Linear Technology (LLTC) reported third quarter earnings of 61 cents, beating the Zacks Consensus by 5 cents. Earnings declined 2.0% sequentially, while increasing 38.1% year over year.
Linear cautioned investors about uncertainties related to Japan, which accounts for around 15% of Linear’s revenue. Although the last quarter was not severely impacted, management stated that customers were beginning to get concerned about supplies out of Japan, which could negatively impact Linear’s performance.
Particularly so, since the company has revamped its portfolio over the last few years, increasing focus on the auto market, which is bearing the brunt of the disaster as far as the chip market is concerned. On the positive side, Linear has the ability to ship to demand very quickly, which could be a positive in this environment.
Revenue
Linear reported revenue of $353.2 million, down 7.9% sequentially, up 13.4% year over year and within management’s guidance range of a 6-10% sequential decline. Street expectations were pegged at around $354 million when Linear reported earnings, slightly higher than the numbers reported by Linear.
Linear generated around 36% of revenue from the Asia/Pacific region (ex-Japan), a 19.2% sequential decline. This was followed by the U.S. with 28% (down 4.5%), Europe 21% (up 7.4%) and Japan 15% (down 1.4%). The decline in the Asia/Pacific was on account of the loss of a tablet customer, while the gains in Europe may be attributed to stronger industrial and automotive demand, particularly in Germany.
Linear does not provide end market detail regarding its quarterly revenue, but given the fact that its lead times are back to the historical 4-6 week range, we think that the detail on order patterns is also indicative of revenue trends during the quarter.
Accordingly, industrial remains Linear’s largest market, with a 43% contribution. However, orders were down 1.0% sequentially and 3.4% from last year, which cannot be considered too good given the seasonal strength the market generally sees in the first half of the year. Linear made some progress in Germany. Communications was the second largest business, with a 23% contribution.
Linear’s current efforts are focused on the infrastructure side of the business and the cell phone business stayed at 1% of total orders. Automotive has grown into the third largest segment, with a 13% contribution, leaving behind computing (10%), which was impacted by the loss of a major tablet account. Aerospace/defense and consumer accounted for 7% and 4% of total orders, respectively, similar to the previous quarter.
Linear stated that customers perceived sufficient product availability and were therefore keeping their internal inventories down. Therefore, although orders were starting to trickle in, they showed yet another decline in the last quarter.
Bottom line: demand appears sluggish to us, with automotive concerns looming. However, management guidance has tended on the conservative side in the past, so we do not expect Linear to miss expectations in the next quarter.
Margins
The gross margin for the quarter was 77.6%, down 86 bps sequentially and 30 bps from the comparable quarter of the prior year. We note that ASPs have been trending upward over the preceding 6 quarters and is now at $1.80.
The decline in gross margin was the combined effect of lower volumes, lower factory loadings (Linear recently added capacity to meet growing demand), higher raw material costs (particularly Gold) and higher inventory reserves, partially offset by the significantly higher ASP. There were no one-time items in the last quarter.
Operating expenses of $95.1 million were down 4.9% in absolute terms from the previous quarter’s $100.0 million. However, the operating margin of 50.7% dropped 172 bps sequentially, as both SG&A and R&D expenses increased as a percentage of sales.
The net income for the quarter was $141.6 million or 40.1% of sales, compared to $143.7 million or 37.5% in the previous quarter and $100.6 million or 32.3% of sales in the year-ago quarter.
There were no one-time adjustments in the last quarter. Therefore, the GAAP net income was same as the pro forma net income of $141.6 million (61 cents per share) up from $143.7 million (62 cents per share) in the December 2010 quarter and $100.6 million (44 cents per share) in the March quarter of last year.
Balance Sheet
Inventories jumped 9.4%, although inventory turns dropped again to 4.5X from 5.1X. Days sales outstanding (DSOs) went down by 1 to around 42. The company ended with cash of $3.57 per share, up from $3.22 at the start of the quarter.
Guidance
The guidance for the fiscal fourth quarter was more or less in line with seasonality after offsetting the negative impact of the tablet loss. Linear currently expects revenue to increase 6-10% sequentially.
In Summary
Linear Technology is a very well-run company. Management has skillfully navigated the company through the downturn (as it has done in past downturns). Consequently, even with reinstatement of base pay and increase in profit-sharing, profitability has continued to improve.
While the Japan crisis will impact most suppliers into the auto market, Linear’s order patterns and linearity seem to indicate that the company will not see a noticeable impact in the next quarter.
Linear Technology shares carry a Zacks #3 Rank (short-term Hold recommendation), similar to analog peers Intersil Corp (ISIL), Semtech Corp (SMTC) and Maxim Integrated Products (MXIM).
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