Linear Technology (LLTC) reported strong fourth quarter earnings of 68 cents, beating the Zacks Consensus by 12 cents, or 21.4%. Earnings were up 11.6% sequentially and 15.4% year over year.
Revenue
Linear reported revenue of $358.6 million, up 1.5% sequentially, down 2.1% year over year and missing management’s guidance range of a 6-10% sequential increase. Street expectations were pegged at around $359 million when Linear reported earnings, just slightly higher than the numbers reported by Linear.
We think the revenue miss in the last quarter was noteworthy, because Linear has traditionally been a very conservative company, providing very conservative guidance that the company has consistently met or exceeded.
Linear generated around 35% of revenue from the Asia/Pacific region (ex-Japan), a 1.3% sequential decline. This was followed by the U.S. with 28% (up 1.5%), Europe 22% (up 6.4%) and Japan 15% (up 1.5%). 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 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, despite the 5.2% sequential increase in orders, they remained below the year-ago level (down 6.2%). Linear generally sees seasonal strength in the first half of the year, which would account for the sequential increase.
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 12% contribution, leaving behind computing (11%), 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 that had built inventory fearing shortages related to the Japan crisis, reduced inventories as they perceived that the supply issues were coming to an end. Therefore, orders were sluggish in the last quarter, resulting in a negative book to bill ratio.
Margins
The gross margin for the quarter was 78.0%, up 36 bps sequentially and down 44 bps from the comparable quarter of the prior year. We note that ASPs have been trending upward over the last 7 quarters and is now at $1.87.
However, volumes declined both sequentially and from last year. Higher ASP, lower volumes, higher raw material costs (particularly gold) and higher inventory reserves combined to generate the gross margin. There were no one-time items in the last quarter.
Operating expenses of $96.9 million were up 1.9% in absolute terms from the previous quarter’s $95.1 million. However, the operating margin of 50.9% expanded 25 bps sequentially, due to the higher gross margin, since the slightly higher SG&A as a percentage of sales offset the slightly lower R&D expenses.
The net income for the quarter was $158.2 million or 44.1% of sales, compared to $141.6 million or 40.1% in the previous quarter and $135.0 million or 36.9% 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 $158.2 million (68 cents per share) up from $141.6 million (61 cents per share) in the March 2011 quarter and $124.5 million (54 cents per share) in the June quarter of last year.
Balance Sheet
Inventories grew 2.5%, although inventory turns dropped again to 4.4X from 4.5X. Days sales outstanding (DSOs) went up by 1 to around 43. The company ended with cash of $922.5 million, up from $810.5 million at the start of the quarter.
Guidance
The guidance for the fiscal first quarter of 2012 was more or less in line with seasonality after offsetting the negative impact of the tablet loss. Linear currently expects revenue to decline 6-8% 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 indicate that the company will start to see a turnaround in the next quarter. Management stated that orders were likely to pick up as soon as buffer inventories built up to deal with the expected supply constraints were burnt off. China is also expected to remain very strong. As regards the mature markets of the U.S. and Europe, Linear stated that the debt crisis in these two regions have increased caution at customers, despite the fact that end demand remained very strong.
Linear Technology shares carry a Zacks Rank of #3 (short-term Hold recommendation), similar to analog peers Semtech Corp (SMTC) and Maxim Integrated Products (MXIM).
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