Linear Tops, Guidance Conservative

Linear Technology’s (LLTC - Analyst Report) first quarter earnings beat the Zacks consensus by 2 cents. Revenue beat the consensus by 9.4%. We currently expect the entire peer group, including Maxim Integrated Products (MXIM - Analyst Report), Intersil Corporation (ISIL - Snapshot Report) and Semtech (SMTC - Snapshot Report) to report above consensus expectations.

Revenue

Revenue of $236.1 million was up 13.5% sequentially and down 23.9% year over year. The sequential strength was broad-based, with all end markets except cell phones contributing. Automotive and industrial were particularly strong. The weakness compared to the year-ago period was recession-related.

On a sequential basis, the U.S. generated 29% of revenue (up 9.7%), Europe 16% (up 13.5%), Asia excluding Japan 40% (up 10.7%) and Japan 15% (up 31%). Both distribution and OEMs sales grew in the U.S. and internationally. Distributor inventories decreased in the quarter. The ASP increased from $1.44 to 1.49. Volumes were up 9.7% sequentially, also contributing to the higher revenue.

Orders

Orders were up strongly in the last quarter. Cancellations were minimal. Lead times remained short, in the 2-4 week range. Historically, management has always met guided revenue numbers, and in the last quarter revenue was at the high end of the guided range. We expect the company to meet guidance in the December quarter as well.

Bookings by end market were as follows: Industrial 33%, Communications 24%, Computing 12%, High-End Consumer 10%, Automotive 13% and Aerospace/Defense 8%. Approximately 53% of orders came from international markets.

Operating Results

The pro forma gross margin for the quarter was 75.7%, up 37 basis points (bps) from the previous quarter’s 75.4%. The gross margin benefited from higher volumes, better absorption of fixed costs over a larger sales base, as well as slightly average selling prices (ASPs), partially offset by a change in the product mix. The company sold a larger number of modules, which typically generate lower gross margins, but higher operating margins (due to lower R&D investments).

Operating expenses of $61.8 million were higher than the previous quarter’s $58.6 million. The operating margin was 49.6%, up 236 bps from 47.2% recorded in the previous quarter. All the three components of cost -- R&D, COGS and SG&A -- decreased as a percentage of sales, contributing to the higher operating margin.

Excluding the impact of stock compensation expenses, the amortization of debt discount -- a non-cash interest expense related to the adoption of FSP APB 14-1 and the associated tax impact -- the pro forma net income was $78.5 million or 33.2% net margin, compared to $71.1 million or 34.2% in the previous quarter and $119.5 million or 38.5% in the year-ago quarter. Including the special items, the GAAP EPS was $0.27 compared to $0.23 in the March quarter and $0.46 in the September quarter of last year.

Balance Sheet

Inventories were down 6.1%, raising inventory turns from 3.9x to 4.6x. Days sales outstanding (DSOs) increased from 42 to around 44. The company ended with cash of $4.09 per share, better than $3.91 at the start of the quarter. Capital additions were $3.36 million in the quarter, used for expansion of the Milpitas facility and equipment for the Penang, Malaysia facility.

Guidance

The second quarter guidance is for sequential revenue increase of 2-5%, operating margins in the in the 40% range. Capital additions are expected to be $10-15 million and depreciation of around $4 million.

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