Linear Technology (LLTC) reported third-quarter
2013 earnings that were in line with the Zacks Consensus Estimate.
The weaker-than-expected revenue guidance indicates limited growth
prospects in several important markets, such as communications
infrastructure and computing.
Revenue
Linear reported revenue of $314.5 million, up 3.0% sequentially
and up 0.7% year over year, roughly in line with management’s
guidance range of a 1-4% sequential increase. Management stated
that order rates improved early on in the quarter and there was a
steady flow through the quarter, accounting for the improved
revenues and orders in the quarter.
Japan and the Asia/Pacific proved to be the weaker geographies
for Linear. Japan was impacted by deflation from a
government-instituted stimulus, China was impacted by Chinese New
Year-related softness and the Asia/Pacific overall saw seasonally
softer consumer sales. Europe on the other hand was particularly
strong due to seasonal strength in the industrial and automotive
end markets.
The revenue distribution by geography was as follows: the
Asia/Pacific region (ex-Japan) 37%, down 2.3% sequentially, the
U.S. with 29% (up 3.0%), Europe 20% (up 21.2%) and Japan 14% (down
3.8%).
Orders
The mix of orders was favorable for Linear. The company saw
strength in the industrial and automotive areas, which are
management focal points, while consumer and computing softened
slightly
The industrial market remains the largest
contributor with a 43% share. Orders were up high single-digits on
a sequential basis. The industrial business remains broad-based
across geographies and end markets and Linear is capitalizing on
the growing demand for energy efficiency in this market.
Automotive, the other focus area accounted for
18% of quarterly orders. The strong double-digit increase from the
Dec quarter was mostly because of Japan and Europe, which were
supported by modest growth in the U.S. and a flattish Asia/Pacific.
Similar to other semiconductor providers, such as Analog
Devices (ADI), Fairchild Semiconductor
(FCS) and Intersil Corp (ISIL), Linear’s
performance in this end market stems from the growing electronic
content in vehicles.
However, communications remained the second
largest market with 20% of total orders. Linear stated that the
low-single-digit increase was attributable to slight increases at
most large telecom infrastructure and networking customers. Cell
phones remained well below 1% of total bookings, so did not affect
segment performance much. The number of smartphones and tablets in
the market today (and those ready to hit the market this year)
indicate wireless infrastructure spending will not go away.
Over the last few years, Linear has reduced its exposure to the
consumer segment and contained exposure to the
computing segment because of the typically low
margins and significant seasonal fluctuations. Over the next few
years, mobile electronic computing goods with a consumer flavor are
likely to grow faster than any other segment. Therefore, Linear
will lose out on this opportunity.
Aerospace/defense accounted for 6% of total
orders, impacted by U.S. government budget constraints. This
resulted in declines from both the previous and year-ago
quarters.
Orders showed good linearity and were up in both the U.S. and
internationally (although Japan declined). As a result, both orders
and backlog increased in the last quarter and the book-to-bill was
also positive.
Margins
The gross margin for the quarter was 74.8%, up 41 bps
sequentially and down 34 bps from the comparable quarter of the
prior year. The ASP grew dropped a penny to $1.84 in the last
quarter, but was higher than the $1.81 in the year-ago quarter.
Unit growth was positive on a sequential basis and slightly
negative compared to the year-ago quarter.
While Linear’s gross margins remain very attractive, the company
is now saddled with some excess capacity and employees that
management does not want to cut. Therefore, it is expected that
margins will get back up as and when sales and therefore
utilization rates pick up.
Operating expenses of $97.0 million were up 2.8% from the
previous quarter’s $94.4 million. The operating margin of 44.0%
expanded 50 bps sequentially because the slight decline in R&D
offset the slight increase in SG&A expenses (as a percentage of
sales).
The net income for the quarter was $116.3 million or 37.0% of
sales, compared to $94.1 million or 30.8% in the previous quarter
and $103.5 million or 33.1% of sales in the year-ago quarter.
Earnings including a couple of cents of debt discount amortization
were 46 cents, up from 38 cents in the previous quarter and 42
cents in the Dec quarter of 2011.
Balance Sheet
Inventories increased 1.6% sequentially, with inventory turns
dropping staying relatively flat at 3.7X. Days sales outstanding
(DSOs) dropped from 43 to 41. The company ended with cash and
short-term investments of $1.45 billion, up $155.1 million during
the quarter.
Guidance
Management provided limited guidance for the fourth quarter of
fiscal 2013. Accordingly, revenue is expected to increase 1-4%,
much better than normal seasonality. The operating income is
expected to grow in absolute dollars but remain consistent as a
percentage of sales. The effective tax rate will be 25%. Capex is
expected to $15-20 million for fiscal 2013.
In Summary
Linear’s third-quarter earnings were helped by the positive mix,
as lower-margin segments softened while higher-margin segments grew
strongly. The company’s business is well-diversified among core
markets, such as industrial, automotive and communications
infrastructure. Its computing business has been hit by weakness in
the PC and notebook areas.
Linear also includes tablets, server and storage revenue here,
so the consistent decline in segment revenue indicates that growth
in other areas is not being offset by weakness in the core
computing segment. While this means that the company is not
benefiting from the strong growth opportunity, it also means that
it is probably leaving lower-margin opportunities on the table (a
long-time management strategy).
Linear has always maintained strong gross margins and when
conditions worsened following the latest recession, it took all the
necessary steps (shut-downs, slower hiring, reduction in profit
sharing, etc.) to maintain margins in the weak demand environment.
While these actions have optimized costs, Linear continues to carry
some extra capacity that remains under-utilized.
Another positive is the extreme caution that distributors have
shown in recent times, which indicates that distributor inventories
remain very lean. Therefore, Linear should benefit from its
operating leverage and lean channel inventories when demand picks
up.
Linear shares carry a Zacks Rank #3 (Hold).
ANALOG DEVICES (ADI): Free Stock Analysis Report
FAIRCHILD SEMI (FCS): Free Stock Analysis Report
INTERSIL CORP (ISIL): Free Stock Analysis Report
LINEAR TEC CORP (LLTC): Free Stock Analysis Report
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