Linear Technology’s (LLTC) third quarter earnings beat the Zacks Consensus by 7 cents. Revenue beat by 11.6%. We also expect the entire peer group, including Maxim Integrated Products (MXIM), Intersil Corporation (ISIL) and Semtech (SMTC) to report above expectations.
The stock jumped 5.26% to close at $31.21, in response to the positive news.
Revenue of $311.3 million was up 21.4% sequentially and 54.9% year over year. Revenue also exceeded the high end of management’s expectations of a 7-10% sequential increase. The sequential increase came from across all end-markets and geographies, although strength was largely driven by computer manufacturers in the U.S. and Asia, and automotive manufacturers in Europe.
Revenue by Geography
The revenue distribution by geography changed slightly from the previous quarter, with the U.S. generating 28%, Europe 19%, Asia excluding Japan 40% and Japan 13%. On a sequential basis, all regions except Japan were up double-digits and Japan was up mid-single digits. On a year-over-year basis, all regions except Europe were up double-digits. Europe was up 110.3%.
Both distribution and OEM sales grew in the U.S. Distributor inventories were flattish on a net basis, as the company succeeded in shipping to demand. However, distributors continue to see strong demand from end-customers. The blended ASP increased from $1.59 to $1.62. Volumes were up 19.2% sequentially, also contributing to the higher revenue.
Orders increased again in the last quarter, resulting in a strong backlog. Lead times remained short, in the 4-6 week range. Required turns are in the 50% range. Historically, management has always met or exceeded guided revenue numbers and we don’t expect any problems in the Jun quarter either. The biggest positive here in our opinion, is the strength in the computing market, since this segment has been in the doldrums for a while. Consequently, we expect the company to report a strong fourth quarter.
Bookings by end-market were as follows—industrial 35%, communications 24%, computing 17%, automotive 11%, aerospace/defense 7% and high-end consumer 6%. Approximately 52% of orders came from international markets.
The gross margin for the quarter was 77.9%, up 194 basis points (bps) from the previous quarter’s 76.0%. The gross margin benefited from higher volumes, better absorption of fixed costs over a larger sales base and significantly higher average selling prices (ASPs), partially offset by higher profit sharing expenses. There were no one-time items in the last quarter.

Operating expenses of $88.6 million were higher than the previous quarter’s $79.1 million. The operating margin was 49.4%, up 435 bps from 76.0% recorded in the previous quarter. All the three components of cost, COGS, R&D and SG&A, decreased as a percentage of sales, contributing to the higher operating margin.
The net income was $100.6 million or 32.3% of sales, compared to $75.5 million or 29.5% in the previous quarter and $49.3 million or 24.5% in the year-ago quarter.
The GAAP net income was $100.6 million ($0.44 per share) compared to $75.5 million ($0.33 per share) in the Dec quarter and $49.3 million ($0.22 per share) in the Mar quarter of last year.
Balance Sheet
Inventories increased 2.8%, with inventory turns increasing from 4.5X to 5.1X. Days sales outstanding (DSOs) went down by 1 to around 43. The company ended with cash of $4.57 per share, better than $4.22 at the start of the quarter. During the quarter, Linear generated $145 million from operations, spent $52 million on cash dividend and $10.2 million on capex.
The fourth quarter guidance indicates a sequential revenue increase of 7-10%.
In summary
Linear Technology is a very well-run company. Management has skillfully navigated the company through this downturn (as it has done in past downturns). Consequently, even with reinstatement of base pay and increase in profit-sharing, Linear was able to turn over solid growth in revenue, gross margin and operating margin, and also generate strong cash flows.
The company’s engineering talent has enabled it to create superior technology products that are differentiated and are, therefore able to generate higher margins.
With the turnaround in the computing market and growing demand from automotive customers, it is not surprising that the company reported very strong results. Sentiment on the stock started going up even prior to the announcement, with three analysts raising estimates for fiscal 2010.
We currently have a neutral recommendation on Linear Technology shares.


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