Linear Sees Very Slow Growth in Q1

Zacks

Linear Technology (LLTC) reported fourth quarter 2012 earnings that were a couple of cents short of the Zacks Consensus Estimate.  Earnings were up 4.7% sequentially, but slid 35.2% from the year-ago quarter. Despite the sluggishness of end markets, good cost control helped the sequential comparison in the last quarter.

Revenue

Linear reported revenue of $330.0 million, up 5.7% sequentially, down 8.0% year over year and in line with management’s guidance range of a 4-8% sequential increase and the consensus estimate of $330.3 million.

The revenue distribution by geography indicates strength in Japan and other Asia, as well as particular weakness in Europe. The U.S. has been relatively more resilient, despite fears of a slowing economy. Around 36% of Linear’s revenue came from the Asia/Pacific region (ex-Japan), revenue from which was up 11.9%. This was followed by the U.S. with 29% (up 2.1%), Europe 19% (down 4.4%) and Japan 16% (up 12.7%).

Linear does not provide quarterly revenue breakdown by end market, but given the fact that its lead times are currently at the normal level of 4-6 weeks, we think that order trends are indicative of revenue trends during the quarter.

The industrial and automotive markets are Linear’s focus areas. The industrial market, comprising 41% of its fourth quarter orders, grew in the last quarter. The second half of the year is generally seasonally softer for industrial. However, automotive (16% of revenue) was slightly sluggish on a sequential basis, while growing strong double-digits from last year. The softness in auto was mostly on account of slowdown in the two important markets of Europe and Japan. Management remains positive about better results in the next quarter, particularly since other areas were flat to up in the last quarter.

Communications remains the second largest business, with a 21% contribution. Linear saw declines here as well, due to softness in China. Management remains optimistic that China will continue to grow, if not at the high rates that it has in the past, since significant infrastructure investments still need to be made.  The cell phone contribution continued to decline in the last quarter to well below 1%. Moreover, the plethora of smartphones and tablets in the market today (and those ready to hit the market) indicate that wireless infrastructure spending will not go away.

Aerospace/defense and consumer accounted for 6% and 3% of total orders, respectively, similar to the previous quarter.

Margins

The gross margin for the quarter was 75.4%, up 24 bps sequentially and down 259 bps from the comparable quarter of the prior year. The ASP inched up to $1.82 in the last quarter, while remaining well below the $1.87 posted in the year-ago quarter. Unit growth was also up on a sequential basis, while declining from the year-ago quarter. Therefore, the sequential improvement was the combined effect of a slightly higher ASP and a 5.1% increase in volume, which led to better cost absorption. The decline from the year-ago quarter was due to a significantly lower ASP, coupled with a 5.4% decline in volumes.  

Operating expenses of $97.3 million were up 2.7% in absolute terms from the previous quarter’s $94.8 million. The operating margin of 45.9% expanded 110 bps sequentially, as all expenses declined slightly as a percentage of sales.

The net income for the quarter was $103.3 million or 31.3% of sales, compared to $98.5 million or 31.5% in the previous quarter and $158.2 million or 44.1% of sales in the year-ago quarter. All this resulted in earnings of 44 cents, up from 42 cents in the previous quarter and 68 cents in the June quarter of 2012 (which benefited from an unusually low tax rate).

Balance Sheet

Inventories were flattish sequentially, with inventory turns increasing from 3.9X to 4.1X. Days sales outstanding (DSOs) were flat at around 42. The company ended with cash of $1.20 billion, up $91.2 million during the quarter.

Guidance

The guidance for the first quarter of fiscal 2013 is for sequential revenue increase of 0-3%, which management says is more or less in line with normal seasonality. Earnings are expected to grow at roughly the same rate as revenue. Management is banking on overall strength in Japan and Asia to offset weakness in Europe and flatness in the U.S.

In summary

Linear’s fourth quarter results were not too exciting, as most end markets did as they were expected to do. However, the company’s business is well-diversified among core markets, such as industrial, communications infrastructure, and more recently, automotive. It also has a finger in the computing pie, although this is not a focus area. While this business focus may not generate very attractive growth rates, it is also not given to rapid changes and product cycles.

However, given the condition of the economy, a company such as Linear with exposure to the core sectors would likely see sluggish demand. This is the main reason for the Zacks Rank of #4 (Sell) on Linear shares, while other semiconductor players, such as Intersil Corp (ISIL), Fairchild Semiconductor (FCS) and ON Semiconductor (ONNN) are ranked #3 (Hold)

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