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Linear Technologies (NASDAQ:LLTC)

Q4 2006 Earnings Conference Call

July 26, 2006, 11:30 a.m. EST

Executives

Paul Coghlan - Chief Financial Officer

Lothar Maier - CEO

David Bell - President

Analysts

Michael Mezbia – Credit Suisse

Doug Freedman - American Technology Research

Ross Seymour - Deutsche Bank

Craig Hettenbach - Wachovia

Christopher Caso - Friedman, Billings, Ramsey & Co.

Tore Svanberg - Piper Jaffray

Krishna Shankar – JMP Securities

William Lewis - J.P. Morgan

Simona Jankowski - Goldman Sachs

Lewis Gerhardy - Morgan Stanley

Raymond James - Steve Smigie

Paul Leming - Soleil Securities

Craig Ellis - Citigroup

Ron Lee - UBS

Auguste Richard - First Albany Capital

Sameet Ghanda - Bank of America

David Wood - Global Crown Capital

Romeit Shaw - Lehman Brothers

Operator

Good day, ladies and gentlemen and welcome to Linear Technology Corporation fiscal 2006 Q4 Earnings Release Conference Call. As a reminder today’s call is being recorded. And now for opening remarks and introductions I would like to turn the conference over to Mr. Paul Coghlan, Chief Financial Officer. Please go ahead.

Paul Coghlan - Chief Financial Officer

Hello, good morning. This is Paul Coghlan; I’m joined today by Lothar Maier our CEO and by Dave Bell, who is our President. Welcome to the Linear Technology Conference Call. I will give you a brief overview of our recently completed Q4 and Fiscal Year and then address the current business climate. We will then open up the conference call to questions to be directed at Lothar, Dave or myself. I trust you have all seen copies of our Press Release which was published last night.

First, however, I would like to remind you that except for historical information, the matters that we will be describing this morning will be forward-looking statements that are dependent on certain risks and uncertainties including such factors among others as new orders received and shipped during the quarter, the timely introduction of new processes and products and general conditions in the world economy and financial markets. In addition to these risks which we described in our press release issued just yesterday, we refer you to the risk factors listed in the Company’s Form 10-Q for the quarter ended April 2, 2006, particularly management discussion and analysis of financial condition and results of operation.

Secondly, SEC regulations FD, regarding selected disclosure, influences, our interaction with investors. We have opened up this conference call to enable all interested investors to listen in. The press release and this conference call will be our sole forum to respond to questions regarding our estimated financial performance going forward. Consequently, should you have any questions regarding our estimates of sales and profits, or other financial matters for the upcoming quarter, as well as how they might impact our income statement model and our balance sheet, this is the time we are free to respond to these questions.

Fiscal 2006 was a good year for us. In what was generally perceived as a slow growth environment we reported record net sales of $1.93 billion, an increase of $43.3 million or 4% over the previous year -- which year had benefited from a $40 million royalty payment. Net income of $428.7 million was down $5.3 million from the previous year. The resulting diluted earnings per share was $1.37 versus $1.38 in fiscal 2005. However, fiscal 2006 results includes a full year affect of the implementation of financial accounting standard number Fas 123(NYSE:R) share-base payments. The after tax charge for all forms of stock based compensation including stock option, restricted stock and stock for employee stock purchase plans was $38.3 million versus $14.5 million for only restricted stocks in fiscal 2005. Consequently net income on a pro forma basis would have been $466.9 million versus pro forma net income of $448.5 million in 2005.

On a pro forma basis, before the impact of all forms of stock-based compensation fiscal 2006 diluted earnings per share would have been $1.50 versus $1.42 in fiscal 2005. During the fiscal year the company returned approximately $500 million to its investors in the form of stock repurchases and cash dividends. Over the last five years this has amounted to approximately $1.9 billion. Diluted shares outstanding decreased by 3.7 million shares during the year and during the five-year period have decreased by 21.3 million shares or 6.4% of shares outstanding. Our return on sales for fiscal 2006 was 39.2% on a GAAP basis and 42.7% on a pro forma basis. Interestingly, we have been profitable every single year during our 20 years as a publicly traded company with accumulative return on sales of 38%. For the year our return on equity was 21% and our return on assets was 18%. Once again the company generated positive cash flow from operations. The overall cash in short term investments balanced increased by $28.7 million. Net of spending $342.8 million to buy back 9,536,000 shares of common stock and net of paying $153.9 million in cash dividends.

During the year we increase the quarterly cash dividend payment by 50% from $0.10 per share to $0.15 per share per quarter. We initially began paying a dividend in 1992 and have increased it every year since. Currently the dividend yield is approximately 2%. The June quarter as forecasted was a quarter for Linear. Sales grew, profits grew, bookings grew and we had a positive book to bill ratio. Revenue for the Q4 ended June 2, 2006 was $292.9 million an increase of 15% over revenue of $255.8 million for Q4 of the previous year, and an increase of 5% sequentially over the Q3 revenue of $278.9 million. Net income for Q4 was $115.7 million or $0.37 diluted earnings per share compared with $110.6 million or $0.35 diluted earnings per share in the prior quarter, also a 5% increase. On a pro forma basis without the impact of stock-based compensation net income would have been $125.9 million and $0.41 per share versus $119.7 and $0.38 per share in Q3. So the impact of stock-based compensation was roughly 9% of net income or $0.4 per share at the EPS level.

For Q4 just ended our GAAP return on sales was 39.5% and our pro forma return on sales was 43%. Cost of sales and operating expenses both as a percentage of sales increased slightly due primarily to head count addition and to a lesser extent to increases in restricted stock brands. The impact on operating income as a percent of sales was largely offset by an increase in interest income, so that the resulting return on sales was an impressive 39.5% versus 39.6% last quarter. Diluted shares outstanding decreased by $2,825,000 shares. During the quarter the company’s cash and short term investments decrease by $96.1 million. For the 81st consecutive quarter we had positive cash flow from operations. However, during the quarter the company spent a record $202.1 million to purchase 5.7 million shares of its common stock. The board of directors authorized the company yesterday to purchase up to an additional 20 million shares of its outstanding common stock in the open market over the next two years. For Q4 just ended bookings grew and improved in all areas except industrial. The increase in bookings was largely in communications and high-end consumer. Our ending on hand inventory at distributors is well within historical turns levels, cancellations are still minimal and lead times have remained unchanged at 4 to 6-week. We continue to have an excellent business model and are therefore, able to remain both highly profitable and cash flow positive. Accordingly, we achieved strong performance in various generally regarded financial indices.

I have already discussed our return on sales. Our quarterly return on equity was 22% and our quarterly return on assets was 19%. When you take cash and short-term investments out of these two calculations, our net return on equity for the quarter was 167% and our return on operating assets was 83%. We had no debt and our current ratio was 8.8:1. Looking forward, the September that we are entering is difficult to confidently forecast. It is typically a slow quarter for industrial and communications business, yet should show growing strength in consumer oriented businesses as the bill period for year end holiday sales approaches. While we expect our bookings to increase over the prior quarter most of the consumer related bookings increase will not shift until the December quarter. Further, while we expect our bookings to increase over the prior quarter we are entering the quarter requiring a modestly higher percentage of turns business which is orders that must be both booked and shipped in the period. Consequently we currently expect sales and profits to be roughly similar to the quarter just completed.

Now I would like to address the quarter’s results on a line by line basis, starting with bookings. As I stated earlier bookings increased over the previous quarter, cancellations were minor and we had a positive book to bill ratio. Geographically, US bookings were essentially unchanged with increased OEM bookings offset by similar decreases in US distribution. Internationally, bookings grew in each principle area, Japan, rest of Asia, and modestly in Europe. At this time every quarter we give you a breakdown of our bookings percentages by in-markets to give you insight into those market that drive our business. As I stated earlier all areas of the quarter grew except industrial. Communications was our largest area this quarter, it represents approximately 36% of our business, up from 34% estimated last quarter. For us, the three significant areas within communications are cell phone and telecom infrastructure, networking and cell phone handsets. Cell phone and telecom infrastructure at 12% of our business grew in absolute dollars but was unchanged as a percentage of sales. Networking at 16% is up 1 percentage point from the 15% estimated last quarter. Power over Ethernet circuits and hot swap circuits, which in technology lead the way. Cell phone handsets at 8% of our business also grew 1 percentage point from 7% reported last quarter as some of our new circuits have gained market acceptance. Industrial, at 33% of bookings closely approximates communications. Industrial was down 3 percentage points.

The March, last quarter is historically seasonally strong as it was this year, so it’s not unusual for subsequent quarters such as the one we are in to be down from the March quarter. For the June quarter, computer represented 14% of our business, down 1 percentage point but slightly up in absolute dollars. High-end consumer at 6% grew 1 percentage point as we are moving into the seasonally stronger second half of the year. Automotive at 7% was unchanged but increased in absolute dollars with the strength being in European and Japanese automotive related manufacture. Finally, the military products at 4% of our business were up 1 percentage point from the prior quarter. In summary, we believe we have very good diversity by in markets which contributes to our leadership positioning and high performance. Moving from bookings to sales, as I stated earlier product sales grew 5% sequentially from quarter to quarter and 15% from a similar quarter in the prior year. Sales grew equally both domestically and internationally. In the USA both the distribution and domestically manufactured OEM improved. Internationally, similar to bookings sales grew in each geographic area, Japan, Asia, and Europe. In summary, the USA at 32% was similar to last quarter, Europe at 19% of sales also remained the same. Whereas Japan at 14% of sales was up 1 percentage point and rest of world primarily the rest of Asia other than Japan at 35% was down 1 percentage point from last quarter. Note that 51% of our sales were created in the USA of which 19% will shift overseas.

Gross margin. Gross margin was 78.3%, this impressive number validates our strategy of selling unique, high performance analog semiconductors into a broad customer base. This gross margin percentage decreased slightly by 2/10 of a point from last quarter. Improvements in factory efficiencies which benefited gross margin were offset by additional labor costs and by minor inventory write-offs. ASP’s decreased slightly to $1.67 from $1.70 last quarter. This was largely due to some changes in mix as sales into industrial in-markets have higher ASP’s than sales in to consumer and cell phone markets that grew this past quarter. R&D. R&D increased above absolute dollars by roughly $3 million and as a percentage of sales from 14.7% last quarter to 15% this quarter. Labor costs increased due to additional headcounts, additional profit sharing cost, and stock-based compensation expenses. We have been adding to our head count and related expenses to continue to maintain our technical leadership position in high performance analogs. We have had particularly good success in adding analog talent to our satellite design centers where our head count this year has increased 26 % over last year.

SG&A, selling general and administrative costs have increased in absolute dollars by $1.8 million. As a percentage of sales SG&A was flat from last quarter at 11.6%. Increases in head count and profit sharing was a major item as well of modest increases in communications expenses. Operating income increased by $5.6 million due to increases in sales partially offset by increased operating cost. As a result operating income as a percent of sales was a very impressive 51.6% verses 52.2% last quarter. Interest income increased by $1.8 million, largely due to the increase in the average rate of interest earned from 3.05% last quarter to 3.35% this quarter. Our effective income tax rate was 30.5%. The major tax savings items that support our effective tax rate are, the benefits from our tax holidays overseas our tax exempt interest, our foreign sale tax benefits and our R&D credit. The resulting net income of $115.7 million is an increase of $5.1 million from the previous quarter. Earnings per share of $0.37 is an increase of $0.02. The average shares outstanding used in the calculation of earnings per share decreased by 2.9 million shares during the quarter, largely due to share repurchases previously discussed, partially offset by stock option exercises. On a pro forma basis before stock-based compensation net income would have been $125.9 million, earnings per share $0.41 and diluted shares outstanding on a pro forma basis would have decreased by 2.9 million shares, as there are less diluted shares outstanding under prior accounting standards than under the current Fas 123(R).

Moving to the balance sheet, cash in short term investments decreased by $96.1 million, net of the $202 million spent to purchase 5.7 million shares of common stock, $16 million spent in fixed asset additions and $46 million paid in cash dividend. Our cash and short term investment balance is $1,819,600 and represents 76% of total assets and 86% of stockholders equity. Accounts receivable of $154.3 million is an increase of $5.7 million form the previous quarter. The increase in receivables is due largely due to the increase in sales. Our day sales and accounts receivable decreased to 48 days verses the 49 days we reported last quarter. Inventory at $39 million increased by $1 million from the $38 million reported last quarter, most of the increase was in work in process inventory. Our inventory turns of 6.6 times was slightly better than last quarter. Differed taxes another current assets decreased $8.8 million from the March quarter. Part of the decrease relates to a reclass of differed taxes on stock option accounting to long term deferred assets, and a part relates to a decrease in interest receivable. Property plant and equipment increased by $5,247,000 as we had additions of $16,114,000 and depreciation of $10,867,000. Most of the additions were for wafer fabrication test and assembly production equipment to support anticipated sales requirements. For fiscal year 2006 the total additions were $69.4 million and total deprecation was $42.5 million. For the upcoming fiscal 2007 capital additions are forecasted to be roughly $80 to $90 million and depreciation to be roughly $43 million. Other non recurring assets totaled $65.8 million, an increase by $17 million. This increase relates primarily to a previously announced $15 million equity investment in a digital power company.

Moving to the liability side of the balance sheet. Accounts payable hardly changed, accrued income taxes, payroll and other accrued liabilities increased by $22.5 million. The largest items here are our profit sharing accrual and our income taxes payable. We pay out profit sharing twice a year, so our accrual increases in Q2 and Q4 and decreases in Q1 and Q3 when payments are made. The increase in profit sharing accruals this quarter accounted for most of the change in this accrual category. As our income taxes payable accounts hardly changed. Deferred income on shipments to distribution also hardly changed. Deferred tax and other long term liabilities decrease by $18.5 million, largely due to changes in deferred taxes related primarily to repatriate foreign earnings to take advantage of the US tax benefit in connection with the job creation Act of 2004. Changes in stockholder equity accounts were primarily the results of the usual quarterly transactions for net income, for dividends paid, stock repurchases and employee stock activity. This quarter again the company announced a cash dividend of $0.15 per share which will be paid on August 23rd to shareholders of record on August 4th.

Looking forward, as you can tell from my previous comments this was good quarter for Linear and that we met our projections and had a positive book to bill ratio. We are encouraged by the diversity of our bookings which saw a growth in every in market for the industry. Historically, the summer quarter is our lowest growth quarter, it is typically a slow quarter for industrial and communications businesses somewhat influenced by slowness in Europe due to European vacation periods. However, we expect our high end consumer bookings to improve as we are well positioned in certain products that should experience good Q4 sales in the year end holiday period. However, as I said earlier this increase in business probably will be booked in the September quarter and shipped primarily early in the December quarter. Our returns requirement are slightly higher than last quarter, orders that must be booked and shipped in the quarter. Our lead times are. On a macroeconomic basis the worldwide economies appear reasonable. The US continues to grow, be it at a little slower rate, although the Fed's position on interest rates merits attention. Japan and Europe are also growing.

However, economic news can be easily influenced by political events and customers at many in markets are generally cautious and therefore tend to order just to current demand. Consequently, given the historical seasonal slowness in the summer quarter for us, partially offset by a growing increase in high-end consumer products, we are expecting sales and profits for the upcoming September quarter to be roughly similar to the quarter just completed. If this proves correct, the September quarter will be the second consecutive quarter that our year-over-year sales growth will be approximately 15%.

Looking to the long-term, we have told you that we have added to our infrastructure. We have completed and begun occupying the new building at our Singapore test location and are also continuing our projects to add capacity to our wafer fabrication plants in Camas Washington and Milpitas, California. These projects are important additions to our capacity. We sell into many diverse markets that are rich in analog circuitry, easy to manage power and affordable products or to sense real world electronic signals and then convert them from analog to a digital format for easy storage and transmission.

Recently we announced the new family of module products. Initial interest in these new micro modules has been high and we continue to believe that these products represent a significant business opportunity in the next several years. In addition, our growing family of high speed A to D converter products is gaining acceptance in the base station and industrial markets and these leadership products are currently contributing to our increasing sale.

Finally, 2006 was a good year for us. We had reasonable quarterly sequential growth in each of the last three quarters. We also added to our pool of technical talent particularly aided by staffing a new Phoenix design center and opening two other new design centers in Munich, Germany and Dallas, Texas.

In summary, we are in a strong segment of the electronics marketplace, namely high performance analogue, where we continue to be the market leader. We met our projections for the June quarter and after a seasonally flat summer quarter; we are looking forward to a good fiscal 2006.

In closing, I would now like to briefly address the issue of stock option price. We have been named in certain Wall Street sell side studies, have been sued in Federal and State courts and have been notified of informal enquiries by both the SEC and the United States Justice Department.

These allegations have been based on statistical analyses, where the underlying premise is that daily stock prices are totally random and contain no bias. For example, the stock price performance at and around earnings release date.

On May 24th, Linear issued a press release in which it stated that its options were always approved by the full Board of Directors and regularly scheduled board meetings which coincide with quarterly earnings release, that the company believes it did not employ backdating and that the company believes a review of its pricing policies will not result in a material impact on its result of operations or financial condition. The company continues to stand by this release. It has been conducting a thorough review of its option granting practice. To date, we do not believe there will be any impact on Linear’s financial statements or any restatements of prior periods. However, our review is ongoing and it’s not yet completed.

The company very much appreciates the open mindedness of those of its investors and interested third parties who have refrained from passing judgment until the investigations are complete.

I would now like to open up the conference call to have questions addressed by either Dave, Lothar or myself.

Question-and-Answer Session

Operator

Thank you, gentlemen. [Operator Instructions]. First up with Credit Suisse, we have Michael Mezbia.

Michael Mezbia – Credit Suisse

Yes, thanks a lot guys. I guess just to start off on a high level, compared to where you are in earnings call of last quarter and where you are now, has anything fundamentally changed in any material way?

Paul Coghlan

No, what we had last quarter was a strong quarter for products in the industrial area, as we told you. Industry is typically strong in the March quarter. The June quarter, we had good diversity in all of our end markets except industrial and then going into the summer quarter as always, for us the summer quarter is usually the slowest growth, so our fundamental business, the customers we have, the end products we designed into, the staff we’ve hired we think everything continues to be just in line with what we discussed.

Michael Mezbia – Credit Suisse

I guess the follow up question is what are the customer mentality? Because it looks like turns a tad higher but things haven’t changed but does that mean something changed in visibility or in their proportion or is there anything moving there?

Paul Coghlan

Well I think if you were to go back a year, you’d find we had pretty much the same introduction for this time, a year ago that turns business in the summers up a little bit. We talked about vacation periods in Europe. There’s also -– to some extent, that impacts the USA. So I think it’s a little difficult for us to tell whether it’s you know, there’s seasonality in our business. We don’t think there is a real fundamental change in the customer attitude. You know, most of our large customers you know, we know where they’re going, and there hasn’t been much of a change in their outlook.

Michael Mezbia – Credit Suisse

I guess, this is the last question -- we have all have been surprised before, there’s one area where you’re kind of looking to make sure you’re not surprised or that you fear there could be some surprises. Where would it be, if anywhere?

Paul Coghlan

You know, to be honest with you, I don’t think we would lose any sleep over anything coming in from Lafield and hitting us. You know we are in a very competitive business so you are always out there you know, everyday working in the marketplace but you have good customer control, I think in good interface with your customers.

In-markets, we had told you early in the year people were surprised consumer dropped off for us, we told you we thought that was seasonal. We told you we thought it would pick up in the second half of the year, and we still very much believe that to be the case. Our customers buy in-market, buy in-products you know, power is a big business for us, signal conditioning is a business, mixed signal has been picking up, so our customers in all of these areas are good.

So to be honest with you, we are not sort of looking to drop, Michael. That doesn’t mean we don’t have our antennas up, so I think if I were to kind of state one area we are kind of worried about, I'd be overstating something. So you know, I think we are going to have a summer quarter. You know, we'd probably wish it were a little better, but it’s a typical sort of summer quarter and I think our business will pick up after that.

Michael Mezbia – Credit Suisse

Great, thank you guys.

Operator

Okay. Now our next question comes from Doug Freedman with American Technology Research.

Mr. Freedman, your line is open, you may want to check your mute button.

Doug Freedman - American Technology Research

Can you hear me now, Paul?

Paul Coghlan

Yes Doug, I can hear you now.

Doug Freedman - American Technology Research

Okay, thank you. At this time of year, you often give us a backlog number. Is it possible that we get that now or do we need to wait for the filing?

Paul Coghlan

It’s roughly 94 million.

Doug Freedman - American Technology Research

All right, thank you. And then if you could, what the share account was at the end of the quarter?

Paul Goghlan

And that backlog going into the summer obviously, is normally at a low point in the year, normally. What is your next question?

Doug Freedman - American Technology Research

My next question was just if you had the closing share account at the end of the quarter?

Paul Goghlan

The balance sheet number? The diluted shares outstanding are $311 million at 221,000. I don’t have the balance sheet number.

Doug Freedman - American Technology Research

Since we are starting up a new fiscal year, can you guys sort of discuss what the areas of improvement you may be looking for given the fact that as we look at the operating model it’s really hard to see improvement in the operating model? If you could sort of discuss maybe on the strategy side, what areas of the company you may be looking at improving in the next year?

David Bell

Well, this is Dave. You know, I don’t see any fundamental changes in our strategy. As you are probably aware there’s a little bit of a mixed difference between the first half of the calendar year, and the second half of the calendar year. The first half of the calendar year tends to have more industrial business, and as a consequence the ASPs are a little bit higher.

Second half of the accounting year that we are entering into now tends to be a little bit more consumer-based and as a consequence, the ASPs are a little bit lower. On the other hand, it’s really important to point out as you are aware that it really doesn’t matter what the ASPs are. We maintain a very similar profitability regardless of the ASPs.

So I don’t think that there’s going to be really any big changes in our strategy nor business mix, going forward apart from their normal seasonality.

Doug Freedman - American Technology Research

Lothar, can you touch on your progress in improving within new product introduction rate? I know that, that was an area of focus for you last year?

Lothar Maier

Hi Doug, this is Lothar. Yeah, one of the things that Paul highlighted in his monologue was the fact that we grew our technical talent at our remote design centers by 26%, so in the last fiscal year that’s a pretty remarkable growth. And so there is a pretty close connection between the number of design engineers that we have and the number of new products that we can introduce, and certainly there’s a lead time between the time you hire a new design engineer to when the product comes out, but I think we did a very good job last year, and setting us up for greater new product introductions in the coming year.

Doug Freedman - American Technology Research

All right, terrific. And then lastly if I could, can you give us any idea of your large OEMs or if there’s been a change in the mix of your customer base and how important the large OEMs are in your product mix, or sales mix, demand mix.

Paul Coghlan

This is Paul, I don’t think we had any kind of significant change in our customer mix, relative to your question. We always value large OEMs where we try to penetrate deep in them, but we have a very, very broad diversity of customers, Doug.

So what we try to do is to be strong in the big ones and strong in a lot of a little broad based ones as well, but there’s no -- I don’t think there’s any material difference in the size of our customer mix this year versus six months ago, for example.

Doug Freedman - American Technology Research

All right, terrific. Thanks so much.

David Bell

You are welcome.

Operator

Okay gentlemen, and now moving on to Ross Seymour with Deutsche Bank.

Ross Seymour - Deutsche Bank

Hi guys, can you hear me okay?

Paul Coghlan

I can hear you, Ross, good morning.

Ross Seymour - Deutsche Bank

Good morning. You talked about the turns having to increase a little a bit. Can you tell us what they were in the June quarter and what roughly you expect them to be in the September quarter?

Paul Coghlan

Yeah, they were in the 60s and they were a little bit in a higher end of the 60s now.

Ross Seymour - Deutsche Bank

Okay.

Paul Coghlan

But it’s not a significant change, Ross. It’s very close.

Ross Seymour - Deutsche Bank

Got you. And then on the -- I think the end market thing where you kind of answered in an earlier question, but the stock repurchase plan that you bumped up to 20 million shares, I think last time the approval was 10 million shares.

A couple of questions on that, first; I applaud the fact that you were turning that value to investors. When you approve the 10 million share repurchase last time, was that over a one-year period or a two-year period? And then the follow up question on the 20 million that you approve now is, given that you increased the absolute amounts should we read anything into the pace at which you will spend that especially given he amount you bought back in this most recent quarter?

Paul Coghlan

First of all, last year when the Board approved 10 million, that was for a two-year period and we bought 9.7 million, I think in the year. So that it was appropriate to refresh that and then since we had bought 10 million in the previous year for a two-year period it seemed like it'd be prudent to double that this year, if we are going for a two-year period.

We constantly look at the price of the stock. We have been buying the stock for many quarters as you know, accelerated it in the last quarter. The stock price keeps going lower rather than higher. So you know, I think we’ll continue to be active. We have to look at how you folks look at the market overall, how you folks look at technology companies. Whether you folks decide to value companies with high cash flow and high return on sales or not, and then make our choices.

So you know, the more we buy -- actually, we are disappointed with buying that much because we think it’s really a better opportunity than we thought we would have. That’s a long winded little bit of wise guy answer to. You know, I don’t know whether we will pick it up more than we did last quarter, but you know, we are certainly looking at the stock and you know, we will be buying in this period.

Ross Seymour - Deutsche Bank

Preaching is required on that valuation argument here. Last question on the consumer side of things, from an end market perspective, is there any difference in the timing of when you expect that to ramp, on the consumer side, and I guess even more so on the computing side, a lot of companies have been getting hit by a later ramp in some of the seasonality this year as compared to prior years. Are you seeing anything in your consumer business that is just later than expected or is it pretty normal?

David Bell

Well, there might be a little bit of delay going on, but to be honest Ross, this is Dave, I don’t have a whole lot of comparative data going back many, many years, but certainly for this year as Paul articulated during his monologue, we expect to see increasing bookings for the consumer products in this quarter, but you know, just the beginning of a really high volume ramp on the shipments for those products may be in the latter part of September.

So the real high volume shipments are probably in the October and November timeframe. So it’s possible, I suppose that some of that stuff is getting compressed, a little bit as the years go by but again, I really don’t have a lot of data going back years and years to compare to.

Ross Seymour - Deutsche Bank

Thanks, thank you for the detail.

David Bell

You are welcome.

Operator

Our next question comes from Craig Hettenbach with Wachovia.

Craig Hettenbach - Wachovia

Thank you. Within the area of networking which bookings are slightly increased there, can you talk about whether you’re seeing just overall health in that market or you mentioned particularly for you guys you know, the power of Ethernet and hot slot, so is it product adoption or just that market feels better, overall as well?

David Bell

Yeah, Craig, this is Dave. I think it’s a combination of both. Certainly, the POE market continues to grow and I think, growing for two reasons, one is just the overall networking business, continues to grow which kind of raises the tide overall, but the other may be a more significant thing relating to PoE is that the percentage of the ports that we see that our powered, that are being shipped by the big guys is going up, so I think that, that is helping in particular with our PoE business.

Craig Hettenbach - Wachovia

Okay. And then if we switch gears to the automotive market, you’ve talked the past about that market potentially going up to 10% bookings over time. What are some current trends you’re seeing within the automotive and is that still the target you’re thinking about for increased bookings as a percentage of your total bookings?

David Bell

Yeah, I think we are on track. You know, don’t pin me down to exactly when we crossed the 10% number, but I still believe that in a number of years we will probably see automotive represent more than 10% of our business.

During the last quarter, we had some nice games in Europe and in Asia in particular, US automotive industry has some of its own personal problems, so that’s kind of put a damper there, but we continue to make inroads. We are getting good design wins in all of the territories, and as you probably know the design cycle on the automotive industry is fairly long, so really what we are seeing now as a growth in our billing is a consequence of design wins that we had, probably a couple of years ago. We have got many more design wins that we’ve been getting during those last two years and we expect those to come home and help grow our billings and bookings in the future years.

So we are pretty bullish on automotive. I think that it’s a market that values the performance and reliability of our products and we are finding our way into many, many new areas within the automobile. So again, we are pretty bullish on the market growing beyond 10% at some point.

Craig Hettenbach - Wachovia

Okay, and then just lastly on the wireless handset side of things just slight pickup in bookings there. What is your outlook as of right now in terms of 3G and the potential for bookings in the back half of the year?

David Bell

Okay, well let me start out by kind of explaining a little bit about 3G because I think it means different things to different people.

There is a fair amount of 3G cell phone sales going on right now, but a lot of those sales are kind of lower end 3G phones, that are really designed to make use of the 3G infrastructure that’s in place. If you look at the really high performance 3G phones, the ones that have this HSDPA protocol that communicated over one megabit per second, and generally also have things like full video capability for mobile TV and what not. Those really high-end phones that I kind of point to when I talk about 3G still represent only about one percent of the cell phone sales right now.

But I think as that percentage grows, that will help us because inherently those phone are very high performance and the higher performance back line solutions because it’s placed on a long time, any higher performance power for their RF transmitter, and so forth, but we really haven’t seen a whole lot of growth in those true high-end 3G phone at this point. What we are seeing though, is we are seeing their penetration into some of the normal phone business where we’ve got a larger number of design wins and this up tick from 7% last quarter to 8% this quarter, it’s really largely the consequences of new models going into production in Korea where we have a larger content of our products.

Craig Hettenbach - Wachovia

Excellent, thank you.

David Bell

You are welcome.

Operator

Moving on to Chris Caso, with Friedman, Billings, Ramsey & Co.

Christopher Caso - Friedman, Billings, Ramsey & Co.

Yeah, thank you. I just wanted to know if you could expand a bit on your comments on the industrial segment and what the outlook is there. And then specifically what the decline in bookings as a percentage of total -- looking back in the model I’ve got the past couple of years, it looks like the seasonal pattern I show here as, typically the bookings increased a little bit as a percentage of revenue in the June quarter and down September. Is there something to read into that maybe just give some color what’s going on in industrial?

Paul Coghlan

Yeah, I don’t think there’s something to read in it Chris, it’s a good question. I think you should… when you talk about looking back historically at your numbers, which is certainly good to do, the last quarter for our industry was 36%, if you go back to similar years it was in the lower 30s, so we had a particularly strong March this year. We talked about reasons for that and I think it’s seasonal to us when we look at the particular strength that, that the June quarter now industrial even though is down is 36% of our business, this time a year ago, it was only 32% of our business, it’s 33% now and was 36%.

So I think it’s -- and for us to give you a lot of granularity, Dave answered very, very clearly the cell phone question. I couldn’t come within light years of that explanation on industrial because there’s just so many customers and so many different in-markets, a lot of it small customers, a lot of it comes through the distribution channels both here and overseas. So I think it’s just seems to be a pretty much normal trend.

Christopher Caso - Friedman, Billings, Ramsey & Co.

Right. So the feedback from your customers is just generally pretty normal conditions from what you are seeing?

Paul Coghlan

Yes.

Christopher Caso - Friedman, Billings, Ramsey & Co.

Okay.

Paul Coghlan

The customers are going into the summer. Correct, so I'd say, yes like every year, they’re going into the summer. If you were to look at our European business a higher percentage of that will be industrial than cell phone or high-end consumer, for example. So that the customers know they’re going into the summer period, they know it’s a slow period that you get into bookings in June et cetera, industry probably drops off.

Christopher Caso - Friedman, Billings, Ramsey & Co.

Okay, that’s fair. And with respect to you know, the consumer segment as we go into the third quarter and certainly expect booking be up there, could you give us a sense, I'm sure you don’t want to commit to a number, but you know, in terms of consumer as a percentage of the total, it’s obviously down from where it was earlier in the year.

Do you accept consumer bookings to be up kind of 1% - 2% or so or are we more likely to kind of get back to the levels we’ve seen in the beginning of the year with respect to consumer as a percentage of total bookings?

Paul Coghlan

You know, that’s a difficult question to answer. Someone prior to you asked if there had been -- had a sense that there might be or asked if there was some compression going on between when people book and when they wanted to ship. Dave addressed that he didn’t think it was dramatic, but he thought that was some of that. So you know, the big time for us as consumers is going to be October, November and in bookings we think September or October, shipments; October, November.

How it falls down at the end of September is a little hard for me to broadcast right here. But I think certainly Chris, if you look at the September and December quarters the percentage will be higher then they would have been or had been in the March and June quarters. Whether that goes to exactly the same percentage as last year depends a lot on how the other rest of our business grows, I think.

Christopher Caso - Friedman, Billings, Ramsey & Co.

Okay.

Paul Coghlan

I didn’t try to avoid your question, I can’t pin it down to the level of precision you want me to.

Christopher Caso - Friedman, Billings, Ramsey & Co.

Okay, and just one final, in terms of how the mix shifts for you guys. You know, as you get mix shifts you know, either -- you know, toward consumer and you go to the third quarter away from industrial that has really no meaningful change on your margin structure, is that correct?

Paul Coghlan

Absolutely none.

Christopher Caso - Friedman, Billings, Ramsey & Co.

Okay, thank you.

Operator

Moving on and taking our next question from Tore Svanberg with Piper Jaffray.

Tore Svanberg - Piper Jaffray

Yes, thank you, and good morning, couple of questions. First of all, Paul could you talk about the linearity both in terms of bookings and sales in the quarter?

Paul Coghlan

I could have if I had it in front of me, I don’t -- you know, I think the linearity from a booking standpoint I think was pretty consistent. From a shipment standpoint June is a five-week quarter for us as is March, September, December. So we always have more shipments in the last month of the quarter. It wasn’t more pronounced this period than another periods.

Tore Svanberg - Piper Jaffray

Okay, and looking at the --

Paul Coghlan

-- it wasn’t more pronounced than the previous periods. The only time that might be a little different will be at December quarter, when you have the holiday coming up late in the quarter.

Tore Svanberg - Piper Jaffray

Okay. And I looking at the September quarter, you expect industrial to be down seasonally, should I then also assume that your distribution customer bookings will be down sequentially?

Paul Coghlan

You know, that could be. Frankly, we are always -- there is no date that I can think of recently when the distributors didn’t want more from us than we were currently shipping, not that they didn’t have enough to meet their demand, but we tried to keep the inventory pretty tight.

So you know, it depends on how their forecasts are looking, but my guess is, certainly March is the strongest quarter for distributors, our POS at distribution grew also in the June quarter, and the September quarter we might grow, but probably not as strongly percent quarter over quarter as it has in the first two calendar quarters.

Tore Svanberg - Piper Jaffray

Great. And then finally with your 80 to 90 million CapEx plans for next fiscal year, could you talk a little bit how much capacity that would add as far as potential revenues I guess, what you already currently have?

Lothar Maier

Yeah, let me comment on that. Most of the CapEx for fiscal year 2007 is going to be for manufacturing equipments, so it would be production tools and our wafer fabrication facility, and our assembly facilities and our final test and logistics operations, so most of that is going to be tailored towards manufacturing expansion.

Most of the infrastructure projects have been completed the fad expansions and the test expansions even though we are planning one infrastructure expansion, which would be for our assembly operations in Penang, which will take about a year to complete. So for us, we have got the infrastructure in place to support sales of you know, quite frankly, twice where our current levels are, and these capital expansions and that’s must be we are going to make, we are really you know, we can govern what we need to spend to support our capacity growth.

So the lead times for these production tools is relatively short these days. We can generally get most of our production tools between six and 12 weeks, so you know, as our demand for more capacity becomes visible to us, we will make the investments, but we are looking at this 80-90 million to support us for all of fiscal year 2007, and if the market becomes even stronger, it may be a little bit less or more and if it’s a little softer, it might be less, but that’s our best estimate for ‘07.

Tore Svanberg - Piper Jaffray

Okay, thank you very much.

David Bell

You are welcome.

Operator

And next up from JMP Securities, we have Krishna Shankar.

Krishna Shankar – JMP Securities

Yes, congratulations on another solid quarter. What was your revenue mix on a global basis between OEM and distribution? And whether in distribution can you characterize how distributors are behaving in each part of the world?

Paul Coghlan

Yeah, I don’t have the exact breakdown between distribution globally and OEMs because some of what we call distributors -- some act like US distributors where what they do is they have their own customers, they get inventory for us, they are very, very important and useful channel for us. Some other distributors also are very useful but we do a lot of the primary selling and we use them for logistics, so you sort of have to bear with me if I don’t have that precise number for you.

Relative to overall distribution in different markets, I think I told you in the US, distribution POS group, how our bookings were down a bit, that’s I think pretty seasonal and US distribution came off on an extraordinarily strong March quarter, so it was good that they grew again in the June quarter. Going overseas; Europe, some of our industrial business has been strong there although this quarter was down a few percent. So Europe starting to move into the summer quarter so distribution at the end of the June quarter and probably early in the next quarter, it'll be at its low point in the year and then pick up in September and then Asia has been pretty consistent.

Krishna Shankar – JMP Securities

Okay. And then you know, looking set a higher level more towards 24 months, do you feel comfortable with the mix of your design winds and what you’re doing in terms of new products where you expect gross margins to maintain a fairly steady profile here and the high 70 there what factors should we look at, as the model gross margin quarter out?

David Bell

Yeah Krishna, this is Dave. Yeah, we are very comfortable where we are going with our new products. One that we’ve talked a little bit about, this conference call and previous ones is our progress in high speed A to D converters, for instance.

So those tend to be high ASP, high margin products so we are excited about the progress we are making in that area. Our new module products tend to be high as ASP products as well. So certainly we are not anticipating any erosion because the quality of our businesses going down in the future. I think that we are going to be sustaining the same kind of mix that we have right now. We have a broad mix everything from high-end consumer products, which are higher values to new things like high speed A to D converters and modules and so forth.

So I’m pretty confident that you’re going to see the same kind of quality of business, same range in gross margins if you look out in a couple of years from now.

Krishna Shankar – JMP Securities

And my final question Paul, have you given thought to increasing the dividend since your stock repurchases don’t seem to be having much of an impact on the stock price. What about decreasing your dividend significantly and appealing to a new class of investors?

Paul Coghlan

Well Krishna, we certainly gave thought to that and continued to get thoughts, so we increased the dividend by 50% this past year. So we went from $0.10 a share per quarter to $0.15 per quarter. We normally announce increases in the dividend once a year right around calendar year end, although we don’t know yet and haven’t made the decision, I think our present frame of mind is we would increase it again as we have in each of the years, the rate we'll decide at that time.

So, interestingly Krishna, at this time several months ago someone asked me the same question you did just in reverse. They said you increase your dividend by 50%, your stock didn’t go anywhere how about buying back more stock? So what we find is that these different camps in different interests at different levels, people want more of a dividend, others want bigger buyback, very few got a few one major dividend, some folks say, "Just keep focusing on growing the business, don’t worry about the cash balance." So what we try to do is balance all of this, so I think you can be -- you’ve seen this increased dividends, I think we continue to do that, I think we will also continue to go to buyback stock.

Krishna Shankar – JMP Securities

Thank you.

Operator

Our next question now comes from Bill Lewis with JP Morgan.

William Lewis - J.P. Morgan

Do you know the order patterns for December…?

Paul Coghlan

Excuse me Bill, could you repeat the question? We didn’t hear the beginning of it.

William Lewis - J.P. Morgan

Sure. Just on your comments about consumer bookings being more skewed towards the December quarter, can you say whether that is related to a few kind of large specific products or broad-based? And then further maybe address what it might imply about your December quarter revenue, does this compression at all strengthen December or is it just kind of push things up?

Paul Coghlan

Well we are certainly not going to talk about particular customers because they’re all very sensitive to their products and they want to drive the announcement of them et cetera, so high-end consumers, there are only so many players in the areas where there’s the most growth in high-end consumer. So to ask if we are more concentrated in high-end consumer customer base than say, industrial or communication, some parts of communications, the answer would be yes.

Relative to how well this is going to play out in December, at the moment, we would think it’s going to have a favorable impact on December. We have to see how the rest of our business goes and we have to see whether the market acceptance of these products, not the customer’s acceptance of our design necessarily but you the consumer’s acceptance of those products plays out.

William Lewis - J.P. Morgan

Okay, and a second question if I could, I think you’d probably be doing or have done new option grants at the beginning of the fiscal year, what should we expect for your option expense in fiscal '07 as compared to where it is now?

Paul Coghlan

I think it'll go up, some of the option expense, but that’s only one item in the whole income statement, so what you need to do is you need to look at each individual here, where your expenses are, where your revenues are et cetera, you might imagine and you work accordingly. I think it’s critical to us in the stock option area now primarily in the restricted stock area, to make it clear that we have clearly the best team we think analog circuit designers and other technical talent and administrative and manufacturing talents and sales talent throughout the company and we want to keep them energized, keep them focused.

So I think you’ll find that Linear believes it’s in a good position. Stock option accounting may have made it more difficult for other people for competitors who have less margin to kind of continue to get the best talent. We think it’s money well spent, it’s part of what influenced a slight down pick in operating income this past quarter it'll probably have another slight tick which could be offset by other areas, but it’s critical for us to spend in that area, we believe.

William Lewis - J.P. Morgan

Okay, thanks.

Operator

Our next question is from Simona Jankowski with Goldman Sachs.

Simona Jankowski - Goldman Sachs

Hi, thanks very much. Paul, I just wanted to see if I understood it correctly that your inventory and distributors, since they have been flat in the quarter are judging by your deferred income line and also related to that the decrease in US distributor bookings, do you think that was more related to just the seasonality in the September quarter from an in-demands perspective or are there any efforts by distributors to try to use their inventory?

Paul Coghlan

You know Simona, the inventory -- how do I best phrase this, when we deal with an OEM, the amount of our influence on the inventory at big OEM carries, is much less than the amount of our influence would be in dealing with the distributors, more an interactive play between us and the distributor. They tell us what their POS is, they tell us what they thing they’re doing, they talk about different areas, we talk about what we think is a reasonable amount of inventory and where it should be.

So increases or decreases in booking don’t always reflect on a one-to-one basis what’s going on in the POS area, some of them are timing differences. I think given that -- I don’t send our distributors, having a situation what they’re trying relative to Linear Technology to lower overall Linear Technology inventory, if anything probably some of them would rather have more Linear Technology inventory.

Now we tell them, "Look, we have four with lead times. If you have 911 call, we will respond in a week or two." So you know, why do you need this more, we would like to keep the inventory here. So it’s more of an interactive discussion between us and them than maybe it would be with a large OEM. But I think given all of that, my guess is the distributors -- not my guess, I think the distributors have had a really good first half of the calendar year, they are probably watching a little bit to see how the summer and fall plays out. Does that answer your question sufficiently?

Simona Jankowski - Goldman Sachs

Yeah, that answered the second part, just from the first part again, did you get the kind of the inventories flat a distributor coming out of the quarter compared to a quarter ago?

Paul Coghlan

No my inventory -- well yeah, worldwide it’s probably flattish.

Simona Jankowski - Goldman Sachs

Okay, then just another quick one, you mentioned that you had a minor inventory write down. I just don’t remember you guys mentioning things like that previously, I just wanted to see if you can put it in context. You know, is that something that typically occurs or it’s not -- can you just give is a little bit more color on that?

Paul Coghlan

Well, I probably should have said minor four times instead of once. We don’t often have inventory write downs to be frank with you, than to called scrap, we don’t often have those. But occasionally what happens is you have a product that’s not functioning exactly how a product or a couple of products, and you make a change to it. We have always been very conservative and when we make the change, we immediately kind of write off the old inventory.

You know, if gross margin changed by more than two-tenth of a percent, I probably would not have addressed this, but you folks seemed -- kind of fixated on gross margins and any little tweak one direction or the other and to extrapolate their from a trend, I though I would tell you that part of the reason was something that tends to be more of a one time event than a recurring event.

Simona Jankowski - Goldman Sachs

Got it, thank you very much.

Operator

Now we will move on and take a question from Morgan Stanley’s, Lewis Gerhardy. Mr. Gerhardy, your line is open, you may want to check your new button?

Lewis Gerhardy - Morgan Stanley

Good morning. You’ve answered a lot of my questions, but I just wanted to understand the sequential decline in the backlog. Is that most likely just driven by what you have been talking about, with regards to distributors, I would have think that they probably give you normally better backlog coverage than some of the other markets and maybe that’s why the backlog was down sequentially?

Paul Coghlan

Well, the backlog is off year over year, a bit. I think if it’s anything, it’s in distributor, but it’s not anything -- you know, everyone would like to have a little more backlog, probably. But I mean at four to six lead time, if you do the math you know, that turns out that this is a backlog easily within capabilities of what we do every quarter and what we have been doing historically. So you know, we’re probably getting questions from you on the backlog than we sweat out here internally, to be frank with you. So it’s probably distribution that has the impact.

Lewis Gerhardy - Morgan Stanley

Yeah, yeah with the lead time is not changing I was just trying to understand the dynamic there. And then can you just give us a sense of your book to bill, how it compared in the June quarter versus March you know, over under type of commentary?

Paul Coghlan

They are about the same.

Lewis Gerhardy - Morgan Stanley

About the same, okay. And then you titrate for ’07, fiscal ’07?

Paul Coghlan

We’ll start up at 30.5 I think and then you know, we’ll keep looking at it as the year progresses.

Lewis Gerhardy - Morgan Stanley

And what’s the status of the R&D tax grant?

Paul Coghlan

Well that’s you know, the papers as well as I do you know, the government hasn’t passed yet the R&D credit, usually they pass that and pass it retroactively, it kind of becomes a little bit of a political football and they have been doing it once a year so they haven’t turn in yet but you know, most people, us included, believe they will but I think we have to be careful and not put much of that into the rate until they do it.

Lewis Gerhardy - Morgan Stanley

Okay, that’s it, I was looking forward to your 30.5 guidance.

Paul Coghlan

Yeah probably not.

Lewis Gerhardy - Morgan Stanley

Okay, thank you.

Paul Coghlan

You are welcome.

Operator

The next question comes from Raymond James with Steve Smigie.

B>Raymond James - Steve Smigie

Great thank you. It seems like GDP seems to be throwing addition amount and you mentioned you have several 50% of your original quarters coming out of US, would that suggest that your year-over-year growth rate in fiscal ’07 would be probably be lower than fiscal ’06?

Paul Coghlan

First of all, you said that 50% of my shipments would come out of the US.

B>Raymond James - Steve Smigie

Well just not that –

Paul Coghlan

What we have is only 32% of my shipments actually come out of the US.

B>Raymond James - Steve Smigie

But I think you told me that 50% of your –

Paul Coghlan

Designing.

B>Raymond James - Steve Smigie

Yeah designing.

Paul Coghlan

So -- but I mean I still think it’s important that you do us as part of the worldwide economy not just the US economy. And then you know, I think that’s a really good question but when we try to track relationships on a one-to-one relationship therein we are not an economist, so quiet quickly up they know how we track for example I think if you go back to year, going to fiscal ‘06 there were some more concerns about inventory and other things in the start ’06 was slow for us, it come off as slow ’05 so you know, I think at the moment we would you know, our internal belief is ‘07 will turn out to be a better year than ’06 certainly.

B>Raymond James - Steve Smigie

Okay, and then just on the consumer electronics side, are there few segments within consumer charge you may expect to do better this (inaudible) get more design winds on LCD TVs would you expect that to be a better part of your consumer mix, could you just comment where your stronger areas of consumer might be, thank you.

David B. Bell

Well this is data you know, I don’t have the data in front me to tell you what areas are going to stronger or weaker frankly there are some areas that are relatively new in the consumer space I guess it having existed, first of all one you pointed out was like flat panel TVs, LCD TVs, Plasma TVs and the like I think that’s an area that there has been growing force in recent years where cell phone do their round for the last decade or so, but you know I’m not trying to avoid your question. Frankly we don’t have the data to give you a lot of resolution there. I suppose MP3 players, it has been something that’s growing lively during the last few years so obviously that’s a growing percentage for our business as well. To probably going any more find a resolution as well and kind of starting any particulars on a customer by customer basis as well, assuming don’t want to do that.

B>Raymond James - Steve Smigie

Okay, great thank you very much.

Paul Coghlan

You are welcome.

Operator

Our next question is from Soleil Securities, Paul Leming.

Paul Leming - Soleil Securities

Good morning. I was just wondering that if you could comment at all on any changes that you might be seen in the competitive landscape out there and specifically Texas Instruments talked about there high performance analog business growing 8% and in the June quarter, quarter to quarter. I just wonder if you really do see more of an impact from Texas Instruments or anyone else out in the market place. If you could take a stab at that?

Paul Coghlan

Sure, I will take a first stab. We’ve competed with Texas Instruments for many years and they are a formidable competitor. They bought analog companies as you know in the last decade, so that, you know we’ve seen more of them now than we did a decade ago. So I mean, I think they are a formidable competitor. We think our market share continues the same and continue or perhaps even improves. Just the June quarter they grew -- I am not familiar with their numbers, if they grew eight we grew five. I don’t know if you can make broad extrapolations from just one quarter, but we have a lot of competitors. They are certainly one of them. We don’t see a lot in new competitors. People I think in your space keep saying asking us to which getting more competitive. We tell you it’s a lot of the same people with us focusing on trying to service the market. So, you know I don’t think we’d attribute any greater -- we’ve seen any significantly greater competition from any one particular customer.

David B. Bell

Yeah, but one thing I caution you about too is that there isn’t a definition of what is high performance analog, and I think what we call high performance analog and what TI may call high performance analog could be two different animals, so you have to be careful without trying to draw to many parallels there as well. Also although TI posted some decent growth recently I think if you look the whole last year their overall annualized growth is something like 10% and change, so we have to look at the big picture there as well. And thirdly the one thing -- the last thing I point out is that I think that a lot of their recent growth has been in cell phones in particular. I know that they have benefited from the growth in cell phone sales and as know we are far less dependent on the -- you know the rise and fall of cell phone with cell phones in this last quarter being 8% of our business. So, I think there are -- we are certainly in the overall big world wide analog IC market, but I don’t think there’s quite as many parallels that as might become apparent when you listen to TI.

Paul Leming - Soleil Securities

Fair enough, thank you.

Operator

Our next question comes from Citigroup’s Craig Ellis.

Craig Ellis - Citigroup

Thank you, good morning guys. Just going back to one of the prepared comments, satellite staffing of 26% in R&D, clearly you’ve got some strategic things in mind but how should we think about the pace of hiring over the next year in R&D?

David B. Bell

Well, we -- you know, we are aggressively hiring folks so you know we would presume this time next year we will also say we hired more people in the R&D area. That’s critical to us, we are very selective in who we hire and as you know there is not a lot of analog talent and then to be selective within that makes it a challenge, but we wanted to communicate to you even with those challenges and those the high -- of selectivity, we did very, very well last year. We can hope to continue to do the same, its important in that you’re going to be a $2 billion etc company and grow at rates you want to grow, you need good talents and people help you get there.

Craig Ellis - Citigroup

So with R&D expenses being up about 7.5% sequentially the last two quarters should we think about that same pace of increase going forward or will it moderate a little bit?

Paul Coghlan

Well, that’s kind of difficult to answer, I mean it could keep at that, I would think next quarter could keep its similar pace to that, to be frank with you. So if we continue our successes so but I wouldn’t -- the income statement has a lot of line, not just R&D, so we are trying to fund the areas that are most critical and sometimes if we have to be more careful in our expenses, be more careful in areas where we think we can have some temporary flexibility.

Craig Ellis - Citigroup

Okay, that makes sense and then lastly Paul, just I know you don’t provide full year revenue guidance but just stepping back and thinking in broad terms, how should we think about the way Linear thinks that the industry’s growth potential this year and how you can grow relative to industry growth?

Paul Coghlan

Well, the industry numbers keep changing a lot if you looked at SIA, they have kind of change the fair bit I think, they have gotten more aggressive than their May outlook, my guess was that they’ll be a little less aggressive in their next one over the February ones so, we tend to be kind of a company that keeps its head down and doesn’t really spend too much time worrying about macro stuff although it certainly you can grow a lot in an environment where the over all industry doesn’t grow much. We think we believe, you know we got lots of opportunity to continue to grow internally, we want to grow 20% year over year, in every year and so its just executing to that but something, you are dependant on the market. So, I think you will find overtime we grow faster than the overall market. I think you will find we grow probably 25% faster over time but that’s all about execution and getting it done.

Craig Ellis - Citigroup

Okay, thanks guys.

Operator

Next, we have Ron Lee with UBS.

Ron Lee - UBS

Hi, thank you. Just some follow up on the R&D, the engineer resources hiring. I was wondering how much of the R&D cost increase is driven by purely hiring more engineers versus increasing the compensation per employee.

Paul Coghlan

As I said in my introductory comments, there are three things that impacted R&D. headcount additions, profit sharing, as we had a better quarter in profit sharing and also stock based compensation. So, it’s a combination of all.

Ron Lee - UBS

And can you get me some more color on which one, you know which one is more, which is less?

Paul Coghlan

Now we wouldn’t break it down into those little individuals segments on each quarter but all three of them were representative.

Ron Lee - UBS

And would you say your hiring is mostly hiring from your competitors or versus college hires?

Paul Coghlan

Well, we are hiring, we don’t want to start to fan issues here so let me put it best this way. We are hiring mostly and significantly mostly experienced analog talent.

Ron Lee - UBS

Okay, that’s fair. Okay, that’s it thank you.

David B. Bell

And the one thing that I would add is that I think it’s really a positive thing that we have been able to grow our design staff for the satellites 26% during the last year. Everybody on the call recognizes the new product is life blood of this company and hiring the best new engineers whether they come out of universities or come from our competition is essential towards the growing rate of new product delivery and in turn growing the company at a faster rate than the industry. That is very positive thing we have been so successful in adding to our R&D team and by no means have we dropped the standards for our hiring, if anything, I think our standards are really going up.

Ron Lee - UBS

Okay, do you have any more plans to open few more design centers?

David Bell

Well a little bit opportunistic about to be honest during the last year we opened three new design centers, we did Phoenix roughly a year ago we did in Munich just back in June, and we opened our Dallas design center this summer as well. It’s possible we would open some new ones but the reason that we open new design centre is one we find a cool high performance analogue IC design talent that we think we could hire and that’s why it kind of becomes an opportunistic situation.

Ron Lee - UBS

That’s it, thank you.

David Bell

You are welcome.

Operator

Our next question now comes from Auguste Richard with First Albany Capital.

Auguste Richard - First Albany Capital

Hi, a couple of product line questions. Your industrial segment has grown nicely over the last couple of quarters on a year over year basis, do you see that as being sustainable over the next year or so?

Paul Coghlan

Well, we think our overall business is going to grow for sure. How it breaks down by the difference in markets, we believe industrial should be one that contributes the add, so I guess the answer to that would be yes, we think that on a more macro view a bit that a lot of companies have a fair bit of cash, industrial expenditures here and in Europe for sure probably over the last seven or eight years have been pretty tight. So Y2k is now six years old, so we think there is the opportunity both for industrial companies to increase their spending. We read that overall domestic production capacity is at a higher level than it was before on a capacity utilization, so therefore there should be capacity edge, so I think overall we’d look at that as a positive area that should grow.

David B. Bell

Now what other thing you will add as to the industrial market isn’t a very glamorous market, so it doesn’t get a lot of attention, lot more attention focused on things like mp3 players and cell phones and what not, but it is important to understand we continue to release a lot of new products that are aimed at the industrial marketplace, data converters interface circuits, power management circuits and the like so we continue to grow the base of our product portfolio that’s going out for that industrial market as well.

Auguste Richard - First Albany Capital

Okay, and then just one quick follow-on and I apologize if you have already covered this. Your cell phone business is up nicely in the quarter, I think it’s the first year-over-year improvement in something like eight quarters. Could you just talk a little bit about the circuits or the kinds of phones --?

David Bell

Well, I think I have mentioned a little bit earlier the up tick from 7% to 8% is primarily due to some new models going into production that have higher Linear Technology content. And where we find the greatest opportunities as always are the high end phones. The phones that really demand better power efficiency and have larger screen and so fourth. So you know, the kind of functions that we would have on those products would certainly be things like battery charges that also DC to DC converters, we get longer battery life. If the cell phone has a large LCD screen especially that’s got TV capability where the screen might be on for long period of time having very high efficiency drivers is important and we got some good design winds in that area. And you know, also think is like photo flash starting to see some phones come out with actual strobe flashes in them, that’s creating some new market opportunities for us. So wherever there is change in product features especially the high-end creates more opportunities for us and that’s kind of what’s happening with some of these new models going to production and where we have got some more part contact.

Auguste Richard - First Albany Capital

Got it, thanks very much.

David B. Bell

You’re welcome.

Operator

Our next question comes from Sameet Ghanda with Bank of America.

Paul Coghlan

Excuse me Sameet, we could not hear the start of your question could you get a little closer to your phone?

Sameet Ghanda - Bank of America

Okay, sorry about that, just sort of a follow up on the discussion around cell phones and the design winds you alluded to and your Korean customer based cell phone business. It seems to be picking up after having stalled out, you know, most of last year. Can you help us get an idea really how much more improvement you see in business segment over the next few quarter is significant or it’s just the balance off to the low base?

David B. Bell

Well it’s kind of hard to predict, I’m not going to try and be evasive here, but our success and our percentage of sales in cell phones as you might imagine is also dependent on the success of certain models where we have hyper content. So that’s out of our control and even difficult for our customers predict to certain degree. I think if you went back a year, Paul had just stated -- we probably were more in like the 13% range for cell phones and if you are right it has gradually dropped down to I think a low point of 7% last quarter back up to 8% now. Is there the possibility that it could continue to gradually increase? Yes, I think there is that possibility. I would be very surprised if we got back up in to the 13% range again. But I think there is some possibility that we can continue to grow a little bit, but again it’s kind of hard to predict. I think one of the things that as I have said for a couple of quarters now that could help that grow would be at these truly high-end 3G phones with high capability and with digital TV capability start growing above roughly 1% market share that they are right now, that could help that 8% grow as well. So in summary, yeah I think that there is some potential for them to grow but it’s really difficult for that because it’s based on the success of particular models made by our customers.

Sameet Ghanda - Bank of America

Let me ask you the question in different way, taking your customer success a little bit on the equation. If you look at the high-end cell phone category, you know, depending on how you want to define it, how much higher content do you have in the typical high-end cell phone now versus lets say the same point in time last year?

David B. Bell

Well I don’t know if there is a big difference in the high-end, but it’s certainly true that the higher end phone have higher opportunities, there are more opportunities for us for the reasons I just mention. So in a high-end phone, we might have two to three ICs whereas in the low-end phone obviously you are going to be limited -- more limited because good enough is going to win the day there. So I don’t know if that there has been a real big change in our -- I guess penetration into these high-end phones I think what could happen, is that the high-end phones start selling a little bit better than they used to when these products with video capability and the like started having greater market penetration.

Sameet Ghanda - Bank of America

Okay thank you very much.

Operator

Our next question is now from Global Crown Capital, David Wood.

David Wood - Global Crown Capital

Good morning gentlemen, three questions. One number, you talked about satellite headcount and engineers. As a percentage of the total roughly how big are they relative to this total size of the your engineering staff. The second question I have is, there is a product transition going on even for notebooks in a PC this year, that should totally see the (inaudible) more into Q3 to Q2 and how would that effect your computer business in the upcoming quarter, and finally I just wondered that in June of this year, we at about two years ago having this conference call, I was thinking about what you would have noticed the difference between June of ‘06 and June of ’04.

David B. Bell

I think why don’t I answer your first question David, and then I can let Paul make a jump in. Our satellite design centers currently represent about two thirds of our design staff right now. So, it’s far easier as you might imagine to grow our staffing at some of these satellite locations than it is to bring people in to the high cost Silicon Valley area. So, that’s where most of our growth has occurred in recent years with that satellite. Does that answer your question?

David Wood - Global Crown Capital

Yeah, so basically two thirds of the total headcount in engineers?

David B. Bell

Yeah, in the design engineering community yes its roughly two thirds now at satellites, one third at our headquarters here in Milpitas, California.

David Wood - Global Crown Capital

Okay, thank you.

Paul Coghlan

What was your second question, David?

David Wood - Global Crown Capital

The third question is really the PC business, you didn’t mentioned anything about the computer segment and yet this is a year where there has been some significant product transition taking place which caused typically a lower June quarter than normally would due to major product transition in notebooks and desktops that Intel is instituting, I was wondering how this effect your outlook for the first fiscal quarter?

Paul Coghlan

It doesn’t have a big impact in our outlook, computer for us was 14% of our business. We have a small amount in desktops, we have maybe somewhere near a half or a third to a half in notebooks and then we have business in servers and other computer related product lines so, it’s not a big driver to our business. So, I don’t think it will have a major impact on the Q1 for us.

David Wood - Global Crown Capital

Okay, the last one was the -- what’s the difference between now and two years ago, roughly the same time and we just finished the June quarter back then and things looked quite a bit bleaker, I remember back then.

Paul Coghlan

Your memory is better than mine to be frank with you David, I don’t -- I know I remember what we thought about June ’05, where we are coming off a couple of flat quarters and anticipating another one and certainly the overall environment appears better now, than it was in 05, going back to 04, we grew obviously more than we did at this stage a year go but I really have to go back to all my notes as to what I was thinking about two years ago for the next coming quarter’s guidance for you. So you got me on that one.

David Wood - Global Crown Capital

Oh, no Paul, I just try to get an idea that we had the inventory corrections starting in the June quarter in ‘04 for all industry and it lasted through the early part of ‘05. We are into a period where the stock market thinks that we are having the same thing, lets say well, what about the companies, do they feel the same way?

Paul Coghlan

Yeah, I don’t think we feel there is a lot inventory corrections going on in our customers with our products. We think that there is -- if any thing we think its more of a macro economic thing, people just seem unsure. I think people to me -- and I’m not an economist, I think there’s less feeling there is too much inventory and more feeling they are just unsure where all these markets are going to go relative to consumer demands but you know, you should take that with a grain of salt, I’m not an economist

David Wood - Global Crown Capital

None of us are.

Paul Coghlan

Okay, thank you.

Operator

[Operator instructions]. And moving on next to Romeit Shaw with Lehman Brothers.

Romeit Shaw - Lehman Brothers

Thanks. Paul, can you just help clarify one point that the strength in communication bookings, as it look like that segment jumped up the most of the percentage, help me reconcile that with your comments on at least the expectation for seasonal weakness in the communication segment this summer?

Paul Coghlan

Well, I think some of the infrastructure stuff I think -- we just think the summer is generally where you have communications customers in Europe, bit generally the summer would be a little weaker than you would have in other quarters in that sector but the biggest area of weakness would probably be industrial. So I mentioned communications after I mentioned industrial but cell phone you know, is not a big part of our business you know, networking is a good segment of our business. There is some -- I don’t know if there had been too much seasonality in that infrastructure, there is a lot of infrastructure customers in Europe.

Romeit Shaw - Lehman Brothers

Okay Thank you.

Paul Coghlan

You are welcome.

Operator

Gentlemen we have no further questions in our queue at this time. I would like to turn the conference back over to you for additional or closing remarks.

Paul Coghlan

Thank you all very much for your attention, we concluded a good June quarter we have (inaudible) for the September quarter but believe 2007 looks to be a promising year for us. Thanks again for your attention and I wish you all a good day. Bye-bye.

Operator

And that does conclude today’s conference call, thank you everyone for your participation. Have a great day.

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Source: Linear Technologies Q4 2006 Earnings Conference Call Transcript (LLTC)

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