Intersil Tops, Guidance Strong

Intersil Corporation (ISIL - Analyst Report) reported second quarter results that beat the consensus revenue estimate by 22.3% and EPS estimate by 8 cents. The results were as expected, reflecting reduction in channel inventories (down 7%), as well as stronger end markets. Yesterday Linear Technology (LLTC - Analyst Report) reported results that beat the consensus, as expected. We also expect peer companies Maxim Integrated Products (MXIM - Analyst Report) and Semtech (SMTC - Analyst Report) to beat the consensus. 

Revenue of $147.3 million was up 24.6% sequentially and down 31.9% year over year. The sequential increase was attributable to recovery in the computing and consumer markets. Computing revenue was up 40.7% sequentially, driven by strength in notebooks, market share gains in netbooks and stability in desktops and servers. There was particular strength in single phase power management products for Intel’s atom processors. Consumer revenue was up 51.9% sequentially, driven by ambient light sensors, proximity sensors and display power products. The strength in notebooks, MIDs and UMPCs is likely to be constrained by panel shortage in the channel. Strength in Gaming should continue. Industrial revenue was up 2.9%, indicating a bottom in the global market. The company benefited from strength in new general purpose products. Communications revenue increased 1.7% sequentially, as the Chinese stimulus program drove pockets of strength in DSL. 

The book to bill was well over 1, which increased the backlog. Customer lead times also started stretching out. As a result, required turns were down slightly. 

Gross margin for the quarter was 54.7%, down 102 basis points (bps) from the previous quarter’s 55.7%. The gross margin decline was primarily on account of mix, as the growth in low-margin computing and consumer products was much stronger than the growth in high-margin industrial and communications markets. The negative impact was partially offset by employee-related cost reductions, transition to quarter micron manufacturing processes, migration from gold to copper wire bonding and a significantly higher utilization rate. 

The operating expenses of $59.1 million were higher than the previous quarter’s $53.6 million. The operating margin was 14.5%, up 421 bps sequentially from 10.3%. The increase was related to benefits of cost reduction initiatives, which lowered SG&A as a percentage of sales by 422 bps, R&D by 211 bps and COGS by 98 bps. 

The pro forma net income was $17.4 million, or 11.8% of sales compared to $10.8 million, or 9.1% in the previous quarter and $48.8 million, or 22.6% in the year-ago quarter. Including restructuring charges, stock based compensation, intangibles amortization, gain on deferred compensation investments and one-time tax expense related to the relocation of headquarters from Switzerland to Malaysia , the GAAP EPS was $0.05 compared to $0.02 in the previous quarter and $0.30 in the year-ago quarter. Excluding the special items, the pro forma EPS was $0.15. 

The balance sheet is very strong and debt free. Inventory was down 4.9%, yielding inventory turns of 2.8x. DSOs decreased from 47 to 43 days. The cash balance increased $16 million to $324.2 million. Principal uses of cash were $1.3 million on capex and $15 million on dividend. 

Guidance was strong. Revenue is expected to be $156-162 million (up 6-10% sequentially) and gross margin to increase slightly due to better mix, higher volumes and increased efficiencies. Interest income should be flat at $1.4 million and GAAP tax rate 17%, yielding GAAP EPS of $0.08-$0.11 based on a diluted share count of 122.2 million. One-time items include stock based compensation ($700K in COGS, $3.4 million in R&D and $3 million in SG&A) and intangibles amortization of around $3.2 million. Capex is expected to be $2-3 million in the third quarter. By end market—consumer to grow significantly (almost normal seasonality), industrial up modestly, and computing and communications up slightly.