Intersil Corporation ( ISIL)

Q2 2011 Earnings Call

July 27, 2011, 4:45 p.m. ET

Executives

Brendan Lahiff - Senior Investor Relations Manager

David Bell - President and CEO

Jonathan Kennedy - Senior Vice President and CFO

Analysts

Ross Seymore - Deutsche Bank

Craig Ellis - Caris & Company

[Gabriella Jorgensen on behalf of James Snyder]

Joanne Feeney – Longbow Research

[Vincitis] Navarantne – JP Morgan

Evan Wang – Stifel Nicolaus & Co.

Patrick Wang – Evercore Partners

John Pitzer – Credit Suisse

Steve Smigie – Raymond James

Sumit Dhanada – Citadel Securities

[Ucha Ubi – UBS]

Chris Caso – Susquehanna Financial Group

Presentation

Operator

Ladies and gentlemen, welcome to the Intersil Corporation second quarter 2011 Earnings conference call. I will be your coordinator for today.

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

Brendan Lahiff

Thanks, Jonathon. Good afternoon, and thank you for joining us today for Intersil’s second quarter fiscal 2011 earnings conference call. Today, with me is Dave Bell, Intersil’s President and Chief Executive Officer, and Jonathan Kennedy, Intersil’s Senior Vice President and Chief Financial Officer.

Today we will deliver remarks on the second quarter of 2011 and provide a summary of our third quarter 2011 business outlook. After our prepared comments, we will open the lines for questions.

We completed our second quarter on July 1, 2011. An earnings press release was issued today at approximately 1:05 pm Pacific time. A copy of the press release and supplementary slides to accompany during the conference call are available on the investor relations section of our website at intersil.com.

In addition, this call is being webcast live over the Internet and may be accessed via the investor relations section of our website. A telephonic replay of the conference call and webcast will be available for approximately two weeks through August 10 th. Questions during the call may also be submitted online via the webcast but we’ll be answer by e-mail after the call.

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

In addition, during this call, we may refer to financial measures that are not prepared according to Generally Accepted Accounting Principles. We sometimes use these 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 are reported.

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

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

David Bell

Thanks, Brendan. Good afternoon, and thank you for joining us today for Intersil’s second quarter 2011 earnings conference call.

The second quarter was challenging as the entire industry reacted to the impact of the March 11 earthquake in Japan. At the same time, we faced a worldwide economy that weakened as the quarter progressed. Despite those challenges, Intersil grew revenues by 5%, reporting revenues of $209.1 million for the second quarter.


We were also pleased to increase gross margin by 40 basis points to 58.2%, remaining at our desired operating model.

The modest headcount adjustments we made in March were helpful and allowed us to control operating expenses during the second quarter. The combination of revenue growth, gross margin growth, and operating expense controls resulted in significant EPS leverage.

GAAP EPS was at the high end of our guidance at $0.17, and our non-GAAP EPS of $0.23 beat the upper end of our guidance by a penny. Non-GAAP EPS excluding equity-based compensation reached $0.30.

Intersil experienced little upstream supply chain impact due to the Japanese earthquake. Because of alternate sources and resourcefulness of our suppliers, our delivery performance remained excellent. Even so, we believe there is modest inventory growth at our customers during the second quarter as a hedge against potential shortages.

As expected, most of the downstream supply chain impact from the Japanese earthquake has already been resolved. However, we still see some pockets of minor shortages or delivery push-outs, primarily in the display and gaming markets. We expect any lingering shortages to be resolved during the third quarter.

Second quarter results were again driven by the growing strength of industrial business, which grew by 10% sequentially. Tech-Wells’s strong growth in both automotive and securities surveillance, resumption in military growth, and isolated power management growth were several of the contributing factors.

Despite what competitors may claim, Intersil remains the clear leader in PC power management. In fact, we believe our share of the Sandy Bridge notebook market, now exceeds the share we owned on the Montevina platform, and that’s no small fee.

Although competition is intense, the power specifications for new processors are very difficult to meet, and Intersil continues to provide the best performing solutions. We estimate over 70% market share on the Sandy Bridge generation, and although it’s still early, we expect to retain similar market share on the upcoming Ivy Bridge generation.

We are now leveraging our advance power conversion architectures developed for the PC market and producing parts aimed at the performance-intensive infrastructure market. Switches, routers, base stations, servers, and network attached storage, all have similar power conversion requirements that can be addressed by our growing portfolio of IC and module-level of products.

Cloud computing and virtualization will continue to drive strong growth in the communications market. During the second quarter, we completed our transition to add [inaudible] as our single global distributor. This carefully orchestrated process went very smoothly and is already paying substantial dividends. For instance, in North America, the total new distribution opportunity dollars recorded in Q2, more than doubled from those in Q4. The additional resources and forces at focus at AppNet will result in significant growth in the coming quarters as those opportunities turn into revenue dollars.

We’re very pleased with our performance during the second quarter having generated over $45 million in free cash flow. We are committed to returning shareholder value and as a result, our Board of Directors has authorized a quarterly dividend of $0.12 per share of common stock.

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