Linear Technology (LLTC) had a dismal first quarter, with earnings of 47 cents coming in well below the Zacks Consensus of 50 cents. Earnings were down 31.3% sequentially and 21.7% year over year. Management stated that there was extreme caution at customers, which resulted in weak revenue and orders.
Additionally, the mix of business impacted average selling prices and thereby margins. The significantly higher tax rate also did not help matters. Movement is share prices has been moderate since the company announced results, indicating that the weakness did not really surprise investors.
Revenue
Linear reported revenue of $329.9 million, down 8.0% sequentially, 15.1% year over year, just making the low end of management guidance range of a 6-8% sequential decline. We note that Linear missed the revenue guidance in the last quarter, so this is not an encouraging trend. Particularly since Linear has traditionally been a very conservative company, providing very conservative guidance that the company has consistently met or exceeded.
The revenue distribution by geography indicates broad-based declines across all geographies, with the U.S. performing slightly better than the rest. Around 35% of Linear’s revenue came from the Asia/Pacific region (ex-Japan), an 8.0% sequential decline. This was followed by the U.S. with 29% (down 4.7%), Europe 20% (down 16.4%) and Japan 15% (down 8.0%).
Management maintained that automotive demand remained strong in the last quarter. However, since Europe slowed down considerably, this was likely due to the recovery in Japan, where Linear has gained from competitors’ inability to meet demand due to the natural disaster. However, growth rates in China are coming down.
Linear does not provide quarterly revenue breakdown by end market, but given the fact that its lead times are currently at the low end of the historical 4-6 week range, we think that the detail on order patterns is also indicative of revenue trends during the quarter.
Accordingly, it appears that all end markets with the exception of automotive declined on both sequential and year-over-year bases.
While industrial remains Linear’s largest market, with a 41% contribution, the segment was particularly weak in the last quarter, declining 9.7% sequentially and 14.8% year over year. The second half of the year is generally seasonally softer for industrial, therefore caution at customers (and also possibly the distributors through which Linear sells most industrial products) made matters worse.
Communications was the second largest business, with a 22% contribution, down 9.4% sequentially and 27.6% from last year. Linear’s current efforts are focused on the infrastructure side of the business and the cell phone business stayed at 1% of total orders. Linear expects the industrial and communications markets to remain soft in the current quarter, due to year-end shutdowns.
Automotive has grown into the third largest segment, with a 16% contribution, leaving behind computing (11%), which was impacted by the loss of a major tablet account. Aerospace/defense and consumer accounted for 7% and 3% of total orders, respectively, similar to the previous quarter.
Margins
The gross margin for the quarter was 75.8%, down 215 bps sequentially and 264 bps from the comparable quarter of the prior year. ASPs have been trending upward for 7 quarters, but dropped from $1.87 to $1.78 in the last quarter. The reversal in trend was on account of a decline in high-margin industrial sales and increase in low-margin automotive sales. Additionally, volumes declined both sequentially and from last year. Lower ASP and lower volumes and some factory shut downs (which led to lower cost absorption) higher combined to result in the gross margin decline. There were no one-time items in the last quarter.
Operating expenses of $92.6 million were down 4.5% in absolute terms from the previous quarter’s $96.9 million. However, the operating margin of 47.8% shrunk 318 bps sequentially, mainly due to the weaker gross margin, but also because of higher R&D expenses as a percentage of sales.
The net income for the quarter was $108.4 million or 32.9% of sales, compared to $158.2 million or 44.1% in the previous quarter and $137.3 million or 35.3% 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 $108.4 million (47 cents per share) up from $158.2 million (68 cents per share) in the June 2011 quarter and $137.3 million (59 cents per share) in the September quarter of last year.
Balance Sheet
Inventories grew 3.3%, although inventory turns dropped again to 4.3X from 4.4X. Days sales outstanding (DSOs) went up by 2 to around 45. The company ended with cash of $967.7 million, up from $922.5 million at the start of the quarter.
Guidance
The guidance for the second quarter of fiscal 2012 is very weak at a 9-13% sequential decline. The average decline in the preceding five years is 3.6%. The macro-economic slowdown, especially in the U.S. and Europe, slowing down in China, extreme caution at industrial and communications customers and a weaker than seasonal projection by distributors were reasons for the disappointing guidance.
In Summation
Linear’s first quarter results are indicative of extreme caution at most customers due to fears of a macro-economic slowdown. However, there were no cancellations or push-outs, which is encouraging. We therefore think that the results and guidance are impacted by general concerns all over and not specific to Linear (as would be the case if there was a share loss).
At any rate, the weaker guidance for December prompted many estimate revisions over the last seven days. Overall, we see 9, 8, 6 and 6 downward revisions for the next two quarters and next two fiscal years, respectively. As a result, the Zacks Consensus Estimates for these periods have slid by 11 cents, 8 cents, cents and 12 cents, respectively.
As a result, the Zacks #5 Rank for Linear shares remains, implying a Strong Sell rating over the next 1-3 months.
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