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Intersil Corporation (NASDAQ:ISIL)

Q1 2006 Earnings Conference Call

April 20, 2006, 4:45 PM (Eastern)

Executives

David Zinser, Vice President and Chief Financial Officer

Rich Beyer, Chief Executive Officer

Louis DiNardo, President and Chief Operating Officer

Analysts

Ross Seymour, Deutsche Bank North America

Craig Hettenbach, Wachovia Securities

Joseph Osha, Merrill Lynch

Douglas Freedman, American Technology Research

Chris Caso, Friedman, Billings, Ramsey and Co., Inc.

Steve Smigie, Raymond James and Associates

Tore Svanberg, Piper Jaffray

Michael Masdea, Credit Suisse First Boston

John Lau, Jeffries and Co.

Romit Shah, Lehman Brothers

Ambrish Srivastava, Harris Nesbitt

Rohit Pandey, HSBC Securities

David Wu, Global Crown Capital

Presentation:

David Zinser, Vice President and Chief Financial Officer

Thank you, Bill. Good afternoon and welcome to Intersil’s 1st Quarter Earnings Call. We completed our 1st Quarter on March 31, 2006. We issued our earnings announcement today at approximately 1:30 PM Pacific time. A copy is available on the investor relations page of our website at www.intersil.com. This call is also being broadcast live over the internet and can be accessed through Intersil’s web address. A conference call replay will also be available for two weeks through April 27.

Joining me on today’s call are Rich Beyer, Intersil’s Chief Executive Officer and Lou DiNardo, President and Chief Operating Officer. In a few moments Rich, Lou, and I will deliver remarks on our 1st quarter of 2006 and provide a summary of our business outlook. After our prepared comments, we will open the line for questions.

Please note that some comments made during this conference call may contain forward-looking statements. I would like to remind you that while these statements reflect our best current judgment, they are subject to risks and uncertainties that could cause 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 pro-forma or other financial measures that are not prepared according to GAAP. We use these non-GAAP measures because we believe they provide useful information about the performance of our business and should be considered by investors in conjunction with GAAP measures that we also provide.

You can find a reconciliation of non-GAAP to comparable GAAP measures on the investor relations section of our website. For those of you in interested in learning more about Intersil at an upcoming Investor event, we will be participating in the Merrill Lynch tech gathering on May 2 in New York, presenting at the Credit Suisse semi-conductor conference on May 3 in New York, and the JPMorgan Technology Conference on May 24 in San Francisco. I will now turn the call over to Rich.

Rich Beyer, Chief Executive Officer

Thanks, Dave. Good afternoon and thank you for joining us on 1st quarter earnings call. Intersil is off to an excellent start in 2006. We experienced a strong 1st quarter in terms of orders and sales. We also made significant progress to our financial model. The company achieved revenue of $178.9 million dollars and non-GAAP earnings per share of $0.28, surpassing our revenue and EPS guidance for the quarter. This represents the 6th consecutive quarter of sequential growth and revenue and non-GAAP gross profit, operating profit, and earnings per share. In addition, our orders were up solidly quarter-on quarter. The growth in both orders and revenue was diverse across numerous product families, numerous new end markets, and geographies.

We saw sequential revenue growth from 3 of our 4 end markets. Our sales in communications, industrial, and computing markets all experienced healthy sequential growth. Our sales in for the consumer market experienced a sequential decline as expected due to seasonality. Lou will provide more color about the end markets after Dave reviews the financials.

We continue to show strong cash generation, delivering over $55 million in cash flow from operations during the quarter. We exited the quarter with approximately $726 million in cash and marketable securities. As a result of our strong positive cash flow and balance sheet, our Board of Directors again authorized and declared a quarterly dividend of $0.05 per share of common stock.

In the 1st quarter of 2006, we announced the appointment of Lou DiNardo as Intersil’s President and Chief Operating Officer. We also strengthened our senior management team this quarter with the addition of several key executives. Most recently we announced the hire of Peter Oaklander for the position of Senior Vice President of Worldwide Sales. Mr. Oaklander will replace Aldan Shovan who will retire later this year. We also hired Andrew Rhine for the position of Vice President, General Manager of Intersil’s Consumer Power Products Group. In addition, we announced the promotions of four seasoned executives to run the remaining product groups. The promotions include Paul, Vice President, General Manager of the Computing Power Products Group, David Lee, Vice President, General Manager of the Industrial and Communications Power Products Group, Simon Prutten, Vice President, General Manager of the Analog and Mixed Signal Products Group, and Susan Hardman, Vice President, General Manager of the Automotive and Specialty Products Group – all of the Vice President, General Managers report directly to Lou DiNardo.

At this time, I’d like to turn the call back over to Dave Zinser, Intersil’s Vice President and Chief Financial Officer, who will provide a financial summary. After that Lou will discuss results from each of our end markets and then I’ll provide some comments on our 2nd Quarter outlook.

David Zinser, Vice President and Chief Financial Officer

Thanks, Rich. Let me begin with the income statement. As Rich stated, we reported a $178.9 million dollars in revenue for the 1st Quarter of 2006. Up 40% from the same period last year and up 2% from a very strong 4th Quarter. We were pleased close the Quarter at a book to bill well above one. Based on the profile of our backlog, we require an order turns rate during the 2nd Quarter of a little less than 40%.

On a GAAP basis, including the expense associated with stock based compensation, we reported net income of $32.4 million dollars or $0.22 per diluted share for the 1st quarter of 2006. For the same quarter last year, net income was $12.8 million or $0.09 per share. For the 4th quarter of 2005, net income was $28.7 million or $0.20 per share. On a non-GAAP basis, excluding the amortization of intangibles, stock based compensation, and other unusual items, net income for the quarter was $41.3 million dollars or $0.28 per diluted share; up a 136% from $17.5 million or $0.24 per share from the same quarter last year, and up 5% from net income of $39.3 million or $0.27 per share for the 4th Quarter of 2005.

We saw an increase in our gross margins for the 1st quarter from 56.6% to 57.3%. This seven basis point improvement was driven by the sequential growth in revenue for general purpose products, lower wafer costs, and reduced tax end costs. We expect a further improved gross margins net quarter as we continue to move closer to lower end of our long term gross margin model up 58-62%.

As a percent of sales, 1st quarter R&D expenses were 14.5% of sales; down from 15.9% in Q4. In absolute dollars, R&D expenses were down $1.9 million from the prior quarter, due to lower spending in R&D materials. This was largely a timing issue; therefore, we expect 2nd quarter R&D expenses to be up $1-1.5 million from the 1st quarter.

Our SG&A expenses for the 1st quarter, were 15.4% of sales; up slightly from 14.6% in Q4. In absolute dollars, the increase of $1.9 million dollars from the prior quarter was due to higher employee incentives and sales commission costs on higher sales, increased marketing communications expenses associated with our general purpose product, and slightly higher general and administrative costs as a result of the consolidation of our Palm Bay, Florida facilities.

Upon completion of this consolidation late this year, we expect to save approximately $2 million dollars annually. We expect 2nd quarter SG&A expenses to be up approximately $500,000.00 dollars from the first quarter on higher sales. As a result of our consistent sales growth, mixed improvement and cost control our non-GAAP operating income for the 1st quarter was 27.4% of sales, which is now within our targeted financial model of 27-30%. This represents a 130 basis point improvement from the 4th quarter.

Next quarter we expect continued improvement in operating margins. Our tax rate was 26% in the 1st quarter and our estimate for the 2nd quarter is approximately 26%. The rate could be lower if Congress approves the R&D tax credit which, as you all know, expired on December 31, 2005. A decision on this is expected sometime in the 2nd quarter.

In summary, we have made tremendous strides towards our long term financial model over the last 6 quarters. In that time frame, gross margins have improved by over 200 basis points and we have actively managed our operating costs; a yield over a 150% improvement in our operating profit. We are now within our targeted operating margin model of 27-30%. We expect to continue to improve gross margins throughout the year and get the low end of our target of 58-62% sometime in the second half of this year. Through gross margin improvement and increasing operating leverage, we also expect to see continued expansion of our operating margins this year as well.

Now, moving to the balance sheet.

For the 1st quarter, we generated over $55 million in cash flow from operations and we exited the quarter with approximately $726 million in cash and marketable investments and no debt. On an absolute dollar basis, our inventory was approximately flat with the 4th quarter. As a result, our inventory turn improved slightly from a 3.4 to 3.5 turn. Days sales outstanding remain approximately flat at 49-days in the 1st quarter, compared to 48-days in the 4th quarter. Distributor inventory increased slightly and our judgment sees levels are appropriate to support our projected growth in Q2 and the second half of this year.

During the quarter, we repurchased approximately $60 million dollars or 2.1 million shares of our stock. Our weighted average share count increased by approximately 1.8 million shares in the 1st quarter, verses the 4th quarter of 2005. Our daily average stock price increased by more than $5 from the prior quarter. For the upcoming quarter, we expect our fully diluted total shares outstanding to remain relatively flat with Q1. Now I will turn the call over to Lou DiNardo, Intersil’s President and Chief Financial Officer.

Louis DiNardo, President and Chief Operating Officer

Thanks, Dave. Let me discuss the highlights from each of our end markets. I’ll start with a few comments about high end consumer. Our sales with high end consumer market represented approximately 25% of 1st quarter revenue. On an absolute dollar basis, although our revenue in the high end consumer market was down sequentially as expected, revenue from the high end consumer market was up more than 60% year-over-year.

In the area of handhelds, we continue to be a market leader for battery charging ICs. In the quarter, we made tremendous progress in expanding our technical leadership into other critical areas within this market. Last quarter we mentioned securing several new design wins for the family of new load dropped out regulators. These wins are in early production and we are seeing significant traction which we’ll (inaudible) throughout the year. We are also seeing significant design wins and revenue progress this quarter, with our battery safety axis. These products have been designed in with several top tier handset manufacturers and we expect them to proliferate through many platforms in 2006.

In retrospect, 2005 was a great year for our handheld products business and in 2006 is looking like another year of exciting growth. In the area of displays, we’ve maintained our design win momentum with all of the major display manufacturers. Global forecasts for 2006 has all been revised upward and panel manufacturers have been adding significant capacity to meet the increasing demands.

Our families of buffering display power products, PCPs and analog front ends are all well positioned and we continue to secure design wins that will ramp through out the year.

With favorable pricing, more capacity, and our market leadership we expect the 2nd quarter and the second half of the year to be much stronger than Q1. In the optical storage market, we saw a sequential decline in total revenue as expected, due to seasonality. Unit demands within the year are still expected to grow modestly and we remain the market leader for Laser Diode Driver ICs. The next generation Blu-Ray and HD products are expected to begin modest shipments in the second of this year and we anticipate mass production volumes in 2007.

In summary, we continue to be extremely excited about our product proliferation and growth opportunity in the high end consumer market.

Heading now to computing.

Our sales into the computing market represented approximately 28% of revenue for Q1. On an absolute dollar basis, our revenue was up from this market 7% sequentially. Although our desktop business was down due to expected seasonality, we saw significant growth in our notebook business. For the next generation of desktop platforms due out later this year, we are enjoying strong design success with our core controller, which uses a differentiated technology and significantly reduces the number of output capacitors needed for CPU cord DC/DC converter design. These devices will be used in both Intel and A&D platforms, with production lines ramping through the second half of this calendar year. On the notebook side, we grew our market share for the current Centrino platform and shipped our first mass production volumes on the next generation notebook platform. Looking ahead to the second half of the year, our positioning on the next generation of notebook platforms is solid. We expect to see further growth in our notebook revenues as we have strong design win momentum and a larger selection of parts to capture silicon content per platform.

In summary, 2006 is shaping up better than we expected for our computing products business.

Moving on to the communications market.

Our sales into the communications market represented 22% of 1st quarter revenue. Our revenue from this market experienced the strongest sequential growth for the quarter. In absolute dollars, our revenue from this market was up 10% sequentially and 28% year-over-year. The growth was driven by an increase in seasonal demand and the ramping of numerous 2005 general purpose design wins.

In the area of DSL – revenue was up from the prior quarter as we continue to be the market leader for central office line drivers. The DSL market remains healthy and we continue to see growth in unit demand as deployment expands abroad. We continue to have success in areas such as China by securing the majority of sockets at all the major (inaudible) manufacturers. In addition, we have introduced a new set of products for VDSL; which allows service providers to offer triple play service bundle of voice, data, and video to users. The VDSL products enables faster access and higher bandwidth and are already being adopted in Korea and Japan this year and will expand to Europe, China, and the US in 2007 and 2008.

Although VDSL is a relatively small portion of the total DSL market, it’s growing at a much faster rate and commanding much higher ASP, thus furthering our progress toward our financial goals. In summary of success in the DSL marketplace, it’s predicated on the robust performance of our products relative to our competition and our ability to enable our customers to stay ahead of the technology road map.

A general purpose product family that contributed to our growth in the communications market was our family of RS232 interface products. Interface product sales experienced double-digit sequential growth for the 1st Quarter due to healthy seasonal demand and a ramping of numerous 2005 design wins. In addition, orders grew for the 7th consecutive Quarter. In summary, our communications products are performing better than expected. Our general purpose investments are paying off and we expect to see growth in Q2. Looking ahead, we have several new product families in development which will contribute to our sales growth in 2007 and beyond.

And finally, moving to the industrial market – our sales in the industrial market represented 25% of 1st quarter revenue. On an absolute dollar basis, product revenue from this market was up 7% sequentially and 18% year-over-year. As expected, the majority of our product families in this market experienced strong sequential growth as we had multiple 2005 and new design wins ramp into production. Last quarter we indicated that we expanded our family of interface products with a dual protocol RS45/RS232 transceiver. This was our first full quarter of production on the dual protocol product. This general purpose product family has seen great success in the distribution channel and generated a large number of new opportunities. We are seeing new design in a wide range of applications, such as single board computers, industrial PCs, security systems, and point of sale systems.

During the quarter we announced the world’s fastest high voltage pin driver for automated test equipment. This device enables memory test equipment to double the number of devices that can be tested thus reducing cost. We have had multiple design wins in the Asia market and expect a see revenue growth throughout the year. We announced a new video switch, a 32/32 video cross point switch; is the most highly integrated products in the market and provides a single high resolution switching device for the next generation of closed circuit TV applications. More than 50 companies are currently evaluating our solution.

For our industrial family of products, we continue to focus on diversifying our product portfolio and expanding our customer base. We are confident in the 2nd quarter of 2006 will be another solid quarter of revenue growth in the industrial market for Intersil.

In summary, we had an excellent quarter in our computing business despite the typical seasonality associated with the 1st quarter and we demonstrated strong sequential revenue growth in the industrial market at 7% and the communications market at 10%; both in excess of the overall high performance analog sector. Now I’d like to turn the call back over to Rich.

Rich Beyer, Chief Executive Officer

Thanks, Lou. Now let’s turn to our outlook for the 2nd quarter.

Given our design wins acceptance and the strong orders momentum we achieved in Q1, we are well positioned for additional growth in Q2. We expect 2nd quarter revenue to grow between 3-5% from our 1st quarter revenue. 2nd quarter is a quarter in which our computing business typically is somewhat softer and so we are very pleased with this rate of growth. And we expect GAAP earnings per share of approximately 23-24%, $0.24 up from $0.22. We expect non-GAAP earnings per share of approximately $0.29-.$0.30 per share up from $0.28 in the 1st quarter. Based upon our strong participation in the computing and consumer markets, we are confident that the second half of 2006 will represent continued strong growth for Intersil.

Before we open up for questions, I’d like to summarize with these key points: We are very pleased that we were able to grow revenue in the 1st quarter 40% over last year and 2% sequentially in a quarter that is typically down due to seasonality. We posted quarterly highs in orders, revenue, non-GAAP gross margin, operating margin, and earnings. This is the 6th consecutive quarter in which we grew revenue and non-GAAP earnings. Our cash flow is steadily increasing and our revenue operating profit and EPS continue to grow. With our many vectors of revenue growth, we have been and expect to continue to exceed the rate of growth of the high performance analog market.

In summary, we have a very powerful strategy and business model that differentiates Intersil and we believe it’s clearly working. With that, Lou, Dave, and I will be happy to answer any questions.

Operator

Our first question comes from the line of Ross Seymour, Deutsche Bank North America

Ross Seymour

Thanks and congratulations on the strong results guys, can you hear me ok? Great, just looking at the two segments that were a little surprising on my side, computing being strong and consumer being week, Lou you went into some details on that. Can you just talk a little bit in those two areas and first in the consumer’s side? It looked like that was a little bit more seasonally down than I would’ve expected. Out of the sub-segments that you mentioned, displays, handhelds, etc. –can you give us a little more color on what happened in the Quarter?

Louis DiNardo, President and Chief Operating Officer

Yes, I’ll talk about both ends of your question about consumers as well as computing. Now we categorize a whole bunch into consumer business. We spoke publicly (inaudible) hand held and displays, but we have a lot of different product lines that make up this particular bucket including (inaudible) as a display and our bridge drivers, there’s a whole sleuth of things, there’s a lot of moving pieces. It is a seasonally down 1st Quarter, I don’t think that there is anything, from our perspective, was completely out of line with what might be expected in the 1st Quarter and we are fortunate we have so many products going to so many different end markets that the seasonality as the 1st Quarter in consumer and we were able to offset.

And the second half of your question, and we were able to offset that in maybe an unusual fashion with growth in our computing business so nothing unusual in the consumer side – just a typical seasonality effect.

And in the computing our strengths really came from a notebook platform which we won deal in the refresh of the last Centrino platform late in 2005. We enjoyed that success during the 1st Quarter of 2006. And, we saw our first mass products orders on the next generation Centrino platform where we have what we think is the finest suite of solutions across a wide range of requirements for power management in the notebook arena.

Ross Seymour

Dave, I think you mentioned a little bit about the seasonality that should kick in the second half of the year. If we think either by sub-segments below the four (inaudible) you guys have or just by the main four. Can you give us a reminder of in the handheld area, maybe in the handsets exposure; I think you’ve talked about in the past four of the main five OEMs being current design winners for your guys. You talked a little bit about any update market and then on the notebook side of things, if you could just remind us when Napa ships what that does to the AFPs for your business.

Rich Beyer, Chief Executive Officer

Ok, Ross this is Rich – I’ll comment on that. In the handset arena, we have five of the top six handset manufacturers in the world that use our battery charges. Now they are beginning to use some of the other components that we offer analog switches and some of our DC/DC converters, so we are starting to get a greater content in these handsets. Also this expands broader then just the cell phone or smart phone market into MP3 players and digital still cameras and so forth. All of those contributed to the seasonal decline that we saw, but all of those are very well positioned to get back on the growth of vector.

And as far as the notebook platform, Lou just commented briefly on it, I’ll just touch on it – we have expanded the number of power management components that we can offer to a notebook manufacturer from where we were 12-months ago. There is significantly more content today available from Intersil and we do believe we’ve got the finest suite of solutions and that being born out by the design wins that we’ve had over the last 180-days that have just begun to go into production in Q1 and we’ll grow nicely for us as the year progress.

Ross Seymour

So, I guess it would be fair to say that those new product areas you would expect if anything to be a little bit more seasonally positive as you head into the second half of the year given that exposure?

Rich Beyer, Chief Executive Officer

As you, we’ve had a very strong second half of the year; we are succeeding as we speak. In the first half of the year based upon nice growth in communication and industrial, no question about it, we expect in the second half of the year we will see the strength and the power of our business in computing and consumer to kick in again this year.

Question-and-Answer Session

Operator

Thank you very much sir. And again, as a quick reminder if you could just please limit yourself to just one question with one follow-up; and if you would like to queue up for questions, please key *1.

Our next question comes from the line of Craig Hettenbach, Wachovia Securities

Craig Hettenbach

Can you guys give us an update on, there’s a number of manufacturing initiatives such as increasing your back end suppliers and going to some small process technology nodes, can you give us an update on the progress you are making there and how you expect that to play out as we go through they year?

Rich Beyer, Chief Executive Officer

Yes, we identified that the gross margin expansion is going to drive from continued improvements in our product mix of higher valued products, ASSPs as well as general purpose. Plus more concentration amongst major foundry partners, some agreements that we signed in Q4 that are now helping consolidation of some of our back end activities into a smaller subset of partners and we are getting better pricing as a result of that. All of those contributed to the expansion in the 1st Quarter and all of those will continue to help us in each of the successive Quarters of this year. We didn’t do a flash cut of all products into the foundries nor a flash cut of all products into a handful of back end suppliers. We are systematically bringing more and more to those particular partners, so we’ll see this as a steady improvement, a steady contributed to improvement in the gross margins and we are well along in that process but we are still at the early stages of those improvements.

Craig Hettenbach

Great, and as a follow-up you talked about record orders. Can you discuss these in linearity through the Quarter and then what you’ve seen to date early into Q2 for orders?

David Zinser, Vice President and Chief Financial Officer

Sure, Craig. Orders increased every Quarter, January was a good month for us but February was a little bit better and market (inaudible) was our best and orders continue to remain strong through this month up until this call – that is one of the main drivers for our guidance.

Operator

Your next question will come from the line of Joseph Osha, Merrill Lynch

Joseph Osha

Hi folks, nice Quarter. One question for Lou, it’s clear on the battery charts side and handsets that you guys have done well – are the gains now coming from, I believe you mentioned DC/DC converters there is a lot of charge pump, LED charge pump value in handsets, curious as to whether you are making any progress there; and then I have a follow-up.

Louis DiNardo, President and Chief Operating Officer

Yes, as we’ve talked about a number of times over the past year, our battery charger business has done quite well and continues to do quite well but from a standpoint of generating revenue as well new product introduction and design wins. The fact is the LED driver business is a sensitive area. There is a lot players, there’s good products aimed at very specific applications in the LED driver space. I think that they next plateau in our growth in the handset or the single cell lithium ion space in general, really comes from protections circuits in DC/DC converters. When you look at safety circuits whether it’s over voltage protection over current protections, gas gauging, or the synchrones buck mode regulators that are used to step down voltages. Those are the areas where we have products in the market.

Maybe to some extent circling back to the last question that was asked – we do take advantage of a processed node in this particular temp for .6 to a .25 micron node. But for analog functions as well as for mixed mode functions, so we take advantage of the best process available and I think with safety circuits, low dropped out regulators and DC/DC converters are really starting to hit the stride with perspective designs wins turning into production volumes.

Joseph Osha

And so that, (inaudible question)

Louis DiNardo, President and Chief Operating Officer

And that’s…

Joseph Osha

Ok we will not go there, fair enough. Second question, I just want to understand this is pertaining to earlier; most of the benefits in terms of shipments from NAPA platform for you guys live in front of us rather than behind it – is that what we are seeing here?

Louis DiNardo, President and Chief Operating Officer

Yes, I think that’s fair to say.

Joseph Osha

Have design decisions on the Maroon/Conrow platforms been made yet? Is that ongoing now?

Louis DiNardo, President and Chief Operating Officer

No, I don’t know that I’d speak to when and how we will make the decisions. I can tell you that we are extremely well positioned. We had, what was, I think the first and finest regulator in the space for that introduction and we think we are fairing quite well in the design activity.

Joseph Osha

And those decisions are basically being made now, right? Obviously without paying you are going to win or lose, but I mean that process in ongoing now?

Louis DiNardo, President and Chief Operating Officer

Exactly.

Joseph Osha

Thanks Lou.

Operator

Your next question comes from the line of Douglas Freedman, American Technology Research

Douglas Freedman

Just if you could, give us an idea of what the backlog looks like, are we seeing customers looking for sort of a media shipments or are the starting to feel a little bit more comfortable in starting to see some backlog (inaudible)?

Rich Beyer, Chief Executive Officer

Doug, that really depends upon the markets. I don’t believe we’ve seen dramatic changes. But, we’ve got certain markets that we serve where the customer simply expects us to be able to ship within in 20 minutes to a week and then we have other customers that are quite comfortable with their business model to give us 4, 6, 8-weeks lead time and we haven’t see any dramatic change in the behaviors within those individual segments.

Douglas Freedman

So, in your take would it be ok to say there’s no real comfort leveling for your customers as far as their outlook?

Rich Beyer, Chief Executive Officer

Well, I don’t think there’s any decrease so I don’t know that there is any increase. I think customers are comfortable with our ability to meet their needs in reasonably typical time frames that they give us. Some of these markets, literally, people give us orders in significant quantities for delivery tomorrow and I think they are comfortable that our lead times are not stretching out and that we have the capacity to be able to meet those needs.

Douglas Freedman

And then if I could, you guys are significant suppliers of the PC market – can you give us some idea of what you’re hearing from your customer basis as far as what they think. The unit process is going to look like for the year and what you are sort of taking it to your expectation?

Louis DiNardo, President and Chief Operating Officer

The unit environment in particular, no I don’t think I have an aggregate number that I have that I’d share with you. You can probably correlate multiple suppliers, rhodium’s in Taiwan or Asia better than in fact we do. From our standpoint, we did experience a seasonal decline in the desktop business which was expected and we’ll track and maybe with some (inaudible) to the impact of the 2nd Quarter phenomenon because we do have a pretty broad footprint in the desktop space.

Some of our competitors supply nothing more than core regulators. Some supply nothing more than graphics processor regulators. We do have a full suite of core regulators for AMD and Intel platforms. The market share shifts in the core regulators space is somewhere to relevant to us. We have graphics regulators, we have IO, we have DDR, and so we have a very nice big footprint in that space. Again, our notebook business unit buying again is somewhat irrelevant to us. We are taking an opportunity here for more unit volume on a per platform basis, because we have more content as well as we think winning a significant share of the next generation platform, of which a sizable mass production (inaudible) in the 1st Quarter).

Operator

Your next question comes from the line of Chris Caso, Friedman, Billings, Ramsey and Co., Inc.

Chris Caso

I just wonder if you could talk maybe some more about the previous question. With the guidance that you provided, if you could just give some color with regard to the different end segments if you expect them all to grow, you made some comments about typical QCC and PC, are you anticipating that that segment does slow down a bit for you in the 2nd Quarter and it’s made up the other segments, just clarify please.

Rich Beyer, Chief Executive Officer

Yes, Chris, that is exactly what we expect. We expect from where we sit today that the computing business will be down slightly from Q1 and that the other 3-segments of the business will grow in Q2.

Chris Caso

I guess the out performance in the 1st Quarter was the result of new designs hitting the market?

Rich Beyer, Chief Executive Officer

Precisely; particularly in the notebook arena – that market, as Lou said, was down as we expected and as you’ve seen indications from people like Intel and others. But, our notebook business which has been expanding by virtue of more success on more OEN platforms as well as more content on average in every platform that we are serving led to a very nice and strong growth in the notebook segment in Q1.

Chris Caso

And just a follow-up – could you just comment on your product lead times and I guess you talked about inventory in the channel, just clarify what you are seeing there.

David Zinser, Vice President and Chief Financial Officer

Product lead times right now are about 6-weeks which is similar to what is was last Quarter. And, I mentioned before in the prepared comments, that distributor inventory is up slightly in Asia but it is in line with the expected growth and sales for the next three Quarters.

Operator

Your next question comes from the line of Steve Smigie, Raymond James and Associates

Steve Smigie

Can you talk a little bit about gross margin on some of the new notebook products and if that’s higher than what you traditionally seeing, computing – I guess what the question is, are you seeing higher gross margin potentially going forward in computing and any where computing verses gross margin relative to the corporate average now?

Louis DiNardo, President and Chief Operating Officer

I’ll answer this quickly; we don’t speak specifically to gross margins on a product line by a product line basis. But, I think it is worth saying that in general the notebook platform still has a great deal of differentiated value for semi-conductor suppliers that know the power plane and it is our ability to add value by having multiple parts that really at a system knowledge level, we understand what goes on in the platform and allows us to bring a differentiated value to the OEM and ODM space. So, we don’t talk about the specific gross margins, I think it is fair to say that in the notebook space, there still is a level of differentiation; which at least for the last few years has been lack luster in the desktop space.

Steve Smigie

And just as a follow-up – can you talk about (inaudible) on the notebook, how much of your wins are going more to the graphics and how another (inaudible) verses the core regulator, and maybe, is that growing to the percentage of what you would typically ship?

Louis DiNardo, President and Chief Operating Officer

Well, I think Rich summarized it nicely. If you look a year ago or more into the first generation or the last generation of Centrino platform, we only had one product to sell, we had a core regulator. Today we have a core regulator, we have a graphics processor, regulator, battery charging IC, we have DDR memory and IO regulation; we have a wide range of products. I would say, frankly, that we are having success on all those vectors. I mean, that is what we do – nice sequential growth in a Quarter typically even for the notebook part of the PC business is typically a down Quarter. And taking unit volume and then multiplying unit volume times success across several vectors. It really has a nice compounding effect.

Operator

Your next question comes from the line of Tore Svanberg, Piper Jaffray

Tore Svanberg

Yes, good afternoon a couple of questions – first of all, obviously you are doing well PCs because of constant increases, where are we in that process and for how much longer do you think you can continue to out grow the unit market?

Louis DiNardo, President and Chief Operating Officer

That’s a good question. Where we are in the process, I think we are entering now the 2nd Quarter of the year. Certainly the common wisdom is that Q3 and Q4 are the bang up Quarters for the computing business. Notebooks in particular happen to be a significant part of the growth in the 3rd and 4th Quarter. There are still some customers we like to knock down and take wins out of. I think we have a significant presence with our design wins as it stands today and most of those are lockdown through the 2nd Quarter. 3rd and 4th Quarter we’ll continue to see substantial improvements throughout the year in the notebook participation.

Additional content that a few of the things we’d like to do in the notebook (inaudible). Some of the have more to do with combinations with new partitioning or functionality rather then they do adding a particular regulator here or there. The strength of our business in the computing space, is we’ve been a leader for many, many years and have a great deal of system engineering understanding and how we might slight things differently, partition things differently to add value and as notebooks gets smaller and thinner and hard drive capacity gets larger and we will have recordable eventually Blu-Ray devices in our notebook PCs. Things change and I think we are perfectly positioned to take advantage of those changes.

Tore Svanberg

Also, on your optical storage business – could you give us an idea what the split is between computing and consumer and how you would you expect that business to track throughout the year?

Rich Beyer, Chief Executive Officer

Tore, this is Rich – most of our sales are actually in the computing states, but we don’t know precisely what that number is simply because how driver families are used in the pick up units and the pick up units are used in the drives and it doesn’t matter whether the drive is a consumer. So that is not that kind of product or the computing product, but there is no question that the market is overwhelming in the computer market.

Tore Svanberg

So, the remnants of optical storage are split this way in your (inaudible) markets, or is it all…?

Rich Beyer, Chief Executive Officer

No, we don’t have any breakdown from our customers. We put it all into the consumer market.

Operator

Your next question comes from the line of Michael Masdea, Credit Suisse First Boston

Michael Masdea

I was wondering, I don’t know if you track this exclusively – can you discuss what your tax rate is for standard products with your ASSP product sales. I think you discussed it when you were discussing certain content, but is there something you and detract explicitly or you can comment on further?

Louis DiNardo, President and Chief Operating Officer

I am sorry, could you repeat the first end of the question. What are you looking for?

Michael Masdea

Yes, when you have your ASSP product sales, what is your tax rate in terms of selling additional standard products? Are you dating faction there into the ASSPs vertical where you are selling the product?

Louis DiNardo, President and Chief Operating Officer

Well that’s a really good question, and it’s one that we’ve challenged our sales force with aggressively. You are touching on one of the areas where Intersil maybe, to some extent, uniquely because we are an ASSP company that’s building a general purpose business. That’s exactly the pitch we give our sales force, our FAEs, and our channel partners virtually every time I get a chance to speak with them. We have what is typically a highly proprietary applications specific product and sitting right next to it is an analog switch or a voltage reference or an (inaudible). I don’t know what our tax rate is, I do know it is improving because it’s a focus that we’ve put on it and I expect that over the course of the next year or two that will improve again and again.

Well, I think I can’t answer your question, I think we are quite pleased with our progresses gaining that general purpose content when we have an ASSP and you have touched one of the areas that we’ve put a great deal of focus on.

Michael Masdea

And then also just a quick follow-up question – could you discuss, I know there’s been a lot of management changes in the last Quarter. Is there any impact or change to strategy going forward that you see?

Rich Beyer, Chief Executive Officer

No, Lou has become the President, Chief Operating Office. I retain the position of Chief Executive Officer, Mohan has moved on and we’ve created five business units. But, the strategies of our Power Management Group and the strategies of our Analog Signal Processing Groups, we’re very sound strategies that are clearly working and while obviously we’ll make enhancements at the edges of all of those businesses and the new General Managers will have ideas about how we can in fact accelerate our success. There is no fundamental change in the overall strategy of the company as a result of the organizational transformation.

Operator

Your next question comes from the line of John Lau, Jeffries and Co.

John Lau

Going back to the backlog again, you mentioned that for Q2 the backlog cover will allow for, I think you said, was less than a 40% turn. I was wondering what that was for Q1 and what it is typically? Thank you and I have a follow-up.

Rich Beyer, Chief Executive Officer

Typically about 40%, it was about 40% in Q1.

John Lau

And then finally, this is a little more technical question – for the notebooks, by going over to NAPA and your positioning with regards to power management in there, what’s the key metric that differentiating factor for your product? Is it the voltage cap or the (inaudible) regulation as you move to dual cords? Thanks.

Louis DiNardo, President and Chief Operating Officer

It is a wide range of things. We have a proprietary technology, probably not worth going into here. Our (inaudible) technology, which happens to deliver the best performance for core voltage regulation with respect to light load efficiency – a wide range of performance metrics that are really critical in the dual core processor arena. It is a very wide range of performance metrics. The OEM and ODMs really put these parts through the wringer. The amount of power that you have to deliver, the transient response that you have to provide, they are a burning desire to remove bulk capacities and keep the bill of materials cost down. All comes down to modulation schemes and system architecture understanding. I don’t think for most of the crowd here going into ripple rejection would have much value.

John Lau

Yes, but suffice it to say, there is a lot more IP that is going in there to drive the NAPA design wins that you have.

Louis DiNardo, President and Chief Operating Officer

Absolutely…

Operator

Your next question comes from the line of Romit Shah, Lehman Brothers

Romit Shah

Thanks for taking my question. On gross margin, just wondering are there any one time items impacting gross margin in the first half? (inaudible) industrial and communications ramping as strong as they are I would’ve thought we’d see a bigger step function up in gross margin in the first half given how favorable your mix is?

Rich Beyer, Chief Executive Officer

No, there’s no one time items. We have a steady improvement in the industrial and in the communications business. We still have those sizable businesses a computing which is below the corporate average, and we indicated that the computing business was up stronger than we had anticipated. Also, our driving for very, very steady improvements in the gross margin as well as operating margin; we are very pleased up 70% basis points of gross margin. We said a year ago that in 2005 we’d see some modest expansion in gross margin and in 2006 we see that accelerate but continue at a very steady rate through the course of the year.

And we believe that is the case. Our operating margins are up better than we had anticipated when we started the Quarter and we actually are above the low end of the range. We think that we are on a very, very consistent path of from a revenue growth standpoint and moving towards the margin models that we have for gross and operating margins.

Romit Shah

Yes, I know you’ve executed well – just trying to understand the long term gross margin target of 60%, I mean if I were to estimate that the blended gross margins on that applications specific side of the business, when you consider desktops, notebooks, and DSLs closer to 55% and the general purpose products which may be a 30-40% of sales is 60+%, the long term realistic gross margin target for this company maybe be closer to 58% not 60%?

Rich Beyer, Chief Executive Officer

No, I am afraid, while we don’t want to comment on individual product lines and won’t comment. I don’t think that really captures the essence of what we are doing. We have applications specific product family that are well in excess of 60% gross margins, so I don’t think it is fair to lump everything into an applications specific by definition – it’s below the corporate average.

There are some products that are below the corporate average, but I don’t think…and this is part of the reason why fixate on how much is applications specific verses general purpose because it can lead to a conclusion that says let’s blend them together. And, in fact it’s really, really market dependent and we have some products that are very, very attractive products that are in ASSP space.

Louis DiNardo, President and Chief Operating Officer

Alright, let me add one comment – I think you can sense that we feel strongly about this. The applications specific markets that we serve, we tend to serve again and again generation after generation because of the innovation we bring to those markets. And when you test them on the leading end or leading edge with intimate customer relationships, which in fact in many cases, define the system architecture and the solution and we have the opportunity to have very, very healthy gross margins on ASSPs. Let’s not confuse ASSPs with kind of commodity high volume consumer items. Our ASSP business can be quite healthy across the revenue growth as well as margin contribution.

Romit Shah

Ok, that’s great. Lou, saw some optimism on the call just about industrial continuing it’s momentum into the 2nd half and I think you’re the second company in as many days to express confidence about the momentum in the industrial carrying over into the second half of the year. I think, historically, the second half hasn’t been as strong seasonally for industrial – wondering if you could just elaborate on why you think the strength may continue for the rest of the year.

Louis DiNardo, President and Chief Operating Officer

Yes, like I said, again we are probably not the best barometer of industry when it comes to our participation in industrial and what happens in the broader market. We have a couple of things that are in our favor. We are taking proprietary products that were developed for applications specific markets and we are readdressing those into the general purpose arena. We have the opportunity to be a relatively small player in a rather huge market.

And, so our ability to grow even in what is, let’s say maybe the worst Quarter for industrial space being the December as an example. Less work to hit North America, less manufacturing days, we still have a wonderful opportunity to increase share in a market that is measured in billions and we are a very small player. But, we have products and which really suite the need very, very well. We have process technologies that give us wide input voltage ranges which are really a prerequisite to participate in the power management part of the industrial space. We have amplifier technology for the video arena – which may change the complexion in the seasonality of the industrial space because it’s somewhat, I think immune to that typical seasonal flow. We put a great deal of what goes on in our video space, non-consumer video into our industrial buckets so when it comes to surveillance or video distribution, professional broadcast, all of those items are in our industrial market and those are all places where we expect growth throughout the year.

Romit Shah

So, market share gains in combination with maybe improving secular term?

Louis DiNardo, President and Chief Operating Officer

Yes.

Operator

Your next question comes from the line of Ambrish Srivastava, Harris Nesbitt

Ambrish Srivastava

Hi good afternoon, it’s William Tuft in for Ambrish – looking at the inventory on your books, the days (inaudible) Quarter around 102-103-days, similar to last Quarter and you had talked about a target of 90-days in prior calls, I was just wondering, are you really comfortable with the level of inventory currently on your books and where do you see that trend for next Quarter and when in fact, I guess or when do you see that hitting the 90-day target that you guys have talked about before.

Rich Beyer, Chief Executive Officer

Well our guidance, when we talked last Quarter was that we would keep the inventory relatively flat throughout the year and increasing sales we would grow into a lower days of inventory and so we are progressing exactly they way we had planned it for inventory. Our goal is 90-days, I don’t think we have a specific target to get there it’s going to happen either later this year or the middle of next year.

William Tuft

And the second question with regard to operating margin obviously you are at the low end of you 27-30% range, in terms of time when do you think you will be able to hit that 30% higher end of the range and also what kind of revenue run rate do you need to hit that?

Rich Beyer, Chief Executive Officer

We don’t have a specific target, our goal is just to make improvements now sequentially every Quarter as we grow revenue. When we hit it is when we hit it.

William Tuft

Any revenue run rate that you would expect the need?

Rich Beyer, Chief Executive Officer

No, it will be dependent on the mix of revenue.

David Zinser, Vice President and Chief Financial Officer

Ok, it’s not revenue dependent, we have the wafer price, improvements we are getting the back end improvements, we are getting lower depreciation in our pads in Florida, they all contribute and those are not dependent. So, obviously growing sales contributes but the other fact also has a dramatic impact on it.

William Tuft

And just the (inaudible) – one quick booking question. Can you give us the split for the ASSP verses the general purpose for this Quarter?

David Zinser, Vice President and Chief Financial Officer

Yes, ASSP was about 60% of our revenue, general purpose was about 40%.

Operator

Your next question comes from the line of Rohit Pandey, HSBC Securities

Rohit Pandey

Lou, you had said there’s a lot of different stuff in the consumer segments – can you help us make out between the cell phones, (inaudible), storage in whatever those ends of the components within the computer electronics segment?

Louis DiNardo, President and Chief Operating Officer

I apologize but no we will not break that down at that level. I think your books clearly understand, if not listening to the call getting transcripts and maybe call as many competitors as there are analysts that cover the stock and so that level of granularity within in the consumer stitch it’s just not prudent for us to go down to that level.

But, circling back to your preamble, there is a great deal of product in our consumer bucket. We have all of our display towers, we have our analog front end, we have buffers for displays, we have programmer buffers for displays, we have bridge drivers that go into consumer applications, we have analog switches, we have multiplexes, we have a lot of at the product type level a lot of products that go into a wide array of high end consumer electronics; but, not something that we are going to give that level of granularity on.

Rohit Pandey

Does industrial segment grow in line or better than expected for you in this Quarter? And, do you still expect the growth to be driven by consumer electronics or industrial or computing and communications for the whole year – is there any others we should think about?

Louis DiNardo, President and Chief Operating Officer

I missed the second half of your question. I think the first half was relative to industrial or did it grow at or better? Frankly, I think the expectations vary within the building. I think it grew at about the rate that I would expect. Given, frankly, I grew up in that marketplace; I have a good understanding of what that opportunity is and just how large an opportunity we have for our existing product portfolio. We are not in a position that we are trying to attack a market that we have no IP or no product. We have to go off and design our ICs and then win designs and live with that one, two, or three year gestation.

A year ago, I think we spoke pretty proudly about the fact that we had a catalog of items that if re-branded and marketed into the general purpose industrial sector, we could gain traction very quickly. And, I think with the help of Susan Hardman and her team while she was Vice President of Corporate Marketing, we built brand very quickly and we are very successful. I am sorry I didn’t hear the second part of your question.

Rich Beyer, Chief Executive Officer

I’ll try. In January, we indicated we thought this year see the strongest growth for the year in consumer, second – industrial, and then after that would be communications and computing. From where we sit today, we think consumer is going to continue to be the strongest. Industrial is growing nicely as we anticipated. Surprising strength in communications, it’s a good thing and as Lou indicated the surprising strength in computing. We think we are on track for highest in consumer, next in industrial but computing and communications are both going to do nicely as well.

Rohit Pandey

And then I have a quick bookkeeping question for Dave. What was the FAB utilization this Quarter?

David Zinser, Vice President and Chief Financial Officer

FAB utilization was about 85%, which is (inaudible) to what I have (inaudible) over the last couple of Quarters.

Operator

Our last question today comes from the line of David Wu, Global Crown Capital

David Wu

I am sorry I was late getting on. Let me just ask two quick ones – on the communications side I remembered most of the most of the business was concentrated on these analog front ends to DSL central office and your largest customer I don’t know if it is still true, Centilium and there’s been a lot of activity in that space over the last year or two I was wondering where is the strength in the communications coming from and the notebook was the surprise on Q1, is that sufficiently take us to this percentage of total computer business not to give you the similar lift in Q2?

David Zinser, Vice President and Chief Financial Officer

David, I’ll cover the first and Lou can cover the second. Communications really is very broad based at the moment. DSL is a reasonable portion of it and it’s not concentrated with Centilium alone. Their a great partner but (inaudible) connections (inaudible) broad communications and our activity with their chipsets is in all of the major manufacturers in China it is also with Alcatel and Lucent and others. But beyond DSL line drivers, we’ve got RS 232 products, we’ve got a number of voice over IP sockets, we’ve got some parts that go into wireless space stations, so we’ve got a pretty broad based of products. And then we have some of our general purpose products like DCPs that go into numerous systems like this. The strength that we had was pretty much across the board. DSL was a nice healthy partner, but it is not even the overwhelming part of it.

Louis DiNardo, President and Chief Operating Officer

David, let me touch on your question on notebooks –and I think your question was given the strengths we had in Q1 is there potential for the lift that is notebooks space in Q2? I think that really does remain to be seen. We had a very healthy 1st Quarter. Again, some of that was predicated on last generation Centrino and some of it was predicated on first mass production orders into the dual core processor in our notebook platform.

The question marked as to whether we have established a sustainable plateau whether there is a breathe in the marketplace between now and the buildups for the holiday season, which usually starts to occur late in the 2nd Quarter for orders and shipments – late into the 2nd Quarter or into the 3rd Quarter or whether there is a pressure on some of the other OEMs and their ODM partners to accelerate their dual core offerings. We can’t make that call we are prepared with capacity and I think we have the design winds in place. If there is lift, we are in the right place at the right time if there is a little bit of a breather it will happen late in the Quarter for a nice 3rd Quarter event.

David Wu

I assume it is in line to two (inaudible) as well?

Louis DiNardo, President and Chief Operating Officer

Yes.

David Wu

That I think has been pulled by roughly 1-month in terms of large space?

Louis DiNardo, President and Chief Operating Officer

Yes.

David Wu

Ok, so it really depends on the month of June?

Louis DiNardo, President and Chief Operating Officer

Yes.

Operator

Thank you very much, sir. That concludes our Q & A session for today. I’d like to turn the call back over to Mr. Rich Beyer for any closing remarks he may have.

Rich Beyer, Chief Executive Officer

Ok, thank you. Let me just sum up by saying we are very pleased with Q1. We grew our business 40% over a year ago, clearly stronger than anything we’ve seen from any of our competitors. Our industrial was up verses Q4 7%, our communications was up 10%, and our computing was up 7% clearly very strong broad bases success in the business.

We grew gross margins 70 basis points; we grew operating margins to 27.4% we’re now above the bottom in our target range, and in addition we had great design wins and came out with some excellent products that we are very excited about and they are going to help drive the second half of this year and into 2007.

We start Q2 in very healthy shape. We have a very good backlog, we have decent visibility and we also believe based upon all of the thrusts that are going on in both the computing and the consumer markets that we serve that we are likely to have a very strong second half of the year. So we think it was a great start to the year and we think we are going to continue to demonstrate a real leadership in the high performance arena.

So thanks very much for all of your interest and we’ll see you either at a conference or in 90-days on the next conference call

Thank you, Operator.

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Source: Intersil Corporation Q1 2006 Earnings Conference Call Transcript (ISIL)
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