Once again, the unedited text of Doug Freedman's remarks. (Contrast these with EE Times' own report.)
Intersil's June quarter results were slightly below Street estimates. Management guided September quarter revenue up 7-11% sequentially. However, 6% of the sequential revenue growth is Xicor acquisition-related, and thus we view guidance as disappointing. We believe Intersil's growth is less than the analog industry average (up 18.4% Y/Y for CY04 versus SIA forecast of up 28% Y/Y). Reiterate Hold rating.
June Quarter Results
Intersil reported an in-line June quarter, with revenue of $144.2M and diluted pro forma EPS of $0.20 versus consensus of $144.6M and $0.20 respectively. The gross margin improved from 57% to 57.3% sequentially, driven by restructuring activities and strength in the communications market. Intersil was able to raise the gross margin to 57.3%, however the gross margin is still below the result of FY2002 and Q1 of FY2003. As we have talked about in the past, Intersil's computing revenue is down and accounts for 23% of revenue, the fourth sequential quarter of decline as a percentage of sales. We believe the company's communications business, which was up 20% q/q, was used to offset weakness in other product lines during the June quarter. The company's book-to bill-ratio was slightly below one, which signals that backlog was consumed to reach the company's quarterly revenue goal. Xicor's management stated that the OEM book-to-bill was 1.0 in the June quarter, which leaves us to believe that if distribution was included, the book-to-bill would have been below one.
September Quarter Outlook
Intersil expects September quarter revenue to be in the $154 - $160M range (up 7 - 11% Q/Q) versus consensus of $155.7M (which we believe in most cases did not include Xicor revenue contribution). We are forecasting gross margins for the quarter to increase to 57.5%, a q/q addition of 20 basis points. Intersil attributed its guidance to two-thirds of Xicor's 3Q revenue and to the seasonal pick up in the computing market, which typically grows 15% in the September quarter. The company was skittish on the outlook, given that communication market strength will not continue in the September quarter as a customer (we believe the DSL line driver sold to Alcatel) now has excess inventory that will take a quarter to work down. The percentage of turns orders (orders that are booked and shipped in the quarter) required to meet the September guidance is 40% as lead-times held steady at five-to seven weeks.
We are reducing our EPS estimates for CY04 from $0.94 to $0.83 and CY05 from $1.38 to $1.05, resulting from slower revenue growth and less leverage from an increased outsourcing strategy. Our FY05 estimates may be conservative when the dust clears after the Xicor merger, but our revenue growth in CY05 is 24.3% y/y and in-line with our view of the overall analog market. The Xicor merger is expected to add 7M shares to the diluted share count in 3Q04 and 5M shares in 4Q04. The added dilution is responsible for an EPS decline of $0.10 to our CY05 estimates. Our reduced estimates are slightly below the Street consensus for the September quarter, CY04 and CY05. While Intersil's consensus numbers are expected to remain unchanged, peer group companies have recently up-sided numbers. We reiterate our Hold rating on ISIL, as we expect the Xicor merger to be a short term distraction and share loss to continue in the near term.
The Bulls Will Point to:
Intersil's improved competitive position after the Xicor acquisition.
The seasoned engineering and management talent gained from the Xicor merger.
The growth in power management content as result of the market transition to the Intel Grantsdale platform.
The reduced capex requirement (FY04 $15M) as a result of the increased fab outsourcing.
The reduced turns order requirement for the September quarter, 40% down from 45% in the June quarter.
The Bears Will Point to:
Intersil's book-to-bill below one.
The communications market over shipped, inventory was built into the June quarter and September quarter communications sales are forecast to decline.
Visibility into the September quarter and beyond remains very limited with lead-times of five-to seven weeks.
Gross margin and operating margin improvements are slower than expected and below peak levels.
Every quarter of revenue growth brings us one quarter closer to the end of the semiconductor growth cycle.
Intersil is trading at 16x both consensus and our new CY05 EPS estimates. We continue to prefer National Semiconductor (NSM, $16.89, Buy) shares over Intersil given the valuation discount at 11x consensus CY05 estimates and an operating model that is very similar to that of Intersil. National is also growing revenue at a faster rate and has a more diverse product portfolio.