Analyst Conference Summary

Linear Technology Corporation

conference date: January 17, 2007
for quarter ending: December 31, 2006 (fiscal Q2 2007)

Forward-looking statements

Overview: Not a great quarter; revenues down more than guidance.

Basic data:

Revenue was $267.9 million, down 8% sequentially, but up 1% from the prior year (fiscal Q2 2006).

GAAP net income was $105 million, or $0.34 per share, slightly higher than the $103.3 million and $0.33 per share of the prior year and $112 million the prior quarter. Non-GAAP, excluding stock compensation, net income was $117.8 million or $0.39 per share.

Cash and short-term investments fell $30.3 million net of share purchases of $91.7 million for 3 million shares and $45.5 million in dividends. Ended at $1.78 billion.


Forecasting March 2007 quarter is a challenge; it has typically been seasonally strong in the past, but this year is likely to be an exception. Inventory reductions are expected to continue.

Revenue to fall another 4% to 7% in March 2007 quarter, with a greater impact on profits due to an increasing tax rate.

Conference Highlights:

Dave Bell has resigned.

Tax rate was 28%, improved from 31% due to reinstatement of the R&D tax credit.

Increase dividend to $0.18 per share (from prior $0.15).

Revenue decline due to inventory reductions by end customers.

Operating expenses decreased $16.9 million due to lower profit sharing. 48.5% operating income as percent of sales.

2,781,000 share decrease in quarter (share repurchases offset by option exercises).

Lead times remain 4 to 6 weeks. Remain highly profitable and cash-flow profitable.

Bookings decreased. Book-to-bill slightly below 1. Bookings down in all geographic areas. Down in all end markets except automotive. Industrial up 33% from 31%; communication 33% from 34%. High-end 3G cell phones don't have traction yet. 13% computer from 14%. High end consumer 9%. Automotive 8%. Military 4%.

Sales by region: 31% US, 17% Europe, 15% Japan, rest of world (mainly Asia) 37%.

77.9% gross margin, down .1 from prior quarter. ASPs increased to $1.59 from $1.57.

Headcount increased but profit-sharing decreased.

SG&A expense increase to 12.5% of sales, but decreased in absolute dollars.

Expect 29% tax rate going forward.

Accounts receivable was down due to lower sales. Accounts payable also decreased. Inventory $45.4 million was up $3.3 million sequentially, primarily in die bank.

Equipment expense was balanced by depreciation. Expects $55 to 65 million in capital expenses in March 2007 quarter. Deferred income on shipments was flat.

December was a difficult quarter. But customers report steady demand. Strong quarter of new product introductions. But customers are cautious about economy, so inventory may continue to tighten. Asia March quarter is typically seasonally weak. Current backlog does not support a growth quarter.


How did inventory get out of control? Talks to end OEMs, who uses subcontractors who are very sensitive to inventory. Perhaps holiday season was not that good for many products.

2 down quarters? Inventory correction still has a way to go.

Expects to do well compared to competition, which also has inventory adjustments.

Digital Power investment? Internal efforts complement acquisition, will not be significant near-term, but could be long term.

What gives confidence March is bottom for inventory correction? End customers, OEMs, though they do acknowledge that visibility is low.

Why increase dividends in difficult times? Have a lot of cash, believes will do well going forward.

Believes December was good quarter for new products, which will sell through in March quarter. Has hired talented engineers and expects more good new products going forward.

High performance market not a growth market anymore? Growth is highly valued, want to maintain margins. In recent period analog growth was not in high-performance. But believes high-end will resume growth.

Bookings growth tends to be similar to sales growth because customers want short lead times.

June quarter revenue growth confidence? Customers think demand is not as tight as inventory correction indicates. But visibility is low.

Industrial networking new products? Try to make general purpose products that serve more than one market. Strategy is still diversity and growth with good margins.

Consumer v. industrial segments for March 2007 quarter? Does expect industrial to do better than consumer. Some things in communication and computer are consumer oriented.

Is outlook a worst-case scenario? Giving as best forecast as we can.

Management structure changes? Better for segment managers to report directly to CEO rather than through a president.

Consumer procucts? More of an annual cycle than other types. Bookings in September are the key indicator for future demand.

Inventory trend? Higher inventories in absolute dollars would be necessary as they introduce new products. But on a turns basis should be steady. Was up $3 million, to $42 million.

Believes automotive segment will continue to grow, but not trying to pick markets. Trying to bring out broadly applicable high-end products.

Overall market is in the high $30 billions and projected to grow to $50 billions. So Linear is a small percent of market. Needs to have unique technology to keep high margin section of market. Growing 20% in the future should not be impossible in this field.

3G phones? Did not say was a slow down; said had not picked up yet. Opportunities for LLTC are in feature-rich phones. But may be in the pipeline.

Adjustments to manufacturing due to slack demand? No, does not believe slack demand will last.

Consumer products tend to have short lifetimes, but industrial and automotive may last for 5 years.

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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2006 William P. Meyers