) 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.
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
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
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%
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
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.
, 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
), Linear's performance in this end market stems from the growing
electronic content in vehicles.
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
segment and contained exposure to the
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
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.
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.
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
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.
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
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
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).
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