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Intersil Corporation (NASDAQ:ISIL)

Q2 2008 Earnings Call

July 23, 2008 4:45 pm ET

Executives

Jonathan Kennedy – Investor Relations

David B. Bell – President & Chief Executive Officer

David A. Zinsner – Vice President & Chief Financial Officer

Analysts

Tore Swanberg – Thomas Weisel Partners

Cody Acree – Stifel Nicolaus & Company, Inc.

Steven Smigie – Raymond James

Ross Seymore – Deutsche Bank Securities

Uche Orji – UBS

Romit Shah – Lehman Brothers

Doug Freedman – American Technology Research

John Pitzer – Credit Suisse

Sumit Dhanda – Bank of America Securities LLC

Craig Hettenbach – Goldman Sachs

KC Rajkumar – RBC Capital Markets

Joanne Feeney – FTN Midwest Securities Corp.

Craig Ellis – Citigroup

Patrick Wang – Wedbush Morgan Securities Inc.

Harsh Kumar – Morgan, Keegan & Company, Inc.

Nicholas Aberle – Caris & Company

Michael McConnell – Pacific Crest Securities

John Lau – Jefferies & Co.

David Wu – Global Crown Capital

Auguste Richard – Piper Jaffray

Operator

Welcome to the second quarter 2008 Intersil Corporation earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Jonathan Kennedy.

Jonathan Kennedy

Thank you for joining us today for Intersil’s second quarter 2008 earnings conference call. Today with me is Dave Bell, Intersil’s President and Chief Executive Officer and Dave Zinsner, Intersil’s Vice President and Chief Financial Officer. In a few moments they will deliver remarks on the second quarter of 2008 and provide a summary of our business outlook. After our prepared comments we will open the line for questions.

We completed our second quarter on July 4, 2008. A press release was issued today at approximately 1:15 pacific time. A copy of the press release is available on the investor relation section of our website at www.intersil.com. In addition, this call is being webcast live over the internet and may also be accessed via the investor relation section of our website. A replay of the conference call and webcast will be available for two weeks through August 6.

Please note that some of the comments made during this conference call may contain forward-looking statements and do not include the effects of future acquisitions. I would look to remind you that while these statements reflect our best current judgment they are subject to risks and uncertainties that could cause our actual results to vary. These risk factors are discussed in detail in our filings with the Securities and Exchange Commission. In addition, during this call we may refer to 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 the reconciliation of non-GAAP to comparable GAAP measures on the investor relation section of our website.

For those of you interested in learning more about Intersil at an upcoming investor event we will be participating in the Pacific Crest Technology Forum on August 4 in Vail, the Citi Investment Research Technology Conference on September 2 in New York and the Deutsche Bank Technology Conference on September 10 in San Francisco.

I will now turn the call over to Dave Bell.

David B. Bell

The second quarter was a solid quarter for Intersil. Despite softness in the overall consumer space we achieved net revenues of $216.2 million, an increase of 21% over the same quarter last year and grew both our GAAP and non-GAAP earnings by 30% and 26% over the same quarter last year. For the second quarter in a row we saw sequential growth in orders. Our book-to-bill was above one and orders improved as the quarter progressed.

Intersil continues to make excellent progress in returning cash to shareholders. During the quarter the company repurchased approximately $30 million, or 1.1 million shares, of our stock and also paid approximately $15 million in dividends. As a result of our strong continued positive cash flow the company’s Board of Directors authorized and declared a quarterly dividend of $0.12 per share of common stock.

At this time I’d like to turn the call over to Dave Zinsner who will provide a financial summary. Then I will discuss results from each of our end markets and provide some comments on our third quarter 2008 outlook.

David A. Zinsner

I’d like to start off by making a few comments about GAAP and non-GAAP reporting format. For this quarter and the remaining quarters of 2008 we are only providing net income and earnings per share on a GAAP and non-GAAP basis. All other measurements will only be provided on a GAAP basis. Beginning with the first quarter of 2009 we will no longer report net income and earnings per share on a non-GAAP basis. We are making this transition as a result of communications with the SEC regarding the use of non-GAAP presentations and to increase the comparability and usability of our financial reports. However, we will continue to provide additional relevant financial information to help investors better understand our financial results.

Now let me begin with the income statement. As Dave stated, we reported $216 million in net revenue for the second quarter of 2008, a 21% increase from the same quarter last year and an increase of 6% sequentially. As we discussed in our last earnings conference call our second quarter had 14 weeks in stead of the normal 13 and we estimate the extra week accounts for approximately 5% of the revenue growth and a similar increase in operating expenses. Our bookings grew sequentially in the second quarter with a book-to-bill comfortably above one. Based on the profile of our backlog we expect an orders turns rate in the third quarter of slightly less than 40%.

Gross margins were 56.7%, up from 53.8% in the first quarter as one time expenses related to our restructuring and consolidation of our internal manufacturing facilities did not repeat during the second quarter. Excluding these one time items, gross margins were essentially unchanged from the prior quarter. We expect a majority of our growth in the third quarter to come from sales into the computing end market. As a result of this mixed change our gross margins in the third quarter will likely be down slightly. Our long term gross margin target remains intact and our cost improvement initiatives are still on track. We continue to make steady progress on the restructuring and internal fab consolidation projects announced last quarter. During the quarter we incurred $1.2 million in additional restructuring cost. We expect to realize almost $6 million in annualized savings from these projects beginning in the third quarter of 2009.

Additionally, we have made excellent progress on our conversion from gold to copper wire for several of our high volume products. We expect a savings from this conversion to start later this year as the first of these products begins to phase into production late in the third quarter. Lastly, we are delighted to report that our first product on the new 0.25 micron process is now ramping into production. Over the next few years more of our products will transition to this process. The smaller dye size offers significant cost savings.

In the second quarter R&D expenses were $38.6 million or 17.9% of revenue, up $3.5 million from the prior quarter. This increase is primarily due to the extra week. As the percentage of revenue R&D expenses decreased 1.3 percent from the second quarter last year as we continued to increase the leverage on our R&D investments. SG&A expenses were $36.3 million or 16.8% of sales, up $8.8 million from the first quarter. In addition to the extra week of expenses we had a non-recurring equity compensation benefit realized last quarter from the departure of Rich Byer, our former CEO.

We continue to make steady improvements on our operating profit. Operating profits were $43.4 million or 20.1% of sales compared to 19.8% last quarter and 18.1% in the same quarter last year. We expect R&D and SG&A expenses to be down approximately $2 million from the second quarter. About $500,000 of this decline is from equity compensation. The transition from 14 weeks to 13 weeks will be offset slightly by increasing investments in R&D and some areas of SG&A.

Interest income was $4.1 million, down approximately $700,000 from the prior quarter as interest rates were lower this quarter. We expect interest income to be approximately the same in the third quarter. Our tax rate for the second quarter was 21.3% as we realized the benefit of lower tax rates on our growing international business. There was a slight true up in the second quarter to bring the annual tax rate down to 23% and looking ahead we expect our third quarter tax rate to be approximately 23%.

We are very pleased that our earnings continue to grow faster than revenue. Diluted earnings per share of $0.30 grew 30% from the same quarter last year and non-GAAP diluted earnings per share of $0.39 grew 26% from the same quarter last year.

Now moving to the balance sheet. On an absolute dollar basis, net inventory increased by $8.6 million from the first quarter and our days of inventory increased 5 days, to 100 days. The increase in inventory is in the form of foundry wafers needed to meet the increasing demand for our products. Looking forward we expect inventory to remain at the 100 day level. Inventory at distribution continues to be at relatively low levels, flat with the first quarter. We believe inventory throughout the channel chain continues to be at healthy levels.

Days sales outstanding was 53 days, up 2 days from 51 days in the first quarter. Cap ex was $8.7 million and depreciation was $5.7 million for the second quarter. Most of our capital expenses were used to expand our production capacity at key foundry and back end partners. We expect cap ex to be approximately $6 million to $8 million in Q3 as we continue to ramp up capacity. For the second quarter we generated $47.7 million in free cash flow and exited the quarter with approximately $460 million in cash and long term investments and no debt. As Dave stated we repurchased approximately $30 million or 1.1 million shares of our stock and paid out approximately $15 in dividends in the second quarter.

As a result of this share repurchase activity our weighted average share count decreased by over 2.3 million shares in the second quarter versus the first quarter. Despite the fact that our stock is a great buy we reduced our buy back rate in order to maintain the appropriate level of liquidity in our domestic bank accounts and to ensure that we have enough cash available for strategic acquisitions. For the upcoming quarter we expect weighted average shares to be approximately flat with the second quarter. In summary, we were very satisfied with the company’s financial performance this quarter and believe we are well positioned again for the next quarter.

Now I will turn the call over to Dave Bell who will provide highlights into each of our four end markets.

David B. Bell

I’ll now address our business in each of our four end market categories beginning with high end consumer. Revenue into the high end consumer market represented approximately 24% of second quarter revenue. On an absolute dollar basis, revenues into the high end consumer market increased 5% year-over-year and decreased 6% sequentially. The sequential decline is due to an overall softness in the consumer space.

As expected, we saw revenue in the optical storage business decline due to the slow adoption of Blu-Ray. We anticipate revenue for the optical storage business to decrease moderately in the third quarter. On the bright side, revenues ramped in the new and exciting area of gaming. In the second quarter we began shipments of a DC-to-DC controller to a major gaming customer and achieved nearly $1 million in revenue. We expect sold growth for the third quarter as we enter a seasonally strong period for gaming consoles.

The second quarter was also a very strong quarter for ambient light sensor product family. Revenue ramped quickly as we continued building design win momentum in this exciting new product category. We expect to see solid revenue growth throughout the rest of 2008 for our ambient light sensor and proximity sensor products. In the area of displays we experienced strong growth in Q2 due to normal seasonality. The display product family is expected to continue growing nicely in the third quarter driven by both normal seasonality and numerous design wins that are slated to go into production. Also during the quarter we released a family of high voltage LCD level shifters that combine multiple channels of voltage level translation with rail-to-rail input and output amplifiers. These level shifters are designed to deliver large peak currents into LCD panels using high frame refresh rates, significantly improving viewing angles in televisions and LCD monitors.

In the second quarter we introduced our very first product built on our new quarter micron BCD process. This process enables both cost savings and increased performance. The first product is a power supply supervisor that delivers very accurate voltage thresholds and low quiescent current while providing very fast response to over voltage or over current events. In summary, despite some softness in the consumer segment we expect this segment to grow nicely for the remainder of the year as design wins continue to earn momentum and recent design wins are slated to go into production.

Now let’s look at our computing business. Revenue into the computing market represented approximately 33% of second quarter revenue. On an absolute dollar basis, revenues into the computing market increased an impressive 59% year-over-year and increased 25% sequentially. In Q2 shipments of our notebook power management solutions significantly outgrew the market. We saw strengths from our well established Intel Santa Rosa platform solution and a strong ramp of our newly introduced AMD Griffin V core regulator. We continue to experience strong design win momentum in AMD notebooks. In the desktop and server space we experienced strong demand for our highly efficient core solutions that support Intel’s VR11 systems as well as AMD’s AM2+ systems. Intersil’s revenue growth in Q2 was substantially higher than the market growth for the desktop and server segment.

The launch of our highly integrated three phase regulator solution extended our V core solutions for Intel VR11 platforms. We anticipate significant adoption of three phase solutions during Eagle Lake refreshes in 2009. Within the second quarter the ramp of Intel’s Atom processors provided upside revenue for our low current notebook and desktop V core solutions. The earlier than anticipated ramp of Atom based netbooks was a pleasant surprise and also benefited Intersil’s computing business. Looking ahead to Q3 we expect our revenue in the computing market to be up strongly with market seasonality and share gains.

Moving now to the industrial market, revenue into the industrial market represented approximately 21% of second quarter revenue. On an absolute dollar basis, revenue into the industrial market increased 5% year-over-year and increased 4% sequentially. In the second quarter revenues in the military business ramped as several programs commenced and orders were placed. The strength of second quarter revenues was also driven by several other product families including video, op amps and voltage references.

We continue to add to our broad portfolio of video products. In Q2 we started sampling a new family of adjustable delay lines for maintaining signal integrity over long cable runs. In addition to providing higher performance these new parts offer a wider selection of bandwidth and total delay. These parts upgrade nicely from our very successful existing silicon delay lines which were the very first video delay lines introduced into the market.

We also continue to make excellent strides growing our automotive business. In the second quarter we released and achieved a significant design win with the high power integrated LED driver designed for in dash display backlight applications. This driver features thermal compensation and load isolation allowing it to significantly improve LED lifespan in harsh automotive environments. This high level of integration provides a tremendous cost saving over existing discrete protection solutions.

During the quarter we expanded our pinPOINT family of precision products with the release of two micro power dual op amps. These general purpose parts are optimized to provide the industry’s highest performance at very low voltage levels, making them ideal for a wide range of battery powered medical and instrumentation applications. We also released a best-in-class ultra low power voltage reference. This new product exploits the benefits of our proprietary floating gate reference technology and consumes 50% less power than competing devices. Its small package combined with its ultra low current consumption makes it ideal as a companion part with data converters in power critical battery powered applications. Looking ahead to Q3 we expect the industrial market segment to be down slightly. Normalized for the 13 weeks, the slight decline actually bucks the normal seasonal decline in the industrial business.

And finally moving to the communications market, revenues into the communications market represented 22% of second quarter revenue. On an absolute dollar basis, revenues into the communications market increased 17% year-over-year and decreased 1% sequentially. We had double digit sequential growth from several of our product families. Isolated power, products for communications satellites and DSL all showed revenue traction from previously reported design wins. Our double digit growth in DSL products was driven by both ADSL and BDSL applications. Revenue from a few notable product releases in prior quarters ramped and contributed to the growth and we expect this ramp to continue through the remainder of 2008.

We also experienced very strong sales in high reliability space as numerous communications satellite programs grew, including major programs in both Europe and Asia. We continued to see solid design wins worldwide and expect revenue to continue its upward trend for 2009. Our design wins gained momentum during the second quarter with our growing family of highly efficient synchronous buck regulators. Our newly introduced regulator is optimized for delivering exceptional efficiency and transient response at low operated voltages. Its small package and ultra low current consumption make it ideal for a broad range of applications such as networking and communications infrastructure equipment, portable medical devices and industrial programmable logic controllers. Looking ahead to Q3 we expect the communications market to be down slightly from the second quarter.

Now let’s turn our outlook for the third quarter of 2008. Despite softness in the consumer market and worldwide economic uncertainty we are projecting continued growth in our seasonally strong third quarter. Given the strength of orders in the second quarter and our backlog entering the third quarter we anticipate our revenue to grow 1% to 3% sequentially. Excluding the extra week in the second quarter, this equates to rough 6% to 8% sequential growth. We expect GAAP earnings per diluted share of approximately $0.31 to $0.33 and non-GAAP earnings per diluted share of approximately $0.39 to $0.40.

During the second quarter we continued to gain market share in several key markets including notebook computers, LCD displays and gaming. We also continued to make substantial investments in our general purpose product families and are beginning to see results from those efforts with growing design wins in a broad range of industrial and infrastructure applications. We also continue to focus on cost reduction programs that will provide significant cost and sales improvements during the coming year. These efforts combined with careful management of operating expenses will allow us to continue making steady improvements in operating profits and earnings.

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

Question-and-Answer Session

Operator

Our first question comes from the line of Tore Swanberg from Thomas Weisel Partners.

Tore Swanberg – Thomas Weisel Partners

Let me first of all, Dave Z., you mentioned gross margin may be coming down a little bit in Q2 because of mix. Is there a way you can quantify that please?

David A. Zinsner

Well, it’s not going to be significant obviously. I think if you back into the earnings guidance you can pretty much estimate. It’s definitely no more than 100 basis points but probably in 10 to the 50 basis point range.

Tore Swanberg – Thomas Weisel Partners

There’s a lot of discussions about the distribution channel, what’s happening there. Could you just give us your take on where you think distributors are as far as inventories are concerned right now?

David A. Zinsner

Well we can’t, we obviously couldn’t tell you for the whole analog semiconductor industry but I can tell you that our inventory at distribution was the same as it was in the first quarter and first quarter was about 10% off of the peak, so we feel like it’s at relatively low levels and very healthy levels.

Tore Swanberg – Thomas Weisel Partners

It looks like PC is going to be quite substantial in Q3. Could you also just add a little bit of color there as far as certain programs such as the Atom processor that’s ramping or is it Montevina that’s finally coming into production? Just trying to understand some of the moving parts.

David B. Bell

It’s very broad based. As I mentioned during the prepared remarks we’ve actually seen tremendous growth both in notebook computers and desktop computers but clearly notebooks were the strongest growth with really dramatic growth year-over-year and over the last quarter, but the programs that are ramping broad range, notebook products for instance. Also, I mentioned that I think we and obviously Intel as well were a little bit surprised by the rapid uptick of their Atom processor demand and we’re well positioned in these Atom UM PCs and netbook products as well so as we mentioned before, we have a dominant market share in PC power and in fact we think that that market share position actually increased significantly with this latest Montevina generation.

Operator

Your next question comes from the line of Cody Acree – Stifel Nicolaus & Company, Inc.

Cody Acree – Stifel Nicolaus & Company, Inc.

Back to the PC side, with the wins, with the share gains, Atom and net notebooks and a lot of this in the early stages of ramp, are you giving up a bit of gross margin profitability? Maybe your percentages for growth that you would expect to come later obviously were in the early stages of ramp and it’s not coming through in September but you would expect to see later.

David A. Zinsner

Cody, I think if I understand your questions, you’re wondering if there’s leverage from the growth and all the most, all of this product is, in fact, all of it is bought from a foundry in terms of wafers and then we use a third party to do the back end, so there really isn’t much in the way of gross margin leverage from growth in computing.

Cody Acree – Stifel Nicolaus & Company, Inc.

Maybe I asked that incorrectly, so 1% to 3% growth this next quarter, share gains in computing are obviously solid but we’re not at full ramp in those share gains, yet we’re going to see if computing comes through likely some growth margin constraints because of the computing mix? Is that correct?

David A. Zinsner

That’s correct.

Cody Acree – Stifel Nicolaus & Company, Inc.

Are you giving up and can you qualify or quantify, are you giving up a bit of share or let’s say a gross margin potential for what in the out quarters may be more rapid growth driven by these computing share gains?

David B. Bell

I guess the question is could we be growing even faster if we were more aggressive? Is that what you’re asking?

Cody Acree – Stifel Nicolaus & Company, Inc.

Well, given that 1% to 3% for the September quarter is not really reflective of the ramp of these new design wins, we’re starting to, it’s concerning your gross margin a bit. As these design wins come in, does this start to give Intersil above market average growth whether in December or throughout 2009?

David B. Bell

Well, I think if you look at it from a big picture we have delivered above average growth for the last several years and I think that you can expect that we will continue to do that. There certainly is a niche change, especially as we head into the second half of the year. A lot of the industrial stuff starts to get a little bit weaker. That can be said a little bit of the communications infrastructure and our growth during the second half tends to be more computing driven, so one impact of that, as we addressed in the prior question, is that there’s going to be a little bit of pressure on gross margin but we don’t think that there’s going to be a whole lot of that.

Also, I guess if your question, I could rephrase, are we leaving a lot of business on the table in an effort to maximize margins? I would say no. I would say that we’re being judicious about it because there’s a spectrum of business in a computing market just like there is anywhere and there’s some low end business as it becomes commoditized with increased competition. I think we’re judiciously walking away from the low end of that business at the same time we’re adding new products to our portfolio that have higher value pricing capability, so there is some management of just, where we put our resources to a degree. What that does is helps maintain our gross margins and make sure that the purity of our business is good.

Cody Acree – Stifel Nicolaus & Company, Inc.

So given the design wins, the heavy design wins in computing and consumer, if we had to look at it in 2009 the mix would tend to leave gross margins flattish or with a slight upward bias, or could you give us any indication?

David B. Bell

Well, we’re not going to give you any indication for 2009 during this call. I think we’re confident in the business that we’ve got going forward. We expect computing will still be a big portion of that and continue to grow but we’re going to see growth in the other areas as well. They mentioned during the introductory remarks we’re investing heavily in our general purpose businesses as well and those are actually seeing excellent traction, so again, we’re not going to give any guidance behind Q3 at this point, Cody, but I think you are, if you’re comfortable with the balance and the health of our business as we go into 2009.

Operator

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

Steven Smigie – Raymond James

Sorry to keep folks on the computing side of it but I was just curious, at what point do you, obviously you’ve done well on Santa Rosa and Montevina, at what point do you get some sense of design win activity for the Calpella platform? When does that come about or do you already have some sense of your market share there?

David B. Bell

Some of those decisions are being made at this time but it’s way too early to get a sense of that. As we saw with Montevina, there are some platforms where decisions are made fairly early on and there’s some platforms where they are made very much last minute so we think at this point, although it’s very early, that we’re well positioned for Calpella but it’s way too early to call how the final results are going to come in roughly a year from now.

Steven Smigie – Raymond James

Two quick ones: your thoughts on maybe where your share is on Atom and then just on the comp side if you could, what would be a bigger driver for your growth in say ADSL standards or the BDSL stuff, of [inaudible] or one of those or would it be more helpful to your business?

David B. Bell

Well, first on the Atom share, honestly I don’t know exactly what our share in Atom is. I know that we’ve got parts that are well suited for the Atom platform and we are getting many design wins in Atom and that’s one of the things, that are sell things that drive our notebook growth but I don’t have any market percentage numbers even at our fingertips at this point so I think a little bit too early to call like I was referring to with Calpella, so I think we’re well positioned but I don’t have any numbers for you.

As far as ADSL/BDSL, ADSL continues to be a good driver for us. That’s where the bulk of the volume is but BDSL is of course where the performance is more intensive and we continue to distinguish ourselves with the performance of our parts there.

David A. Zinsner

The other thing in communication’s that’s going to drive growth I think over the longer term is 1) the satellite opportunities. We’re seeing great design win activity there plus the dollar content into satellites is increasing plus the number of satellites being deployed is increasing, so that’s helping. I think it’ll help drive some growth in communications and then Dave did mention really that general purpose investments that we’ve been making, a lot of those are in the power space specifically for networking products and routers and base stations and the like, so we feel pretty optimistic about our communications systems and its ability to grow for the next few years.

Steven Smigie – Raymond James

On the satellite stuff, and then I’ll get off, are you seeing more dollar content on the actual satellites themselves or is it on the launch pads?

David A. Zinsner

Yes, if you remember in the analysts’ day, we talked about the increasing dollar content within satellites and it was a meaningful increase, and it’s somewhat crazy even what the dollar content of satellite is but it’s going up.

David B. Bell

We sometimes talk about dollar content in cell phones and notebook computers in terms of single digit dollars. Well, in satellites the bar is at $1 million per satellite and we think that that’s going to become an achievable target at some point.

Operator

Our next question comes from the line of Ross Seymore from Deutsche Bank.

Ross Seymore – Deutsche Bank Securities

Just a question on the lead times and capacity constraints, specifically in the computing side: have you guys seen those go down or can you give us an update there?

David A. Zinsner

Generally, our lead times are in the six week range. There are a few spot parts that have extended lead times but it’s not very broad based and it’s not across any one end market. Clearly, the computing space, that’s where I’m talking about, and it’s just a few parts in computing really still have extended lead times so I think we’re now in a good position. We’ve ramped up the capacity at IBM pretty significantly now and feel we’re well positioned now to meet the demand.

Ross Seymore – Deutsche Bank Securities

What about on the [DIPC] versus OEM demand in general? A prior question was about the inventory level but are you seeing any differences or odd behavior from those guys on either side, just the ROEM versus one another?

David A. Zinsner

I can’t say that we have. I would say that [DIPC] was relatively as expected for the second quarter and we’re expecting it to be up in the third quarter.

David B. Bell

And as Dave said, our inventory levels are basically almost identical as where they were a quarter ago so no real change there.

Ross Seymore – Deutsche Bank Securities

One last quick one: of the power management IC that you had as a handset win, can you give us a little update what’s going on there, and then I’ll go away?

David B. Bell

You’re talking about the PMIC?

Ross Seymore – Deutsche Bank Securities

Yes.

David B. Bell

Yes, I think as we indicated during our last call that had been delayed somewhat. The programs that we expect are going to give us some ramp there, probably going to begin to ramp near the end of Q3 so we don’t think there’s going to be any meaningful revenue with our PMIC product for Q3, but I think that we could see some revenue in Q4 of the introduction of that product.

Operator

Our next question comes from the line of Uche Orji from UBS.

Uche Orji – UBS

Maybe I misheard you, but did you say your LCD business grew and if so, what could be driving it given all the general comments about LCDs, [inaudible] are they weak?

David B. Bell

Yes, we’re seeing strength in our LCD business but we’re not entirely pegged to the just overall revenue growth with in the macro LCD business, and the reason for that is that we continue to introduce more and more parts for LCD panels so that means that basically our dollar content average per panel continues to go up. And we also continue to get lots of really good design wins that are benefiting our market share, so I think we’re bucking the trend that’s happening in the macro LCD business with increased dollar content per panel and just our increased market share with the major panel makers.

Uche Orji – UBS

Is it just on that? Are you at liberty to tell me what you have with dollar content is now or somehow quantify what the increase was say year-on-year especially?

David B. Bell

I don’t know, to be honest with you exactly, what our dollar content is but what I can tell you is some of the kinds of things that we’re doing today. We probably have the opportunity for half a dozen or more parts that could go into an LCD panel. We’ve got things that are in the signal chain, gamma buffers that are driving the column drivers, we’ve got digitally controlled potentiometers for adjustment, we’ve got power management parts going in there, we’ve got things such as ambient light sensors to adjust the brightness of the screen, we’ve got HDMI interface parts, so lots and lots of different functions that we’re going in there with so it clearly, the opportunity is many dollars per panel that quite frankly I don’t know what our average dollar number is per panel today.

Uche Orji – UBS

Just one last question: can you just, this is just my housekeeping question, can you just tell me the mix between high performance and high volume last quarter?

David B. Bell

Between high performance and high volume?

Uche Orji – UBS

Yes, general purpose and…

David A. Zinsner

Oh, general purpose was about 62%. I’m sorry, [AFST] was about 62% of revenue, general purpose was 38%.

Operator

Our next question comes from the line of Romit Shah with Lehman Brothers.

Romit Shah – Lehman Brothers

Do you guys think your, well are you supply constrained on the power management side for notebooks?

David B. Bell

Well, let me take a stab at that, Romit. I think Dave, in an earlier question, indicated that we believe we’ve largely solved the capacity crunch that we experienced during the last year. We’ve made really dramatic improvements in expansion in our capacity and it’s mostly in this one process that does most of our power managed products, what we call our P6 process so we dramatically increased our capacity there and now manufacturing capacity that is well in excess of our demand because of that. That said, there is still a few parts where it’s difficult to predict the demand exactly and a few spot shortages but on the whole, we feel very comfortable at our capacity at this point, even being able to meet upside demand that could come along during the second half of the year from time to time.

Romit Shah – Lehman Brothers

Yes, the reason that I ask Dave is that the 25% sequential growth in computing seems like a large number and given the issue in previous years of being constrained, are you guys concerned at all or do you think that the channel may be double or triple ordering at this point?

David B. Bell

I don’t believe so.

Romit Shah – Lehman Brothers

Does that concern you as you think about perhaps Q3 and Q4 especially in this environment?

David B. Bell

Yes, we think we have a pretty good handle, Romit, on where the inventory is in the supply chain and so we obviously either established really close relationships with our key ODMs and OEMs through the last year, having dealt with this rapid rise in demand, so I think we’ve got a really good handle on where our parts are throughout that supply chain and we don’t perceive any problems at this point in terms of stuff piling up somewhere. I think a lot of the increase, you’re right, 25% quarter-over-quarter increase is a big number but I think that’s the combination of several factors. It’s a combination of a lot of strength particularly in notebook computing, that there’s this huge growth bucking the tide with the worldwide economy but secondly, it’s market share gains and we think that those have been pretty significant as well, just going from Santa Rose to Montevina.

Romit Shah – Lehman Brothers

That’s definitely a fair point and then just on the operating expenses: can you, Dave, provide a little bit more color on the increase in Q2? I was surprised by the drop in the operating margins, thing is significant.

David A. Zinsner

Well, this was in the range of what we expected. We were going to get a 6% increase for the extra week and there was a 2% increase for, Q2 just happens to be quarter in which we increased salaries, so there’s about a 2% increase to reflect that. I would say Q1 probably had a little fewer new product introductions which meant that materials cost in R&D were a little bit lower and I think we did a little bit better on new product introductions this quarter; caught up a little bit and so there was a little extra cost for materials. Outside of that, I can’t think of anything else that was unique to the quarter.

Romit Shah – Lehman Brothers

Well, if I look at the numbers, your operating expenses were up about 18% sequentially and you had 6% from the extra week and then 2% from salary raises, so what’s the other 10%?

David A. Zinsner

Hold on, let me just grab my sheet of paper, if you don’t mind. See if I’m getting that also. It’s up 9% sequentially. Now maybe you’re doing GAAP versus non-GAAP? Is it the issue or something like that?

Romit Shah – Lehman Brothers

That’d be the total operating expenses were $75 million Q2 versus $64 million in Q1. Maybe my numbers are wrong.

David A. Zinsner

Oh, oh yes. Yes, you know what? Including in the, we’re going to have this GAAP/non-GAAP reconciliation I think for a while, but there was absolutely no SG&A equity compensation expense in the first quarter. Essentially, when Rich left, the reversal of the accrual’s related to Rich Byer made that number $0 when normally it runs at about $5 million so that was the main reason for that, at least that was $5 million of the $8 million increase.

Romit Shah – Lehman Brothers

So that would go away then in Q3?

David A. Zinsner

No, I may have not explained this, so normally SG&A equity compensation is around $5 million. In Q1, it was basically $0 because we booked $5 million as we normally do but we released $5 million in associated with Rich, and then it resumed its normal pace in Q2 and so that would continue.

Operator

Our next question comes from the line of Doug Freedman from AmTech Research.

Doug Freedman – American Technology Research

You talked a bunch about different cost saving programs. You talked a bit about getting the gross margins back into the 58% to 62% target bracket. Can you help us understand how those layer in? It sounds like the gold transition is going to happen late in Q3. Does that mean we’re going to get a gross margin benefit from that in Q4? Anything that you can do to help us understand how the cost impacts that you’re taking are going to fold into the gross margin to get you that target number?

David A. Zinsner

Well, we have talked about gold being a significant cost for us. It’s about 350 basis points, just the adder alone that we’re getting right now is about 100 basis points of cost. What will happen at the end of Q3 is just one or two parts transitioning to gold wire bondings, so what we’ve done is we’ve picked some of the higher running parts and looked to transition those to copper because we’ll get the most benefit particularly ones that have high [tin up]. So, I wouldn’t imagine all of the gold cost goes away in Q4, in fact it’s quite the contrary but it will be beneficial. It probably adds 20 or 30 basis points to the Q4 number.

I think if you looked at overall, all the cost savings we have in front of us it is a 200, 300 basis point type benefit to us but it’s going to take a while to get there. It’s going to take at least six or eight quarters to move more of our volume to copper. I think the 0.25 process will be several years in the making and then the consolidation of our two fabs in Palm Bay really doesn’t start to benefit us until the third quarter of next year so we do have a while before we start really seeing major step up, step function improvements in those areas but it’ll start to happen in Q4. I think you’ll start to see a little bit of benefit in Q4 and then throughout next year you should probably see some pretty meaningful improvement.

Doug Freedman – American Technology Research

I just want to make sure I understand things correctly. The quarter micron transition, is that outside of IBM? Is that correct?

David A. Zinsner

Yes.

Operator

Our next question comes from the line of John Pitzer from Credit Suisse.

John Pitzer – Credit Suisse

First question, was any of the strength in the PC in the June quarter a function of the Montevina being pushed out i.e. to the extent that the Santa Rosa parts had been worked down ahead of the transition; the transition was pushed. Did you guys see rush orders for Santa Rosa that helped meaningfully in the June quarter?

David B. Bell

I don’t think it had a meaningful impact on our order or revenue. If anything I suppose it maybe delayed the benefits of our increased market share in Montevina to some degree, but I don’t think it was really significant. What it did do, with a fairly last minute change on Intel’s part to push that out, is it posed some challenges just in the production area because we have some different mix of products on a Santa Rosa notebook platform than we may on a Montevina platform and as many of these notebook manufacturers decided to sustain making their older versions for maybe two more months, it meant we had to scramble a little bit and refill the pipeline with some parts that we were planning to taper off, and delay some of the parts that are in Montevina platform notebooks but it even just illustrates the close relationships that we have with our customers. We worked closely with them on that transition and we were able to manage our way through that to refill the pipeline again with some of the parts that were in Santa Rosa platform notebooks.

John Pitzer – Credit Suisse

Well, Dave, as a follow up, when you look at the growth in PCs in June and what you were able to do with gross margins, especially with some of the inefficiency you just talked about in manufacturing, I guess I’m a little bit confused as to why we should see gross margin pressure in the September quarter; 24% sequential growth in PCs in June. It grew by 500 basis points as a percent of revenue and yet if you ‘x’ out the one time charge in March, gross margins were kind of flat. What’s the offset going into September that you were able to avoid in June?

David A. Zinsner

I think it’s just an additional grow, we’re expecting computing to once again grow in Q3. We’re expecting industrial and com which are our higher gross margin in market to be down in Q3 so I think that that’s one of the main drivers. It’s just a mix.

John Pitzer – Credit Suisse

Another thing, guys, my last question: any help on where Atom gross margins might compare to the overall computing gross margins for you guys?

David B. Bell

I don’t think it’s going to be appreciably different. As Atom first starts out a lot of our existing notebook parts also get used in Atom notebook designs. The core processor, instead of being multi phased powered might be single phased powered but fundamentally I don’t think there’s going to be a big difference in the margin profile between Atom products and other products.

Operator

Your next question comes from the line of Sumit Dhanda from Bank of America Securities.

Sumit Dhanda – Bank of America Securities LLC

Two questions: first, on the op ex side again, Dave, is it fair to assume that on relatively short order your operating margins which were running about 200 basis points higher on a non-GAAP basis just two quarters ago, that’s a fairly achievable target again within the next two to three quarters?

David A. Zinsner

I’m not sure what you mean by high. You mean the operating margins? Will we achieve the number that’s in that range? Is that what you’re saying?

Sumit Dhanda – Bank of America Securities LLC

Yes. You had a disproportionate increase relative to revenue from the extra week in the June quarter and you look back to just December of 07 quarter, you were running almost 200 bits higher.

David A. Zinsner

I think that’s a fair assessment.

Sumit Dhanda – Bank of America Securities LLC

Could you remind us again what the terms were in June quarter relative to your expectation for September which is slightly less than 40?

David A. Zinsner

Yes, I think it was probably in the mid 30s.

Sumit Dhanda – Bank of America Securities LLC

Finally, any update on the redesigns on the Blu-Ray side for optical and how the design wins there were progressing and expectations on the timing of the ramp, any different from it being sometime in 09?

David B. Bell

Yes, it’s pretty much as we described at our last conference call. The standards conversion ironically has meant that a lot of those products are being redesigned and just frankly the adoption of Blu-Ray, particularly writers, in the marketplace has been slow so if that continues to be the case, meaning I don’t think we’re going to see really any uptick in our Blu-Ray business through 2008. I think it’s going to be largely a 2009 story as we’ve said before. That said, there are some bright spots. We just learned a couple days ago about a nice design win with a major maker of optical pick up units where our part got designed in for a Blu-Ray application, so there are some glimmers of hope there but throughout the rest of 2008 I really don’t think it’s going to start upticking. I think it’s a 2009 story.

Sumit Dhanda – Bank of America Securities LLC

Just one last follow up: so implied in your terms outlook, Dave, is that the backlog’s relatively flat heading into the September quarter? Is that accurate?

David A. Zinsner

I couldn’t tell you on a six month backlog, I mean a three month backlog. A six month backlog is up because we had a positive book-to-bill.

Operator

Your next question comes from the line of Craig Hettenbach from Goldman Sachs.

Craig Hettenbach – Goldman Sachs

Can you just talk about the price environment within a notebook in terms of as you transition to Montevina and within the Atom processors as well?

David B. Bell

There’s no question it’s a very competitive environment there. More and more competitors jump into that market so we though are confident in our technology. We continue to be told that we’ve got the best performing parts and continue to get a little bit of a premium because of that, and obviously as we’ve talked about previously, we’ve gained some market share in the Montevina generation. I think that’s a result of us having parts that are winning over these key makers and designers of notebook computers but, Craig, there’s no question it’s a competitive environment. Also, as I mentioned earlier we’re being judicious there at the low end of the spectrum; things like system power solutions that are more commoditized and have more competitors. We’re trying to exit as much of that business as we can without leaving our customers in the lurch and focusing our energy in areas where we really believe that we can differentiate our products through our technology, through our customer relationships, through our support and so forth.

Craig Hettenbach – Goldman Sachs

If I could follow up on the gaming front, looking out over the next year or two are there opportunities to be on just the core power in terms to add other products into gaming consoles that you’re looking into?

David B. Bell

Yes, absolutely. We really have not been a major participant in the gaming console business until just recently here. As I mentioned in the prepared remarks we just began ramping with one of the products and saw nearly $1 million in our first quarter of ramping. Absolutely there are more opportunities with that particular customer that we’re shipping that product to and I think there’s going to be opportunities at other gaming console companies as well. Also, in that same category of course would be handheld gaming devices. We are shipping some products today there into that market. The nice design win is just beginning to ramp there as well so in both handheld and line powered gaming consoles create some opportunity for us going forward.

Craig Hettenbach – Goldman Sachs

In a gross margins within the gaming, some works in the computing market? Is that right or…?

David B. Bell

To be honest with you I don’t know exactly as we’re just starting with this one particular part. My guess, Craig, is that it’s probably going to be a little bit better just because I think there is going to be more opportunities to differentiate a little bit more unique needs there than in the computing space so, but that’s just my expectation, perhaps wishful thinking but I think it could be a little bit better.

Operator

Our next question comes from the line of Mahesh Sanganeria from RBC Capital Markets.

KC Rajkumar – RBC Capital Markets

KC, calling for Mahesh. A couple of questions: on your handset segment, did I hear you correctly that you expect to send them to take down in Q3 and if so, when do you guys see that segment turning around?

David B. Bell

Yes, just looking at the numbers here so we can make sure we’re giving you the right data here. In Q2, the handheld portion that I’m looking at here was down and that was down primary just to overall softness in the handset market as everybody’s painfully aware of so that was one of the reasons that our consumer business was down in Q2.

David A. Zinsner

Handheld is going to be up.

David B. Bell

But yes going forward into Q3 we do expect that trend to reverse and expect to see some decent growth in the handset category.

KC Rajkumar – RBC Capital Markets

How do you see the prospects of the overall consumer segment in Q3 and beyond?

David B. Bell

Well, it’s a little bit difficult to predict obviously. If anybody has a crystal ball please share it with us but as you just mentioned, certainly in the handheld area we think that that’s going to recover a little bit for us and I think that a lot of these high end products are more insulated from some of the pressures that we’ve seen during the first half. Like in the cell phone arena, the low end commodity phones are taking much more of a beating while the high end phones really have fared far better. I think that that’s probably going to continue through in the second half of the year. Also, as we start going into the Christmas build season obviously there’s going to be some growth there in consumer products.

KC Rajkumar – RBC Capital Markets

On to the phone recapacity question, now that the phone recapacity issues have seem to been solved, I’m surprised that the overall guidance wasn’t higher than what you guys gave. Should one expect that that should build a sudden load of conservatism into your Q3 items?

David A. Zinsner

I think 6% to 8% on a pro forma basis is actually pretty good growth. If you look back in history my guess is the average is somewhere in that range. I’m not sure if it’s on the low end of that range or in the high end. Perhaps it’s a little bit on the higher end. I think it would be imprudent for us to guide significantly higher given the macroeconomic uncertainty that’s facing us. We do a very detailed ground up build up of the forecast and we don’t typically deviate too much from it. We have a certain hedging factor that’s put in place but generally speaking it’s pretty accurate and we’re pretty comfortable with this guidance.

Operator

Your next question comes from the line of Joanne Feeney from FTN Midwest.

Joanne Feeney – FTN Midwest Securities Corp.

Just a couple of questions; a lot of them have been answered but on the foundry side, just so you can increase your capacity which is terrific, with foundries running at pretty high recent capacity utilization are you starting to see them pass on some price increases to you?

David B. Bell

Well, I know that that is true with capacity issues. You can expect some increases but no, we have a long standing relationship with this particular foundry and we have done an outstanding job of adding capacity but also making sure that our way for prices have stayed in check through this.

Joanne Feeney – FTN Midwest Securities Corp.

Just a bit more detail if you could on the high end consumer side. In talking to your customers, we on this side of the wall here are getting a mixed review about what the customers are feeling, whether they’re becoming simply more cautious or whether they’re actually seeing declines in demand. Have you talked to your customers? What kind of sense are you picking up regarding their outlook at this point?

David B. Bell

You’re referring during this specifically to the consumer market here?

Joanne Feeney – FTN Midwest Securities Corp.

No, I was thinking about the high end consumer and in particular, really the global distribution of, perhaps of changes in sentiment and a change in demand. Is Asia still running pretty hot or are they starting to get more cautious? Is this really a U.S. problem? What are you hearing from your customers?

David B. Bell

Well, I think that there is some difference depending on where your talk. Hopefully, this doesn’t insult a lot of the people on the phones here but if you talk to people in New York City, I think that’s probably the epicenter of negativism with all the credit crisis and everything so I hear a lot more negative sentiment in New York frankly than we do other places in the U.S. And as you go outside the U.S., you start hearing a much different view and Taiwan, for instance, with the computing business. Yes, desktops are flat, maybe even declining a little bit in terms of volumes but notebooks are on fire so I think that sometimes we do get a little bit of a U.S. centric view here with our own problems that the credit crisis and so forth and in many other parts of the world, it’s just not that bad and in, in fact, some places it’s actually doing very well.

Now there are other spot issues like the earthquake in China and so forth that I suppose factor in so bottom line is it’s hard to predict exactly what’s going to happen, but especially in higher end products as I was mentioning earlier, I think we’re more insulated from the overall economic problems throughout the world than you are if you’re participating in commodity products. And that’s where we’re increasing and putting our efforts is to go into these high end products.

Operator

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

Craig Ellis - Citigroup

First, a bigger picture question for Dave Bell: Dave, one of your big competitors has talked a lot recently about trying to grow much more progressively in the high volume space. Have you seen any change in competitive dynamics in the consumer computing businesses? Some companies try and put more effort into that space.

David B. Bell

Yes and no, we have not seen any more activity. We probably both know which company we’re talking about. We really have not seen increased competition from them at all. I do smile when I looked at the recent commentary that came with the press release though about how on one hand, I think they’re trying to de-emphasize their participation in the consumer market focusing on industrial and infrastructure yet the growth in their upcoming September quarter apparently is due to growth in high end consumer so it’s interesting that even though they’re really focusing on industrial and infrastructure stuff, it’s growth in consumer that they’re relying on to give them some growth in the September quarter, but as far as competition out there, Craig, having to compete against them, no. Really none whatsoever.

Craig Ellis - Citigroup

Actually I was thinking of a different competitor; one down in Texas that had put up a 20% high volume analog growth but back in May and I was wondering if you were seeing anything from them as they try and reaccelerate efforts in high volume analog.

David B. Bell

Well, yes I think it’s a pretty audacious goal that Rich Templeton said of growing analog by 20%. I would imagine that he won’t be pushing that same goal anymore after their recent earnings release. As far as competition though with TI; yes, absolutely there. TI is putting a lot of energy into gaining market share where they can. Clearly, that was part of the plan; they’re trying to grow a big analog number by 20% but it seems like that’s having a setback with the recent announcement.

Craig Ellis - Citigroup

Dave Zinsner, you mentioned in your prepared comments when talking about the buyback that you want to keep some cash on the balance sheet for strategic acquisition purposes. Can you just give us some color on maybe the size of deal that you’d be comfortable with and obviously you can’t talk about anything specifically that’s in the pipeline, but is there a particular time frame that we might be thinking about as to when the company might want to do a deal?

David A. Zinsner

Yes, sure. So most of the deals I’m talking about are actually the smaller tuck ins and I’d say those are probably the ones that are more likely to happen, but they could be $20 million, $30 million, $40 million, maybe even $50 million type size acquisitions with earn out. And so those are really the ones that I want to keep cash aside for. It’s been an interesting market since the ideal market is not real receptive to these smaller players and generally, DCs seem to be less inclined to make that next round of investment with a lot of these, actually, really good companies that just might have a little bit longer time to revenue.

We’re seeing some pretty good opportunities to buy some companies that ordinarily would be multiples of what I just said for numbers around those figures of $20 million, $30 million, $40 million, so I would expect us to do one or two deals over the next 12 months in that range and perhaps some maybe even stretch out just a little bit larger than that. And so those are the ones that we’re looking for. Timing is tough to say, Craig; it’s when all that, everything comes together and it’s hard to predict when that happens but I think you can expect us to do some good strategic tuck in type M&A.

Operator

Our next question comes from the line of Patrick Wang from Wedbush Morgan.

Patrick Wang – Wedbush Morgan Securities Inc.

Most of my questions have been answered but just one quick one: can you talk about the linearity of orders during the quarter?

David A. Zinsner

I don’t have that figure in front of me but if memory serves me correctly I think every month was sequentially better than the prior month, so last month, which was obviously the June month was stronger than the other two months. It was strengthening through the quarter.

Patrick Wang – Wedbush Morgan Securities Inc.

Is that also consistent with what you saw? I know you guys get monthly reports from your disties. Is that what you saw on the distie side as well?

David A. Zinsner

I can’t tell you that one for sure how that played out.

Operator

Our next question comes from the line of Harsh Kumar from Morgan Keegan.

Harsh Kumar – Morgan, Keegan & Company, Inc.

Couple of questions: Dave, any areas in consumer that stand out the second half? You mentioned gaining but anything outside of that that you see particular strength in?

David B. Bell

I think some of them we touched on already. I think we’re going to see the handheld devices come back, down in Q2. We expect them to be back nicely in Q3 so that’s one area. I think we’re also going to see the LCD area; LCDs obviously going into flat panel TVs. We expect that’s going to be recovering and growing in the second half of the year once again, so those are a couple areas I would point to that I think are in the consumer area that we have high hopes for.

Harsh Kumar – Morgan, Keegan & Company, Inc.

A clarification: communications I think you said on absolute basis it’ll be down slightly. Would that still be down accounting for the extra week or would you think it’d be flattish to maybe slightly up?

David A. Zinsner

It’s flattish without the extra week.

Harsh Kumar – Morgan, Keegan & Company, Inc.

And last question: how much, I wonder if you can answer this, how much is your exposure to, what as a percentage of sales is optical drives for you guys?

David A. Zinsner

We don’t normally break it out to that level of detail, Harsh, but suffice it to say it’s at a fairly low level at this point.

Operator

As a reminder, please limit yourself to one question. Your next question comes from the line of Nicholas Aberle from Caris & Company.

Nicholas Aberle – Caris & Company

It’s a tough call today. Just wanted to ask about the restructuring; you guys initiated operational restructuring during the quarter. Maybe can you just highlight the steps of that restructuring, potentially what cost savings we could see from that over the long term and maybe the timing of that as well?

David A. Zinsner

And, Nick, just to clarify, the restructuring actually happened in the first quarter, at least the announcement. There are certain items that just from an accounting perspective you have to accrue as you incur them so there’s actually going to be four or five at more a quarter so it’s a million dollar accrual that will occur, and these are for decommissioning costs, defacilitation costs, those kind of things that just from an accounting perspective have to be accounted for after the timing of the initial announcement. We made the announcement really after the first quarter and that was to consolidate our four inch fab with our six inch fab and we’re in process of doing that so there’s probably 20 or so processes, some of which we’ll do end-of-life on and some of which we will transfer into our six inch facility and that’s ongoing. Best guess is that it will be done sometime in the Q2/Q3 timeframe of 2009.

Once that’s finished, the good news is that the savings is probably in the neighborhood of $6 million on an annualized basis. If there’s any negative news to this, it’s that we have to wait until all of it’s done before we see even a dollar worth of the savings so we won’t see any savings until most likely Q3 of 2009.

Operator

Your next question comes from the line of Mike McConnell from Pacific Crest Securities.

Michael McConnell – Pacific Crest Securities

Dave, we’ve talked about what you can do with the margins from a cost perspective but could you talk a little bit about mix? Are we going to take another step down to margins in Q4 as computing conceivably could become even a larger piece of the company or when’s the next inflection do you think upward in margins? If we look at the front half of the year, typically you have communications, industrial stronger yet in the last two years we really haven’t seen a sequential lift in margins so are we going to have to wait for optical storage and Blu-Ray to kick in potentially Q2 of next year before we see that lift in margins? Could you just talk about the expectations from margins and when we could see that positive inflection and what you’re expecting for Q4?

David A. Zinsner

Well, as I said, we do have a number of cost improvement initiatives and even we named the top three. There are probably 25 other items that the operations group works on and manages through to help reduce the unit cost and those are ongoing. We had some in the second quarter; we’ll have some in the third quarter. I believe just reading the tea leaves today that we’re at the low point in the third quarter; that we will make improvement in the fourth quarter based on the gold to copper wire transition.

Normally, in Q1 and Q2 those are seasonally strong quarters for the industrial and com infrastructure space; computing and consumer, computing specifically tends to be weaker in the first and second quarter of next year so just based on the way things normally trend, we would hopefully see gross margins begin to improve in Q4 and then in Q1 and Q2. Obviously, mix does derive a lot of this and you never know and we could be really successful in computing, maybe outstrip our expectations in Q4 and maybe that does impact gross margins a little bit, but I can tell you if that does happen, most likely sales is growing even faster which would mean our operating margins are growing even faster and that’s really the number that at the end of the day we’re really looking at. We’re looking at trying to drive superior earnings growth off of hopefully superior revenue growth.

Michael McConnell – Pacific Crest Securities

So if you have the growth opportunity in computing you wouldn’t walk away from certain aspects of it to manage the gross margin on a percentage basis?

David A. Zinsner

Well, we’re not doing it from that perspective. We’re just trying to be participate in businesses that provide good return on investment and at a certain margin level those things don’t happen so we do walk away from; we do it all the time. That’s the nature of the high performance analog space, that some things commoditize and they’re replaced by new highly differentiated, very sophisticated new analog products. That’s the nature of the business we play in and I think that we’ll do a pretty good job of transitioning away from some commodity business in the future.

David B. Bell

Mike, one other thing that I would add to that too is that we have been investing a lot in non-computing products like Dave made a brief reference to that earlier during the call here, that we had a substantially higher number of new product introductions this last quarter and in fact, we didn’t really highlight this, but actually hit 100% of our goal at the beginning of the quarter for new product introductions and a vast majority of those products are non-computing products. And as those new products get to market, get designed into a wide array of different products, end products, I think we’re going to start seeing some of the other areas: industrial and communications infrastructure starting to really pick up steam and that will help offset the mix pressure that we’ve seen during the last few quarters in computing.

Operator

The next question comes from the line of John Lau from Jefferies & Company.

John Lau – Jefferies & Co.

I know you’ve answered a lot about the computing area so I just had one more question left. Is there a change in parts from the Santa Rosa to the Montevina platform? I’m just worried that with such a large shipment in Q2, if the Montevina ran progresses, the older parts may be at risk and I guess the corollary to that is: are the expectations for the Montevina ramp in your mind matching your customers’ expectations and does that match the way they ordered?

David B. Bell

As far as the parts that are used in Santa Rosa versus Montevina, almost all of the parts are the same and in fact my understanding is that the parts that are used in Montevina are actually backwards compatible to Santa Rosa, so there is always some [inaudible] in the parts that are used and in some cases it actually has nothing to do with the processor itself. It’s just that there’s a different platform that the company designs and sometimes the basket of parts they use is a little bit different but we work really closely with our customers there and work with our ODMs and OEMs and as I mentioned, the delay last minute of Montevina did cause a little bit of a ripple there but we worked our way through that and I don’t think that we’re going to be ending up holding parts that can no longer be used. I think that’s where the root of your question, are we going to be left in the lurch and have parts that are designed for Santa Rosa platforms that can no longer be used and the answer to that is absolutely not. We feel very comfortable. We’ve got those things managed well and we’ve got homes for all of those parts.

And then your second question again, John? I apologize.

John Lau – Jefferies & Co.

No, no. That was the gist of the question; I wanted to thank you for clarifying that.

Operator

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

David Wu – Global Crown Capital

I just want to clarify one thing, two things actually. Dave, you mentioned about a $2 million drop in op ex? Is that out of SG&A in Q3? And as far as the consumer electronics business concern, I guess one would expect some growth in both Q3 and Q4. I guess the Q3 is being masked by the extraordinary growth in the computing side but I assume seasonal growth in Q3/Q4 in the consumer side should occur, right?

David A. Zinsner

So answering your second question first, I think it’s at least, we don’t predict what the fourth quarter’s going to look like until we get to the end of the third quarter but typical seasonality is that consumers op will wait and provide more accurate guidance what that, after the third quarter’s call. And in answering your first question, which is where you’ll find the expense reduction, I think if you had to take the $2 million, about $1.2 million of it will come from SG&A reduction and then about $800,000 to R&D. Now keep in mind there was an extra week of expenses in the second quarter which don’t repeat in the third quarter so that’s really the widest chain of reduction and in fact on an apples-to-apples basis, we probably are increasing both areas of the P&L, more significantly the R&D because we’re looking to continue to ramp our investment in new products.

David Wu – Global Crown Capital

If I were to think about this year, the consumer electronics part would be ramping, typically Q3 is the bigger quarter than Q4 and it sounded like a number of programs are going to kick in in Q4 in the consumer electronics so would this year be different from prior years?

David A. Zinsner

Oh, we always have programs ramping that should typically we some benefit from in the fourth quarter so I don’t know that this would be an atypical quarter. I think the bigger question is what is the macroeconomic backdrop that we’re operating under in the fourth quarter. Clearly, you’re right though; there are products that are ramping into production where we’ll see higher revenue from, from Q3 to Q4 even if volumes are flat.

Operator

Your next question is a followup question from Gus Richard from Piper Jaffray.

Auguste Richard – Piper Jaffray

Just could you quantify your content Napa to the next generation platform and then what’s your content opportunity is on Atom as well?

David A. Zinsner

Gus, you mean really Santa Rosa to Montevina?

Auguste Richard – Piper Jaffray

Correct. Correct, sorry, mind slip.

David B. Bell

Yes, I’ll take a stab at that, Gus. Actually stepping all the way back to Napa a year ago we did see a sizeable increase in our market share going from Napa to Santa Rosa and we claimed back about a year ago when that occurred that we felt that we clearly had a dominant market share for power management. Although we haven’t quoted any specific numbers, and in fact we’re sometimes a little bit fuzzy, hard to get real precise numbers, we know that we have had some significant increases in market share even further still going from Santa Rosa to Montevina in this latest generation here so again, we don’t quote you specific numbers but we clearly have an industry leading market share for power management.

In the Atom area, as best I can tell and again I don’t have really accurate data, Gus, but I think that our market share is probably going to be similar there. The early Atom products are largely based on similar products to those used in the full size notebook arena. We’ve got single phase core power products for instance that are used for low power applications that are used to power the Atom processor so my belief is that our market share is probably very similar with Atom as well, but quite honestly I don’t have specific data.

Auguste Richard – Piper Jaffray

I was more interested in dollar content as opposed to the market share, sorry.

David A. Zinsner

Yes, so in dollar content terms we think we went from about $2.00 to $4.00 in the transition from Napa to Santa Rosa. I don’t think that from a dollar content perspective we changed very much in the Santa Rosa to Montevina but I think, maybe this gets back to Dave’s point, I think that our hit rate in terms of the number of sockets we’re getting per notebook has probably increased a little bit but tough to say what that would be.

Auguste Richard – Piper Jaffray

And your dollar content in the Atom? Is that similar to a Napa or is it similar to Santa Rosa?

David B. Bell

Yes, just quite honestly, Gus, I don’t know the exact details there. I would imagine it’s going to be similar or slightly less. The reason I would say slightly less is that the core power tends to be a single phase solution as opposed to a two phase solution but I don’t think it’s going to be dramatically less.

Auguste Richard – Piper Jaffray

So roughly two bucks?

David B. Bell

It’s probably more than that. As Dave was saying I think we probably moved up into the range of $4.00 per notebook so it’s probably just slightly out of that I would guess.

Operator

At this time, there are no further questions in queue.

David B. Bell

Well thank you everyone for joining us for our earnings conference call for this second quarter 2008. So we’re very happy with the results of our second quarter in a relatively challenging economic environment and with the consumer business being down, but despite the softness that we’ve seen in the computer market and these economic uncertainties as you know, we’re projecting continued growth in our seasonally strong third quarter. Given the strength of our orders in the second quarter and our backlog entering the third quarter once again we anticipate that our revenue’s going to grow from 1% to 3% sequentially in Q3 and when taking into account the extra week in the second quarter, this translates to roughly 6% to 8% sequential growth for our third quarter. So again we’re very pleased with those results and those projections and once again we thank all of you for joining us on the call this afternoon. Have a good day.

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Source: Intersil Corporation Q2 2008 Earnings Call Transcript
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