment Group

Yes, hi, guys. Jonathan, one clarification I wanted on gross margins, both on a sequential basis and then on a year-over-year basis, it seems like the mix is better to significantly better, but your gross margins are down sequentially albeit a small amount despite the matter of mix and then if you look at industrial as a percentage of your mix, it’s up significantly year-over-year. So help us understand why the gross margins haven’t done better?

Jonathan Kennedy

Well, if you go back in history, we typically were bounded by 54% and 58% gross margin. Quarter-to-quarter, the shift tend to be mixed, but over multiple quarters absolute volume makes a difference. So despite being predominantly outsourced, we still have, say maybe an amount of overhead that we absorbed in our manufacturing operations.

So when revenue and production is at very low levels like it’s today, our margin drops down, and when revenue goes back up in the 180, 200 range, it goes back up. But it’s typically bounded fairly tightly. The one thing I’d say it’s really due to kind of categorize all the three end market together. But in fact with in each market there are mix shifts.

So for example, in the INI as you embark a year or so ago, we had a significant amount of military business that had a higher gross margin towards the high end of INI. Today that business is gone. We’ve talked about that in the past that business is gone. So the overall gross margin and the INI has come down even though as a percentage of revenue, it’s gone up. So I mean the fluctuations may appear large with a microscope on it, but in reality our gross margins stays fairly stable as long as I’ve at the company for the past nine years, it’s between 54% and 58% into the ups and downs. But right now, it’s down because the volume.

Sumit Dhanda – International Strategy & Investment Group

Okay, okay. And maybe not to belabor the point, but I think inside of it mix is an issue even on a sequential basis in the second quarter. So I guess in the second quarter your revenues are up 7%, but – and your industrial piece did really well. So why did you highlight mix as a driver for that slight decline in gross margins?

Jonathan Kennedy

Well, that’s what drove it down, because production was actually up slightly in the second quarters, so mix is the difference. So the mix within – margins aren’t exactly stable in all of the three end markets, quarter after quarter. So it’s not a total, just take the three end markets and you get it. There is dozens of moving parts in there. And then when you factor that in on a relatively lower revenue number. It makes a difference.

David Bell

Yeah, Sumit, I would say that the big swings in the gross margin between 54 and 58 are largely utilization driven like Jonathan pointed out, like kind of little perturbation so, on top of that just tend to be these minor mix shifts from quarter to quarter, which aren’t necessarily apparently Jonathan said, if you just look at the top three categories its mix just even within each one of those categories, but the mix shift impact turns to be much smaller than the overall utilization impact is.

Sumit Dhanda – International Strategy & Investment Group

Okay, well, on a separate note, you had lot of desktop has been a source of strength in the second quarter, was there something specific to Intersil that transpired there, because it seems like that wasn't naturally the case by looking at the actual PC data. So, just any color you could add there?

Jonathan Kennedy

Yeah, I don't think there's any real significant message in that just for the facts that notebooks were flattish, I think desktops were up that, but no I don't think that there is any particular message, there I would imagine just have as to do with unique dynamics with each one of the customers we serve in those areas.

Sumit Dhanda – International Strategy & Investment Group

And this is my final question here, there were some discussion during the call about the in-dash back up camera versus the rear-view mirror camera and, I'm sure you saw this Gentex reported yesterday, they talked about some of their customers actually moving away from rear-view designs to in-dash designs, so help me understand why that 99% share even matters at this point in time and really have aggressively do you plan to be with the in-dash market going forward.

David Bell

Well certainly Gentex is a very big player in that area still. So, I think today we are honest in reporting that some of their customers are currently going to the navigation display instead of using the display in the rearview mirrors. If we had a choice, I guess we might prefer it to be in the rearview mirror, because we’ve got virtually 100% market share there, but we’ve got a very decent and growing share we believe in the in-dash displays there. So I don’t think that it’s going to have a huge impact on us. We’re certainly redoubling our efforts to make sure that we’re gaining market share in the in-dash displays and even this week we had some great reports about some new design and activity going to the in-dash.

So I think in the final analysis, well, obviously, Gentex is really only selling in the rearview mirror displays, we can sell into either application and if we play our cards right and we make sure that we get those design wins in the navi displays, I don’t think it’s going to end up having a huge impact on us.

Sumit Dhanda – International Strategy & Investment Group

Thank you for you time.

David Bell

You’re welcome.

Operator

Your next question comes from the line of Chris Danely, representing JPMorgan. Please proceed.

Christopher Danely – JPMorgan

Thank you. Hi guys, now you’ve sort of reset the business model here. Should we expect OpEx next year to trend higher, but less than sales, or is there anything else going that could throw it off either way?

Jonathan Kennedy

No. I mean, we put up the model, we believe that the OpEx level today supports about $200 million per quarter company and that’s how I’d model it. Obviously, time will be the enemy, if it takes extended period of time, it’s hard to fight the headwinds and payroll increases and things like that, but we believe for the – not too distant future, the OpEx will be at the level that we reported today.

And then as I talked about earlier, Q4 tends to be a little bit lighter in OpEx, Q3 is one of the heavier and Q1 is probably one of the heavier, so it tends to go up in Q1, down in Q2 due to summer vacations, Q3 can be a little heavy and then down in Q4. If you’re going to look at historical trends, Chris, you can see kind of how it bounces around. But generally speaking, our OpEx should remain in the flat category for the foreseeable future.

Christopher Danely – JPMorgan

And then, can you also talk about the relative driver for gross margins between utilization rates and mix going forward?

Jonathan Kennedy

Well, I mean it’s – 400 basis points of gap there, we can drill into the nitty-gritty details of it, but that’s kind of the band that it operates in. We’ve got about $15 million worth of fixed overhead annually that we have to cover. The rest it is all outsourced. So that could give you a kind of a model in where revenue goes for every incremental dollar, if it’s tough we make internally then the margin is incrementally very good, if it’s a product we buy offshore, it doesn’t outsource, it doesn’t change the margin really except for what you’re selling. That’s basically fixed price. So that’s a very long, very larger model to kind of model out the 400 basis points.

Christopher Danely – JPMorgan

Yeah. And you mentioned that just the inventory of 65 days, do you remember what the trough was during the ’08, ’09 downturn?

Jonathan Kennedy

I think the last time – well, my chart doesn’t go back that far in front of me, but if I remember correctly, we got down into somewhere in the high 50s, 57, 58 days at the lowest inventory levels, it got as high as 99 days, I think back in the worst part of 2009.

Christopher Danely – JPMorgan

Sure. And what do you guys consider to be normal does inventory?

Jonathan Kennedy

We are there.

Christopher Danely – JPMorgan

Okay, great. Thanks.

Jonathan Kennedy

It’s close 60s, mid level of 60s.

David Bell

Yeah, Chris. One thing I would add in there is that, I think we’ve been very careful with the way we managed our business through the cycles. You really can’t force customers to buy more stuff than they need, nobody’s sales people are good enough to do that, but what can you do is, you can influence the timing of when they take deliveries of what they need. So I think looking at what happens to just the inventory, and as well looking at what happens to our own inventory during these cycles, kind of gives you an idea of how well the business is being managed. And when there is a downturn, there is a huge allure to increase the international – at least the inventory in case of us and most of our competitors, because we claim revenue per ship in there.

But I think we've really managed it well, in fact we’ve seen – just the inventory is going down, with the business cycle heading down to make sure that we maintain, the kind of days of inventory or turns with our distributors that we think is healthy, rather than abusing that relationship as some companies do to support revenues.

Christopher Danely – JPMorgan

Great, thanks guys.

Operator

Your next question will come from the line of Patrick Wang, representing Evercore. Please proceed. Mr. Wang your link is open.

Unidentified Analyst

Hi guys, can you here me, this is Mike calling in for Patrick. Thanks for taking my question.

David Bell

Sure.

Unidentified Analyst

A question on your consumer revenues, they declined 40% year-over-year, and I was hoping to get a better understanding of what proximate up this decline?

David Bell

Well, there are a number of products that were in there, but I would say, the most significant one and one that kind of pointed out in our prepared remarks is an optical sensors part that ships to a major smartphone maker, and that we've seen significant decline on – so there were a few other parts in there that I specifically mentioned that, the largest moving piece was that optical sensor.

Unidentified Analyst

Okay, fair. That apply over 50% of the decline then?

David Bell

Yeah

Unidentified Analyst

Sounds good, and then could you discuss the mix of your inventory by business segment and your targeted about $46 million reduction inventory, what areas they’re targeted in?

David Bell

Well the inventory that we build in-house, so that would be things like DSL line drivers, military products Rad-Hard space products and things like that, that’s where we have the largest buffer of inventories if you will. The products that we purchased from our outsource suppliers generally are at a fairly quick turn.

Unidentified Analyst

Okay, sounds good. That’s it. Thanks guys.

David Bell

You’re welcome.

Operator

Your next question comes from the line of John Pitzer, representing Credit Suisse. Please proceed.

John W. Pitzer – Credit Suisse

Yeah, good afternoon guys. Lot of my questions have been answered, but Dave I’m just kind of curious on the PC front, you talk about some share loss from Sandy Bridge to Ivy Bridge, how do you differentiate kind of what do you think are the market trends in PC in the near term versus kind of what could be some share loss as we make that transition from Sandy Bridge to Ivy Bridge?

David Bell

Well, let me start out and say that this slight share loss that I just talked about is something that we’ve actually been talking about and for the last couple of quarters. So it’s no new news. We anticipated that we would lose some market share going from Sandy Bridge to Ivy Bridge. I’d say it’s pretty much on track.

On the other hand it’s still fairly early in Ivy Bridge and probably only about a third of the sockets out there had been determined at this point, and then even once you know where you’ve got design wins and where you don’t, you have to wait and see which platforms sell better than others. So it’s kind of hard to be very precise about it. But that slight share loss is something that we anticipated and is built into our forecast.

Now as far as their kind of dynamics in the PC market, John I’m not sure exactly which you’re alluding to, may be you can clarify?

John W. Pitzer – Credit Suisse

Well, I’m just trying to figure out, given that you have talked about some share loss the weakness in the market to what extent do you think this is just the overall market versus some of that share loss trends starting to show up in your business.

David Bell

I think the kind of softness we’re seeing now is nothing to do with share loss, because they’re not building Ivy Bridge products right now, it’s all Sandy Bridge stuff and some – even some older generation stuff. So the share loss that we’re alluding to as we go into Ivy Bridge that really is not impacting the kind of softness that we are seeing really in the market to any appreciable degree. But I think it’s a mixed bag. I think that as I mentioned earlier, we are seeing that our customers are predicting that volume shipments are going to go down from June to July.

I think that what we are hearing from a lot of the PC guys is that Europe is basically taking essentially zero PC products. So that’s having a impacting on them. There is the transition that’s beginning from Sandy Bridge to Ivy Bridge, and we want to make sure that they use up their inventory on Sandy Bridge products before they make the move. We got Windows 8 coming up in the fall, I think some customers and manufacturers are kind of trying to position themselves for that. So I think there is a whole mixed bag of stuff going on, but like I said the share loss in that transition I think is really immaterial in what we are seeing right now.

John W. Pitzer – Credit Suisse

And then David, you mentioned earlier about the content opportunity at Haswell. I was hoping to elaborate on that a little bit because I was under the impression I guess I could be wrong with that. Some of the techniques that on power management that Intel is trying to integrate into Haswell might actually diminish the potential content for power management in Haswell systems. Is that just inaccurate or can you help me understand kind of the content story you talked about earlier?

David Bell

Well, it kind of depends on whether they are talking VR12.5 or VR12.6. In VR12.5, which is for traditional notebooks, yes, the power system relating to Vcore is much simpler. But when you look at our solution for VR12.6, which are basically Ultrabooks, what we are doing there instead of just supplying the Vcore, which is what we’ve traditionally supplied to notebook computers. We’ve got an entire power solution including the system power and the battery charger. So that’s why I’m saying especially when you start looking at Ultrabook systems even though the Vcore piece is simpler because we’ve got a systems solution for the whole thing a dollar content in Ultrabooks will go up.

John W. Pitzer – Credit Suisse

And then this is my last question David, as some of the new growth opportunities that the 10 growth opportunities start to kick in, how should we think longer term about industrial’s exposure to the overall compute market and may be Jonathan you can try managed whether or not that will have a meaningful impact on gross margin, which is sort of follow-up to a question that someone asked earlier?

David Bell

Well I guess when you say compute, I would kind of break that into two pieces, I would break it into PC’s, and I would break it, the other piece being in the infrastructure the server piece, while serving the processor architecture are basically the same, the market dynamics are a lot of different, which is why we categorize them differently as well, we put servers in our industrial and infrastructure, because it’s really an infrastructure product, and we put the PC's obviously in our PC market category.

So I think it’s going to be remain to be very strong ASP pressure in the PC market. There is a limited number of guys that we compete head to head with for those power management sockets that's kind of the way it’s been for a number of years, the gross margins actually even others ASP reduction because we keep coming out with new generations of products and it’s been fairly stable. But the piece that we think in growth quite a bit is the infrastructure piece and that just server, it’s server, is it base stations, network attached storage, switches, routers so forth. And the power requirements for those kind of products are surprisingly similar in a lot of ways and ASPs are higher and obviously the profit margins are higher there too, so a lot of our Zilker Labs digital products, digital module products and so forth aimed at data infrastructure application including servers.

Jonathan Kennedy

You asked about the gross margin, I mean clearly some of our products are above the corporate gross margin efforts and some are below PC’s certainly below and as they attend to the top ten growth driver areas just to have a balanced approach. And many of these are above and some are below the corporate gross margin average. So to the extent that PC were to outgrow other parts of the business, then that would put pressure on margins to the extent that they’re even, then we’d say flat and to the extent that PC would grow slower than the rest of the business then that would be beneficial to margins. So does that answer you question, John?

John Pitzer – Credit Suisse

No, it does. I appreciate it guys. Thanks.

Jonathan Kennedy

You’re welcome.

Operator

Your next question comes from the line of Harsh Kumar representing Stephens.

Harsh Kumar – Stephens, Inc.

Hey, guys. Actually touching on the previous question Dave, could you segregate the industrial and the infrastructure market business for your company and talk about the growth trends or lack of as you get into the September quarter i.e., the grow or lack off in the industrial versus the infrastructure piece?

David Bell

I don’t think there’s going to be a huge difference there. We’re seeing the present softness in the market as broad based, broad based from a market standpoint as well as from a geographic standpoint.

As I mentioned previously, the one area that I would say where we’ve seen though the sharpest downturn has been in PC, and may be owing to some of the unique dynamics in the PC market. But aside from that, whether it be infrastructure, equipment whether it be industrial equipment, I think that, that – I wouldn’t raise any real big distinction between or as at least based on the data that I’ve seen.

Harsh Kumar – Stephens, Inc.

Got it. Thanks Dave, very helpful. And then with regards to your optical sensor product, the downtick you saw in the June quarter, is that related to the build cycle of the customer and if so, when would be – when would you expect that to be back?

David Bell

I wouldn’t call the build cycle of the customer, it’s obviously due to issues that are affecting that customer, but what I think is going to drive that back up is going to be other design wins some of which we already have and they’re going to start driving some of that business up. For instance, we’ve got some smartphone customers in China where we’ve achieved some new design wins on our optical sensor products. That’s going to start driving some revenue up in the third quarter. We’ve got some other customers elsewhere in Asia. So those are the kind of things that I’m looking towards to drive the optical sensor business up not the one particular customer that I refer to is going to have a resurgence in their own particular demand.

Harsh Kumar – Stephens, Inc.

Got it. Thanks, Dave.

Operator

Your next question comes from the line of Uchechi Orjii, representing UBS. Please proceed.

Steven Eliscu – UBS Securities LLC

Hi, this is Steve Eliscu for Uchechi. Thank you. First question I want to ask another on gross margin again. Trying to understand, next couple of quarters looks like we’re going to have fairly weak growth in the industry, uncertainty 2013, trying to understand if there is anything you can do if we do end up in that situations for your fixed cost component. And then as we look at into next year thinking about how your – as your top 10 growth drivers start folding into your overall revenue mix, how that is going to influence gross margin? How do you think of the revenue drivers’ longer term affecting gross margin?

Jonathan Kennedy

This is Jonathan. I think no there is not a lot we can do to lower the fixed cost at this point. I mean there is a certain basic infrastructure you need to run a company. Like Intersil I think we’re there. I mean where we typically get cost improvement are on packaging and wafer cost and things like that. But the overall fixed cost of the company are just not that large to make a meaningful in gross margin.

I think – as I’ve said before in numerous calls and the company runs in a fairly narrow band of gross margin, our goal is to oscillate around this with the goal of 57%, and we’ve done that. And I think as the company grows, even grow slightly, we end up with improving gross margin and volume.

The top 10 growth areas, all have their own margins. But if you were to average them out, I would I say, they turn out in the mid-to-high 50s. So as they layer in, as business picks up, I would see those gross margins starting to pick back up aiming towards our targeted 57%, once again, we don't think that there is some structural change that could occur, that would drive us beyond that.

David Bell

One thing I might offer is, as we talked about already – I think the primary impact on gross margin is just our utilization and overhead that Jonathan has talked about. There’s minor perturbations that are mix related, but from a very simplistic standpoint you can probably almost drive straight line between $160 million per quarter, and $210 million per quarter kind of the range we’ve been in. And when we’re up in that $210 range, we’re like 58-ish when we’re down in the 150 range, we’re like a 64-ish, we’re aiming at our near term model, $200 million like 57-ish.

So I don't want to imply that there is a lot of precision there, but it’s largely driven by our utilization and you’re going to see gross margins kind of drift up as the revenues drift up I believe.

Now there might be some slight improvement as well like Jonathan said in some of these newer products come on line, it’s obviously our goal to introduce new products that are above corporate average gross margins. But there too, it’s hard to be very precise in the prediction because a lot of the ultimate prices for those products are determined by market dynamics and competitive pressures.

Steven Eliscu – UBS Securities LLC

That's helpful. And as a follow-up, more strategic question on the 10 growth drivers. We thought about – in terms of longer term, how you think about the growth vectors of your company and basically what I'm saying is, 10 is a lot of growth drivers, you've been talking about them for a while and as we – as some start to kick in, in 2013, as some become more successful and others focusing around let’s the top three or five of those and redirecting some of the other resources elsewhere?

David Bell

Well, I guess your thesis of 10 is too many, I'm not sure that there is a magic number, but one thing that we don't want to have as a problem where – we've got too few product areas or too few customers we’re depended on. I think that that's a very fragile situation. The other extreme is, if you have too many things going on, you don't have enough resources to adequately staff them and you risk doing too many things and none of them well. That's one of the reasons that we decided to focus on the top 10 as we pick the areas where we think we've got the talent, the IP, the customer relationships to beat our competitors and then adequately staff those, so that we know that we've got sufficient resources for success. And we think we can do that with the 10.

Well, one other thing I'll offer you is, we're a little bit like a venture capital this year I guess is today we've got our 10 picks, if you compare the 10 picks to what they were a year ago, you'd see some minor changes in the top 10. If you look at it next year, maybe there would be a few minor choices, its kind like what you are saying is that we're going to evaluate constantly what's winning and what's not winning and we're going to make sure that we’re putting a weight behind the areas that are winning.

Steven Eliscu – UBS Securities LLC

Great. That’s helpful. Thank you.

Operator

Your next question comes from the line of Chris Caso, representing Susquehanna International Group. Please proceed.

Chris Caso – Susquehanna International Group

Hi, thank you. I’m wondering with regard to the new business structure, do you have sort of a timeframe in mind for achieving the targets, and I realize in this environment not asking to predict sort of where the end markets are, but really more along the lines of your level of patience in getting there, and obviously when you guys set the targets earlier this year, we’re all expecting maybe a stronger economic environment. At what point does that cause you to go back and take another look at the strategy?

David Bell

Well, I think that we’re all living in the same kind of stagnant economic environment. We put together our plan, our restructuring plan, understanding that. I think we had been hoping that there might be a little bit stronger growth in the second half of the year, but it fundamentally doesn’t change our strategy.

So as we’ve talked about, we think that our financial model works pretty about the $200 million per quarter level. I’m absolutely confident that we will get there. I can’t tell you exactly when of course because the economy is pretty difficult to predict. But with our top 10 growth drivers as some of those start kicking in as a mentioned earlier, I think it become less and less tied to the overall macro economic conditions and we’re going really become more and more control – in control of our destiny in these areas.

And I just – you are on the back of the envelope calculations with the potential for some of these areas, they absolutely have the opportunity to drive us to $200 million per quarter and well beyond. And Chris I know you saw the Analyst Day presentation, you can see some kind of very rough estimates for each one of the top 10 growth drivers as to what we think the kind of revenue opportunities might be for each one of those areas.

So I think we’re very bullish about that. Yes, we’ve got headwinds as all the people in the semiconductor industry have right now, but as we start getting to 2013, and we start getting some of these independent growth drivers going, I think we’re going to be able to grow regardless of stagnant economic conditions.

But even that said, I can’t tell you exactly when we get to $200 million. Certainly, learning my lesson about the ability to predict very far out during the last four or five years.

Chris Caso – Susquehanna International Group

Right, yeah we’ll we’re in the prediction business – we don’t do great job of it either, maybe another way to look at it is, what point then do we have to wait until the 2013 in order to see that divergence between your revenue growth and the industry or we start to see signs of that in the beginning of next year?

David Bell

Again, what I would say is you’re going to start seeing some of these things have a material impact in 2013, hopefully some in the first half of 2013, but increasingly as you go through 2013.

Now again as I mentioned earlier, I think security surveillance, we’ve got some new product there that are already starting to ramp, and they’re going to have a material impact or dense power conversion in particular our module products there, that’s going to start, we’ve got this one major program that I talked about, that we’re in already, that’s in prototype right now.

We’re going to start shipping volume, production volumes right around the end of the year. Number of hand held device programs, some which are already beginning to ramp right now. Optical Sensors talk about some design wins already beginning to ramp this year. And then the Thunderbolt active cables are beginning to ramp around the end of this year. So I think that you will see some impact is my predication in the first half of 2013, but increasing impact as we go through 2013.

Chris Caso – Susquehanna International Group

Okay, and just as a final question what would you guys consider to be normal seasonality for your Q4 and obviously very hard to predict in these market conditions. But what – would you see any particular headwinds or tailwinds that you are going to identify now as you look into Q4.

David Bell

Well I’m always cautious about talking about normal seasonality, it seems like the last four or five years, it had been anything, but normal. But if you go back and start looking at lots of years kind of average together we would tend to see low single digit growth from Q3 to Q4 that would be kind of a typical sort of thing for the company. But again I haven’t seen a normal year in quite a few years. And I’m not sure how useful that kind of information is.

Chris Caso – Susquehanna International Group

Okay, thanks

Operator

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

Steve Smigie – Raymond James

Great, thanks Dave. If I could just follow-up on your comment on Thunderbolt cable, you mentioned of anything sort of towards the end of this year. Can we talk about where you’re in the qualification process in terms of getting that out sort of further headwind than what you might have thought at this point or just working through, and then once that qualification takes place you already have the relationship with the cable manufacturers such that you can say you will get the design wins right away and you can start shipping right way.

David Bell

Well the answers to your questions is yes. I’m not going to be able to give you a lot of detail on that, as I think there is a couple of major companies in our industry that are driving Thuderbolt and they certainly have the clout to make it successful. I would say we are right on track with our plans to have production parts beginning to ramp by the end of this year.

We do have engagements with the key cable manufacturers and again because this part goes into the ends of the cables, we’ll be selling this to the cable makers not to the computing equipment companies. And as far as qualification and so forth, we are on track there as well. There are a limited number of companies that are in this market right now, as best as we can tell, we’ve got by far and away, the best performing, the smallest, the lowest power, and probably the most cost-effective solution out there. So I apologize I’m going to be cautious to not give you a whole lot more detail with that. But I'm very bullish on this product area and I believe Thunderbolt is going to take off and I think we're extraordinarily well-positioned to take advantage of that.

Steve Smigie – Raymond James

And if I could, just one follow-up question on that, you guys have argued, one advantage you think you have is that your 40 nanometer on that versus much larger processor at other folks and checking with some of those people, I’d argue that as you shrink down to the floor one what you actually get sometimes worst interface performance. And so I was just curious if you could comment on that in terms of your competitive nature with the small line with devices. Thanks.

David Bell

Well, I'm not sure what you are referring to a worst interface performance. You certainly do have additional challenges that coming up. It certainly is much more challenging to produce a device on a 40 nanometers than it is 130 nanometers. So it’s a more complicated risky undertaking to do that, but we managed to be successful on that and First Silicon is working very well. But if you want to go 10 gigabits per second per channel and up, you definitely have benefits having the smaller line with devices.

Steve Smigie – Raymond James

Okay, great. Thank you.

Operator

Your next question comes from the line of Cody Acree, representing Williams Financial. Please proceed

Cody Acree – Williams Financial Group

Thanks for getting me in Dave. Dave, thanks for giving us the details on the ramps next year, can you give a little bit of magnitude that you think your opportunities grow as you go first half to second half and how that, there is opportunities knowing that, we don't know where the markets will be – may be the opportunity resides as you go into end of ‘13 and maybe of beyond.

Jonathan Kennedy

No, first of all I wish I knew, but honestly all I can tell you is that, I'm optimistic about those growing, but to try and make any predictions, a year out from now is virtually impossible, to thought enough to make a prediction about, but our business is going to be in the current quarter, let alone try and give you any specifics about what we look like a year from now.

So I’ll like and really due code is going to give you the general shape of the curve. Again I'm confident, that we’re going to see somebody is starting to kick in. At the end of this year beginning of 2013, and I think that there are impact on our revenue is going to grow, as we go through 2013, and I think what is going to do, it is going to allow us to kind of de-couple, initials growth from just being stuck going up and down with the tide in our industry.

Cody Acree – Williams Financial Group

Dave, you look at those private securities named off, which one or two those of you think has the greatest market opportunity in the next 12 months or 18.

David Bell

I think there are different, if you look at Thunderbolt, we just have been talk about there is more consumer play, I think because of that it has the opportunity to ramp very, very quickly, and the numbers can be very, very high. On the other hand if you look at for instance, the Dense Power Conversion were I spoken a few times about our Zilker digital modules and the traction that those are having for one customer already, that we’re going to see start ramping, representing $15 million per year, and others that are starting to come online with design wins. Now those aren’t necessarily going to ramp as quickly, just because the nature of the infrastructure business, but there are going to be in those sockets probably for five plus years, so I think you need to look at it, both in terms of the total units preferred, but also their longevity.

Cody Acree – Williams Financial Group

And one for Jonathan, just Jonathan on the efforts to keep a bit more cash on hand for things like the dividend. Are you taking any kind of structural packs going to be hedged ongoing?

Jonathan Kennedy

No, aridity in our tax rate is when we are closer to a breakeven, the tax rates get unusually high, and that’s because as our revenue fluctuated typically fluctuates outside the U.S., and that’s where we have the very low tax rate. And so the non-U.S. income goes down, you don’t get the benefit of low tax rates and net income, where our U.S. income tends to stay stable, because we do most of our design here, and most of the U.S. income is more spending dependent than it is revenue dependent.

But in terms of settling tax disputes things like that, bringing cash back, we still have the same tax structure and would still return back to our normal long-term tax rates in the low 20s. Once we return back to normal profitability, which we will be there with this – with the cost we just made and with the revenue come out just a little bit. So I would look at 2013 as a more normal tax year, we won’t have any open large tax disputes, we should have profitability level that is consistent with past, and more predictable tax rates.

Cody Acree – Williams Financial Group

Thank you.

Operator

At this time, we have no further question. I’d now like to turn the call over to Mr. Bell for closing remarks.

David Bell

Well, I like to thank all of you for joining us today for Intersil's second quarter earnings conference call. From today's discussions, I hope each of you are as excited as we are about our top 10 growth drivers, obviously we're very bullish of the prospects those bring and excited at the beginning to decouple us from just being tied to the overall market dynamics as we enter 2013. We look forward to updating many of you on our progress at our presentation at the Deutsche Bank Technology Conference in Las Vegas on September 13.

So with that, I thank you and wish you all a good evening.

Operator

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

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