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Linear Technology (NASDAQ:LLTC)

Q4 2013 Earnings Call

July 24, 2013 11:30 am ET

Executives

Paul Coghlan - Chief Financial Officer, Principal Accounting Officer, Vice President of Finance and Secretary

Lothar Maier - Chief Executive Officer and Director

Robert H. Swanson - Co-Founder and Executive Chairman

Analysts

Joseph Moore - Morgan Stanley, Research Division

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Ross Seymore - Deutsche Bank AG, Research Division

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

John W. Pitzer - Crédit Suisse AG, Research Division

Terence R. Whalen - Citigroup Inc, Research Division

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

James Covello - Goldman Sachs Group Inc., Research Division

Christopher B. Danely - JP Morgan Chase & Co, Research Division

Auguste P. Richard - Piper Jaffray Companies, Research Division

Sumit Dhanda - ISI Group Inc., Research Division

Romit J. Shah - Nomura Securities Co. Ltd., Research Division

Aashish Rao - BofA Merrill Lynch, Research Division

Doug Freedman - RBC Capital Markets, LLC, Research Division

Operator

Good day and welcome to the Linear Technology Corporation Fiscal 2013 Fourth Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Paul Coghlan. Please go ahead, sir.

Paul Coghlan

Hello, good morning. Welcome to the Linear Technology conference call. I'll be joined this morning by Bob Swanson, our Executive Chairman; and Lothar Maier, our CEO. I will give you a brief overview of our recently completed fourth quarter and fiscal 2013 and then address the current business climate. We will then open up the conference call to questions to be directed at Bob, Lothar or myself. I trust you've all seen copies of our press release, which was published yesterday.

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 yesterday, we refer you to the risk factors listed in the company's Form 10-Q for the quarter ended March 31, 2013, particularly, management discussion and analysis of financial condition and results of operation.

Secondly, SEC Regulation FD regarding selective disclosure influences our interaction with investors. We've opened up this conference call to enable all interested investors to listen in. The press release and this conference call will be our 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.

As you can tell from our press release, the June quarter was a good quarter for us, with sales up 4%, which was at the high end of our guidance. Entering the June quarter, we commented that business had improved at the end of the December quarter and early in the March quarter and had remained largely at that new level throughout the March quarter. Since then, the June quarter business has then further improved. Bookings were better in each month than the corresponding month in the previous quarter. Consequently, quarterly bookings grew over the previous quarter. All of our major end markets improved, led by industrial. Cancellations were minor, and we had a positive book-to-bill ratio for the quarter. We continue to believe that inventories worldwide and customers were relatively lean exiting the quarter. Although worldwide macroeconomic concerns still prevail, we sense that these concerns have lessened during the quarter as particularly the USA is showing signs of improving economic outlook. With regard to our financial results, sales increased by 4%. The gross margin percentage increased from 74.8% to 75.2%. We again had shutdowns in our U.S. factories and expect them to continue at a similar pace in the September quarter.

ASP, average selling price, at $1.86 was up slightly from $1.84. Operating expenses increased modestly by $1.9 million. We had no shutdowns in the operating expense area compared with 4 days last quarter. This added expense was offset by exsorbing -- by absorbing expenses over higher sales base. Consequently, operating income at 44.9% of sales increased from 44.0% last quarter and was in our forecasted range. Below the line, interest income and expense were unchanged.

Pretax income at $135.9 million was $8.7 million or 6.9% better than the previous quarter. However, this improvement was offset by an expected increase in the effective tax rate as the company's effective tax rate increased to a more normalized 25% from 12.75% last quarter. The company's tax rate last quarter was lower primarily due to cumulative benefits from the reinstatement of the federal R&D tax credits and secondarily due to the release of estimated tax liabilities for fiscal years that are no longer subject to audit. As a result, net income of $101.9 million is $9 million less than the $111 million reported last quarter, again due to an increase in income taxes, which offset the benefits from improved sales.

Our return on sales was 31.1% versus 35.3% last quarter. Headcount increased by a little less than 1%, mostly due to modest increases in our foreign manufacturing plants. In summary, the effect of the items I just listed on the published quarterly results was that revenue was $327.3 million for the fourth quarter of fiscal year 2013, compared to the previous quarter's revenue of $314.5 million and $330 million reported in the fourth quarter of the previous fiscal year. GAAP diluted earnings per share of $0.43 decreased $0.03 from the previous quarter's EPS and $0.01 from that reported in the fourth quarter of fiscal 2012. Earnings per share would be $0.49 on a pro forma basis, which excludes the impact of stock option accounting and the amortization of debt discount, which is the theoretical difference between the company's convertible debt, actual interest and the interest it would potentially have had to pay if it had used straight bank debt.

During the fourth quarter, the company's cash, cash equivalents and marketable securities increased by $70.2 million to $1,525,000,000. The company spent $34 million to purchase 944,000 shares of its common stock in the open market. The company also announced that it would again pay a quarterly dividend of $0.26 per share. This dividend will be paid on August 28 to stockholders of record on August 16.

The June quarter is also the end of our fiscal year. As in fiscal 2012, much of 2013 transpired during a difficult macroeconomic environment. The first half of our fiscal year was impacted by concerns around the Presidential election and fiscal sequester in the USA, a change in government in China, sovereign debt issues in Europe, and stagnation in Japan, which weighed on business confidence. However, in the last quarter, business confidence has improved, although at a measured pace as macroeconomic concerns still exist. In this difficult environment, Linear grew 3 out of the 4 fiscal quarters and overall achieved modest growth. By end markets served, industrial and automotive grew, communications and the military were flat, and computer and consumer regressed.

Product innovation was strong as we introduced many new products this year. Expense control in our factories and operating areas in a low growth environment was a challenge that we largely met. Sales grew 1%, operating income was down 2%, and net income was up 2%. Revenues of $1,282,000,000 grew $15.6 million from the previous year. Operating income at $573.2 million decreased $8.9 million but was still a very respectable 44.7% of sales. Our effective tax rate at 23.1% was lower than last year's 25.7%. This had a favorable impact on net income, which at $406.9 million improved $8.8 million from the prior fiscal year.

Diluted earnings per share for fiscal 2013 were $1.71, an increase of $0.01 from the $1.70 reported for the prior fiscal year. From a balance sheet standpoint, cash, cash equivalents and marketable securities increased by $321.7 million, after spending $85.7 million to repurchase 2.4 million shares of common stock and paying $241.3 million in cash dividend.

As has been consistently demonstrated by our business model, this was generally good cash flow generation and return to stockholders in a relatively flat revenue year. The company returned to stockholders 25% of its revenue in the form of dividends and stock repurchases. As we turn our focus to fiscal 2014, we are optimistic about our future growth prospects and are forecasting to grow in the September quarter. We ended 2013 fiscal year with a good bookings quarter and a book-to-bill ratio greater than 1. We have gotten off to a good bookings start so far in July. Historically, the first fiscal quarter is a seasonally weak period for us. But given our current bookings level, we are currently forecasting that revenues for this first fiscal quarter of 2014 will be up 2% to 5% sequentially over the June quarter.

Now I'd like to address the quarter's results on a line-by-line basis. Starting with bookings. We had a good bookings quarter as bookings increased over last quarter. As I said earlier, each month was better than the corresponding month in the previous quarter. As a result, we had a positive book-to-bill ratio for the second consecutive quarter. Geographically, bookings were up both in the USA and internationally. Internationally, bookings were up in Japan and Asia Pacific, but down modestly in Europe. Bookings were up in absolute dollars in every end market except consumer.

At this time, every quarter we give you a breakdown of our bookings percentages by end markets to give you insight into those markets that drive our business. Coincidentally, each of our end markets maintain the same percentage of this total as in the previous quarter. This highlights the breadth of our bookings improvement.

Industrial continues to be our largest area and once again grew in absolute dollars. Industrial was 43% of our bookings. Geographically, Japan and the USA grew, whereas Europe was relatively unchanged. Our industrial business is very broad based, both geographically and by end products. The communications area at 20% also was similar to last quarter but also increased in absolute dollars. Most large communications infrastructure and networking customers were up. Cellphone continues to be very small part of our business and rounds to less than 1% of our business. Computer was also up in absolute dollars but remained 10% as a percent of sale. Within computer, we serviced opportunities in notebooks, desktops, tablets, servers, storage devices and printing and imaging end products. Notebooks showed the most improvement. Automotive continues to be a focused area for us, increasing in absolute dollars, while remaining similar as a percent of sales. Japan, USA and Asia Pacific grew for us, whereas Europe was down slightly from the previously very strong quarter. The expansion of existing Linear parts into new car models and also new parts for new programs continue to help us. Our battery monitoring products for hybrid and electric vehicles are achieving expanding market acceptance. In addition, we continue to distinguish Linear as a high-quality supplier in important international automotive manufacturers.

Consumer, which has been our smallest end market, although remaining at 3% of bookings, was down slightly in absolute dollars. Finally, the Military Space and Harsh Environment products remained at 6% of our business, which was up modestly in absolute dollars. The USA and Europe are the predominant geographic areas for these business. The USA will probably continue to be impacted by national budget savings expected out of the military area. In summary, this is a good distribution of business by end markets for us. Whereas 4 years ago, 14% of our business was in cellphone and high-end consumer related markets, now only 3% of our business, is in these generally commodity and volatile analog areas. On the other hand, automotive, which was 8% of our business 4 years ago, is now 18% of our business, reflective of the increasing electronic content in vehicles concurrent with high standards for quality and reliability.

Note that we have good balance of where our bookings are actually created with 42% of them created in the USA and 58% internationally, generally similar to last quarter.

On a fiscal year basis, industrial was 42%, up 1% from the prior fiscal year. Communications at 20% was down 1%, as was computer at 10%. Automotive at 17% was up 1%. Finally, consumer at 3% and the military and space at 6% were unchanged.

Moving from bookings to sales. Net sales increased 4% from the prior quarter and were down 1% from the similar quarter in the prior year. Sales increased both in the USA and internationally. Within international, sales increased in Japan and Asia Pacific and were down modestly in Europe.

In summary, the USA remained at 29% of sales. Europe at 19% was down from 20% last quarter. This was not unusual since the March quarter is usually seasonally the strongest quarter for Europe. Japan at 15% was up from 14% last quarter. The new government has instituted strong stimulus, which, while weakening the yen, may help exports moving forward.

Asia Pacific at 37% of sales was unchanged from the prior quarter. For the fiscal year, the percentages were generally similar to the just completed fourth quarter: USA, 29%; Europe, 18%; Japan, 16%; and Asia Pacific, 38%.

Moving to gross margin. Gross margin at 75.2% of sales improved from 74.8% in the previous quarter, largely due to absorbing fixed costs over higher sales base and a higher ASP at $1.86 versus last quarter's $1.84. The company continued having shutdowns in its USA plants in the quarter and will continue to do so in the September quarter.

R&D. R&D at $60.6 million increased $2 million from the $58.5 million reported last quarter, however, decreased as a percent of sales from 18.6% last quarter to 18.5% this quarter. Labor costs increased primarily due to fewer shutdown days and modestly higher profit sharing on increased sales. Other non-labor-related R&D expenses also increased modestly in the period.

SG&A. Selling, general and administrative expense at $38.3 million was similar to the previous quarter and consequently decreased as a percent of sales to 11.7% from 12.2% in the prior quarter. Labor cost increased similar to R&D, largely due to fewer shutdown days and modestly highest profit sharing on increased sales. However, non-labor-related SG&A cost decreased by a similar amount, largely in the marketing and legal areas.

Operating income. As a result of the above, operating income increased by $8.8 million or 6.4%, as a percentage of sales increased to 44.9% from 44.0% last quarter. Spreading fixed costs over an increased sales base largely contributed to this improvement. This is strong profitability and clearly puts us ahead of our peers in this financial performance measurement. Both interest expense at $6.8 million and the amortization of debt discount at $5.4 million were similar to last quarter. Interest income of $1 million was also similar to last quarter. As a result of all the above, the company's pretax profits were $135.9 million, up $8.7 million from last quarter. Pretax profits are now 41.5% of sales versus 40.4% last quarter, with the improvement due primarily to higher sales volume.

Our quarterly effective income tax rate of 25% did not have any discrete items, whereas the previous quarter had an effective tax rate of 12.75%. This lower rate was due primarily to cumulative benefits from the reinstatement of the federal R&D tax credit and, secondarily, due to the release of estimated tax liabilities for fiscal years that are no longer subject to audit.

Going forward, the company expects that its effective tax rate for the September quarter will be 25.75%, which will include only a half year's benefit of the R&D credit, which is currently due to expire at the end of the calendar year or in the middle of our fiscal year.

The resulting net income of $101.9 million is a decrease of $9 million from the previous quarter, as the significantly higher tax rate was only partially offset by higher sales volume and operating spending efficiencies.

The resulting return on sales was 31.1%, down from 35.3% last quarter. The average sale -- the average shares outstanding used in the calculation of earnings per share increased by 284,000 shares. Stock option exercises and employee-restricted stock grants were largely offset by the purchase of approximately 944,000 shares in the open market.

GAAP earnings per share was $0.43, which was a decrease of $0.03 from the prior quarter, again, due to the particularly low effective tax rate in the prior quarter. On a pro forma basis, without the impact of stock-based compensation of $15.8 million and noncash interest expense of $5.4 million, diluted earnings per share would have been $0.49 per share compared with $0.54 last quarter and $0.50 in the similar quarter last year.

Moving to the balance sheet. Cash and short-term investments increased by $70.2 million, $163.7 million was provided by operations, and $13.7 million was provided from the exercise of stock options by employees. $61.9 million was paid in cash dividends, $5.4 million was used to purchase fixed assets, and $39.7 million was used to repurchase both common stock purchased in the open market and restricted stock from employees.

For the 109th consecutive quarter, the company had positive cash flow from operations. Our cash and short-term investment balance is now $1,524,700,000 and represents 73% of total assets. The company currently plans to use approximately $845 million of its cash to call its outstanding convertible bonds in May 2014.

Accounts receivable of $145.3 million increased by $2.2 million from last quarter due to the increase in shipments. Our days sales and accounts receivable were 41 days, similar to last quarter. Inventory at 87.2 million increased modestly 670,000 from last quarter. Linear raw materials inventory increased 216,000, WIP inventory increased 342,000 and finished goods inventory increased 112,000. We continue to believe investing modestly in WIP inventory, while maintaining our production capabilities will again enable us to best service customers as demand accelerates.

In summary, our quarterly average inventory turns is 3.7x, similar to last quarter. Deferred taxes and other current assets of $36.6 million decreased $39 million. This decrease is largely offset by corresponding increase of $35.5 million in current deferred tax liabilities, as deferred taxes are rising from our convertible bond have moved from the long-term portion of the balance sheet to the current portion since the bond is callable within a year.

Property, plant and equipment decreased by $6.8 million. We had modest additions of $5,438,000, and we had depreciation of $12,287,000. Most of the additions were for building improvements in our Raleigh, North Carolina, design center and for manufacturing, test and assembly equipment worldwide.

For fiscal 2013, additions totaled $17,369,000 and depreciation was $49,397,000. In light of a flat sales year, we had modest additions given we believe we have generally adequate installed capacity to grow the business substantially.

For fiscal 2014, we expect additions to be roughly $25 million to $30 million and depreciation roughly $50 million. Other noncurrent assets are now 0 as costs related to the convertible bond are no longer long term. Finally, on the asset side of the balance sheet, our return on assets was 19.5%, down from last quarter's 22.2%, which had benefited from the lower tax rate discussed earlier.

Moving to the liability side of the balance sheet. Accounts payable decreased by $1.8 million, largely due to timing differences on recurring payable items. Accrued income taxes, payroll and other accrued liabilities increased by $26.2 million. The largest items here are our profit-sharing accrual, income taxes payable and accrued interest payable on our convertible debt. Our interest payable accrual decreased as we had our semiannual interest payout this quarter. The profit-sharing accrual increased. We pay profit-sharing to our employees semiannually in the fiscal first and third quarters. Consequently, the accrual increases in the second and fourth quarters like this quarter and is reduced in the first and third quarters.

Finally, our income taxes accrual increased due to the higher quarterly income tax charges discussed earlier. Deferred income on shipments to distribution increased $2.3 million as our shipments to U.S. distributors were greater than what they shipped out to their end customer. This account decreased in the prior quarter. And as business has improved the last 2 quarters, we have needed to increase our U.S. existing [ph] inventory. Worldwide, we continue to believe our inventory levels are lean. We continue to closely control our inventory at distribution to properly position the inventory relative to potential demand.

Our senior convertible notes increased by $5.3 million. This increase reflects the noncash amortization of debt discount charged to the income statement. We have also reclassed our convertible senior notes to current, as we currently expect to call these notes within the year. Since we reclassed these notes to current liabilities, our current ratio has been reduced from 12.9:1 last quarter to 1.7:1 this quarter. Deferred tax and other long-term liabilities of $90.5 million decreased $75 million, largely due, again, to deferred taxes on a tax deductible interest on our convertible notes moving to short term.

Changes in the stockholder equity accounts were primarily the result of the usual quarterly transactions for net income, dividends paid and employee stock activity. The company announced that it will again pay a quarterly dividend of $0.26 per share. The company believes that paying a dividend is an important way to return value to its shareholders. The company began paying a dividend in 1992 and has increased it every year since and currently pays approximately a 2.5% yield.

Looking forward, over the last 2 quarters, our business has steadily improved at a measured, consistent pace. Customers are still cautious and, on average, have a neutral stance on the global economy. There is enough innovation, particularly in the industrial and automotive end markets to drive this steady improvement. However, customers generally have been ordering to meet immediate demand and not unnecessarily growing inventory.

For Linear on the positive side, June was a good bookings quarter. Bookings definitely improved from the previous quarter and we had a positive book-to-bill ratio. Our bookings were stronger across all major end markets. In particular, industrial and automotive continue strong. Both of these end markets are in innovation cycles: energy efficiency and smart manufacturing in industrial, and higher electronic content in automotive. In many ways, these markets are moving into a new electronics age as electronics are replacing many previously mechanical functions.

Both of these end markets are also the fastest growing within the analog industry. In the last 3 calendar years, the overall analog market grew at a 7% compounded annual growth rate, whereas within this analog market, industrial grew at a 12.8% compounded annual growth rate and automotive grew at 22.6%. Linear itself overall grew 12.5% compounded for the 3-year period. And within Linear, industrial and automotive also grew faster than the industry average.

Finally, we've gotten off to a good start in bookings, so far, in the month of July. For us some signs of caution are: overall, customers are generally acknowledging growth but booking to the low end of our published lead times and then expediting us to meet their current demand. So their inventories are low, but they are relatively risk adverse to adding to inventory levels. Although our leading end markets are doing well, other important end markets, such as computer, are showing little near-term expansion.

Finally, the global macroeconomic outlook is in need of further improvement. The USA, although improving, still is forecasting less than average annual growth. Europe continues to have more headwinds than tailwinds and even Germany is expressing concerns. Japan is transitioning to more stimulus and a weaker yen, which so far seems to be successful in improving Japanese demand. Finally, China is trying to balance both growth and inflation.

Summarizing these various data points gives us a positive bias, and we currently forecast revenues to improve in the September quarter 2% to 5% over the June quarter. We expect operating income to grow in absolute dollars but to remain generally similar to slightly up as a percent of sales. Our effective tax rate will be 25.75%. The company expects to continue having limited factory shutdowns in the quarter, but no shutdowns in the operating expense personnel areas. Looking beyond these near-term market conditions, the major market opportunities that drive our business demonstrate continuing growth, particularly in the industrial and automotive end markets. Increased analog innovation in our other end markets will also benefit us.

Finally, we are very well product and end-market positioned to execute our strategy. We are strong in the areas we want to be -- industrial, communications infrastructure and networking, and automotive -- and believe that we are in an innovation-driven environment. Our strategy is differentiated from our other analog competitors. We dominate in different end markets. We are more reliable supplier with consistently lower lead times and better support. And our technology and support is valued as evidenced by our higher operating margins.

I would now like to open up the conference call to questions to be addressed to either Bob, Lothar or myself.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll hear first from Joseph Moore with Morgan Stanley.

Joseph Moore - Morgan Stanley, Research Division

I was wondering in terms of the macro environment, you talked about the U.S. being strong. What's your assessment of China? And to the extent that you can see it, I mean I know you sell direct in China, but also to the fact that you sell equipment and chips to China, is there any impact from kind of the slower conditions there?

Paul Coghlan

For us, actually, China has been doing reasonably well. So we haven't -- any major macro changes, if there are any major macro changes in China, we haven't felt the impact of those yet.

Joseph Moore - Morgan Stanley, Research Division

Okay, great. And then when you talk about the sort of growth priorities and you talk about industrial and automotive, can you put communications into that context, because you guys have done pretty well historically in sort of communications infrastructure markets? And how do you prioritize resources into that market versus the others? And think about long term growth rates versus the others.

Paul Coghlan

Well, we actually say that we focus on 3 end markets. In my closing comments, I mentioned those are industrial; communications, but within communication, infrastructure and networking, not cellphones; and then finally, automotive. So that we had more growth in industrial and automotive than we have had in communications infrastructure. But that's still an area that values high-performance analog, so it's still an area of focus for us.

Joseph Moore - Morgan Stanley, Research Division

And the long term growth rates -- I'm so sorry I misunderstood that, but the long-term growth rates you think are similar in communications to industrial?

Paul Coghlan

No, no. We would think the long-term growth rate in automotive, in particular, is greater than communications. And in our opinion, industrial will probably turn out to be better than communications infrastructure. But that doesn't mean communications infrastructure isn't an area of emphasis also.

Operator

And next we'll hear from Will Stein with SunTrust.

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

Your contribution margin on both the gross and operating line were good, and I'm hoping you can remind us what the total front-end capacity is for the company, so we can get an idea of utilization, and whether we can continue to expect these levels of contribution margin to continue?

Unknown Executive

Yes, our capacity for the front ends, which is the wafer fabs is, from a sales standpoint, we could easily get to around $400 million a quarter with the equipment and facilities that we have in place. We probably would have to add a few people to reach that number. But from a capacity infrastructure standpoint, we could support $400 million.

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

So fair to assume that the contribution margin levels that we saw, particularly on the gross line, should continue at about that pace going forward? Or is mix a bigger factor in that?

Unknown Executive

I think as sales go up, you'll see the gross margins continue to improve. One of the things that's holding the gross margins down is the fact that, particularly in the front ends, is that we still are doing shutdowns every quarter. So during the shutdowns, the lights are still on and the depreciation continues, but there is no outputs in the factories. So I would expect as sales grow, gross margins would improve, as well as we absorb the cost in the front-end factories.

Operator

And now we'll take a question from Chris Caso with Susquehanna.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Wondering if you could expand on the comment you made about the increase in distributor inventory. Can you go into a little bit of reasoning of that? Is that -- I guess as TI talked about on their call that the fear of lead times increasing is it on the part of increasing confidence in the second half? What's your view?

Paul Coghlan

Well, last quarter, Chris, we decreased our shipments into -- into the -- pardon me, we decreased deferred revenue last quarter as we shipped less to -- this is the March quarter, as we shipped less to the distributor than they shipped out to our U.S. distributors. This quarter, we thought their inventory was low. They thought their inventory was low at the start of this quarter. At the start of this quarter, what we did was we increased it in our U.S. distributors. And looking forward, they grew last quarter their sales, and we would expect they would continue to do so. So it's more -- it's not concerned about lead times stretching out, I believe, it's more just making sure they have the right amount of inventory to service demand.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

And just to clarify, you did not increase the inventory at the Asian distributors then?

Paul Coghlan

Worldwide, our inventory did not increase.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Okay, great. And I guess just as a follow up, just looking at it from the bigger picture. We've all kind of been waiting for the typical semiconductor recovery for some time now. I guess based on your comments -- well, maybe I'll let you answer the question. I mean it seemed like that you still had some concerns maybe a little more optimistic that this is the year?

Paul Coghlan

Well, to be frank with you, we would rather -- a continued measured improvement without much dramatic inventory increasing as opposed to this recovery you've all been waiting for, which you, I think once it happens, would worry that it's inventory driven not demand driven. So that frankly, from our standpoint, we'd love to see this consistently growing as it is and just keep on going. So that's kind of how we feel about it. And right now, we don't see any reason why that should change. I mean, people have pretty good inventory control, customers -- suppliers like ourselves and some of our competitors have reasonable lead times. So hopefully, the growth continues to be what we hope equates with increasing demand.

Operator

We'll hear next from Ross Seymore with Deutsche Bank.

Ross Seymore - Deutsche Bank AG, Research Division

Just a question on your comms business, Paul. You talked about what the bookings did in the quarter. Can you guys give us a feel of splitting that 20% comms down between the wireless and the wireline side of things and any different dynamics you see between those 2, please?

Paul Coghlan

Yes. My guess is that 60-40, 60% networking, 40% wireless infrastructure. And both -- I said in my comments that major customers in both areas bookings improved in absolute dollars. So I don't think one area improved more dramatically than the other.

Ross Seymore - Deutsche Bank AG, Research Division

Great. And I guess for my follow-up, the once a year I get to ask this question, do you give of what the actual backlog was ending the year, could you give us that number, please?

Paul Coghlan

I can, Ross. I said here yesterday that Ross was going to ask me this question.

Ross Seymore - Deutsche Bank AG, Research Division

I got to be consistent.

Paul Coghlan

Yes, I'm glad you do. We ended the fiscal year with backlog of $151,136,000.

Operator

And it looks like Tore Svanberg will -- with Stifel has the next question.

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

My first question is on the shutdown. I assume we're now counting them by days as opposed to weeks. Is it fair to say that maybe even though you will have shutdowns in the September quarter that it's actually coming down?

Lothar Maier

I would say it's probably more flattish right now from our shutdowns. But you are correct, we do measure it in days.

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And my follow-up would be on that same topic. So when would you not have shutdowns? Is that going to be a function of your revenue run rate, or is it a little bit more dependent on your customers' willingness to order at slightly higher lead times?

Lothar Maier

No, it's directly tied to revenue. So as revenue goes up, we'll peel away days of shutdowns, and hopefully, in the next few quarters, we'll get down to none.

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Okay, very good. Just one last question, on the lead times, you said that customers are still ordering to the lower end of the range. Is there any reason why that would change? I mean, would that change with the global economy growing faster or -- I'm just trying to understand if that would change at all this time around.

Lothar Maier

Well, I mean, the customers they're right now -- obviously, nobody wants to carry inventory. And so if they can order to the low end of the lead times and get their product, their -- I guess we probably trained them to do that. I think as the capacity starts to tighten up, people will adjust their lead time expectations to the fact that lead times will extend. But in Linear's case, we have relatively tight window for lead times. Typically, our lead times are around 4 weeks. And for the most part, people can get those lead times in most any market condition. I think what we're seeing right now is the fact that they're ordering. And again, this is just a continuing sign that customers aren't carrying a lot of inventory. What I suspect is happening is our customers get an order, they place an order on us within the low end of lead time, and since their customers are pushing them, they push us that they need to have it right away. So I think it's just a pattern through and throughout the entire chain, not just our customers, but our customers' customers are really inventory resistant, and that's what's causing some of this expedite. And as business improve, I think probably lead times will end up more towards the middle of our distribution.

Operator

And next we'll hear from John Pitzer with Credit Suisse.

John W. Pitzer - Crédit Suisse AG, Research Division

A couple of questions guys. I was supposed to lead about asking the gross margin questions because you guys absolutely have the best gross margin in the industry. But, Lothar, can you quantify what the impact to gross margin is for the shutdowns? And at what revenue level you think the shutdowns go away?

Lothar Maier

I don't think I can quantify what the shutdowns effect directly. But I figure there's significant cost, particularly in the front ends where even though we're shutdown and we save labor expenses, in a wafer fab, depreciation is a big expense. You can't turn the electricity off. So there is a lot of ongoing cost. So there's a pretty significant leverage that takes place once we fully utilize our factories. And so I think we'd have to get up in sort of the 380 range to kind of get the -- get rid of the full burden of the under-absorption of the factories.

John W. Pitzer - Crédit Suisse AG, Research Division

And then, guys, as my follow-up. Paul, can you help me better understand how mix impacts gross margin? The reason I'm asking is if I go back to sort of June of 2010, you guys had unbelievably high gross margins at about 78%. And ever since that time period, every quarter, gross margin has been down year-over-year, pretty consistently. And I know some of that's been a headwind to revenue. But since June, it's my impression you guys have actually done a better job mixing towards end markets that you structurally want to be in. So I'm just kind of curious as given that consumer's less, handset's less today than it was in June, how mix -- how should we think about mix relative to gross margin percentage?

Paul Coghlan

Well, I think if you go back to the 2009, I think, it was the example you mentioned, or 2010, what we did is we had revenues of about $388 million. And we also had bookings substantially higher than that in that quarter. So that what we did is we needed to -- we felt we needed to build out our capacity. So we added a lot of capacity costs. We made some changes in the flows. We added some people. So we added some fixed cost. Since then our sales have dropped off and have kind of dropped off fairly significantly. I think it got down close to $300 million. And now we're climbing back up. So it's really not a mix issue that's causing the changing gross margin. It's really more utilization of these fixed costs that we added at the very period you're noting there was a change.

Operator

And next we'll hear from Terence Whalen with Citi.

Terence R. Whalen - Citigroup Inc, Research Division

The first question relates to the December quarter. TSMC -- and understanding the visibility as well, TSMC, because of dynamics in the mobile space, made commentary already on their expectation for December growth. I was wondering -- I understand that you're looking at completely different markets, but I was wondering if we look back over prior December quarters, the past 3 years we've seen declines that have been pretty consistent on that 3% to 4% just sequential level. Is that a new pattern emerging in terms of the annual industrial cycle for your -- inventory cycle for your market? Or are you at a point where you have a feeling whether or not December quarter will be up or down?

Paul Coghlan

That's a good question. We've asked that internally, actually. We noted that the last 3 years the December quarter, particularly in the international side of our business was down. Now we can point to macroeconomic events that prevailed during those periods. So as we look to this year, we don't think there is necessarily something inherent in our business that would require us to have downturns in the December quarter. But 3 years in a row is certainly a pattern. We think the macro environment will be better this year as you commented in the beginning of your question, we don't forecast out and it's early to call December. But internally, we'll be interested in looking at it, but we don't think there's something inherent in our business that would necessarily mean that, that would always be a down quarter.

Terence R. Whalen - Citigroup Inc, Research Division

Okay. And then as my follow-up, you made a comment that July bookings, so far, have been encouraging. Can you just dig into a little bit deeper detail there? Can you, perhaps, quantify whether that means that the run rate is above monthly run rates from the second quarter? Or are you talking about just relative to normal seasonality in July? And can you just -- sorry, remind us what the normal seasonal pattern of orders for the September quarter is on a monthly basis?

Paul Coghlan

Wow, that's a big long question. We don't really put too much emphasis on 1 month, so we don't like to be forecasting months. But we did say that the bookings improved in July, and we got off to a good start in July. So now that's the first of the summer months. August is a summer month when there's vacations, et cetera. That typically isn't a particularly strong month. We don't know what this August will be. And then September, depending again if coming out of the summer if the macro environment is pretty good. It's normally a pretty good month, but again we have to wait and see on that. So I think what we just wanted to tell you was we gave guidance that was above our seasonal summer quarter norm, when we guided 2% to 5%. We wanted you to know that, that was based on some real figures, i.e. July has gotten off to a good start, and we had a positive book-to-bill ratio and good bookings in the June quarter.

Operator

And next we'll hear from Steve Smigie with Raymond James.

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

I was hoping you could talk a little bit about the tax rate. Do you think this -- the guided rate that you gave will be sort of consistent going forward? And just, if you could comment a little bit on R&D tax credit, it seems like Congress is never going to do it at the start of the year, always at the end. Should we just assume March, there's some sort of true up typically? And what would be an average magnitude if that were to continue versus, like, the 12.7 that we saw in this cycle, or this past year?

Paul Coghlan

Yes, Steve, I think, we are forecasting a 25.75% effective tax rate as I said. We're assuming, for financial statement purposes as we're required to, that the R&D credit will stop in December. What we think as business people is that the R&D credit will probably get passed, again, as it has been every year by Congress. We hope it gets passed in the March quarter as it was this year. The previous year, I think it got passed in the June quarter. So when that happens, I think our effective -- our normal effective rate with an R&D credit would be roughly 25%. So if you want to push out taxes at least that far into next March, my guess is we'll have a discrete benefit next March. I don't think it'll be as dramatic as the discrete benefit we had in the March quarter this period, but we will need to true the overall rate to 25% after having booked at 25.75% for probably 2 quarters.

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

Okay, great. And then just another gross margin question. You guys sort of covered just about every angle. But what revenue level do you think you'd hit your peak gross margin? I guess it seems like -- you said around $380 million most of the shutdowns should be done. So it's somewhere between $380 million, $400 million. Is that the peak, or is there something different you've done in terms of factories this time that would change that?

Paul Coghlan

Well, we're at 75% gross margins now. So the peak is not going to be a huge peak. So I think is -- when we're hitting on all cylinders, all the -- we're tooled up for $400 million a quarter of sales. So when all the capital equipment we have and all the shutdowns are gone, I think you can see us being back to the best gross margins we've ever seen.

Operator

And next we'll hear from Jim Covello with Goldman Sachs.

James Covello - Goldman Sachs Group Inc., Research Division

Paul, first, you specifically, on Europe, you commented about, I believe, it was industrial bookings in Europe were flat this quarter. Can you talk about the progression of the order activity in Europe? It seems like that might have gone from a headwind to no longer being a headwind? And is it your view that it can potentially become a tailwind especially in the industrial sector over the next couple of quarters?

Paul Coghlan

That's a good question. Normally, we would have expected bookings have gone down in Europe in the June quarter. So normally the March quarter is the strongest. June is pretty close. The September quarter is usually pretty weak in Europe because of all of the vacations that take place. So I guess if I'm going to read any sign into that, I think your question is accurate that that's probably a positive more than a negative what's happened in Europe. And maybe it's -- there's less headlines on the sovereign debt issues, although Germany is complaining now that it doesn't want to carry the bag much further for everybody. But -- so it's kind of hard to read because you're coming into a summer quarter, which is usually kind of down in Europe. But industrial activity's pretty good, automotive activity is pretty good, and that helps fuel industrial activities. So I guess overall, I'm giving you a long-winded answer, I think sort of what's implied in your question we would agree with, that this is more of a positive than a negative, what's happened in Europe in the June quarter.

James Covello - Goldman Sachs Group Inc., Research Division

That's terrific and a good lead into my follow-up. You guys have done a terrific job. You commented auto is now 18% up from 8% not too long ago. When you look back on it, how much of that is unit growth versus content per box or just content per vehicle if you will?

Lothar Maier

Both of them are important. But I would say contents is more important than the absolute number of cars. It's just amazing how much electronics are going into the cars presently, and it's even more amazing how much it's going to be in the future.

Operator

And now we'll hear from Christopher Danely with JPMorgan.

Christopher B. Danely - JP Morgan Chase & Co, Research Division

Just a quick one on the model. Any changes, up or down, on OpEx going forward? Or any guidance for OpEx for the fiscal year?

Paul Coghlan

Well, I think, as a percent of sales, OpEx should come down a bit if we continue to grow at these levels for the fiscal year. But we don't have any shutdowns. We didn't have any shutdowns at the operating expense level or the professional staff level, if you will, in the June quarter. We're not expecting to have any in the September quarter. December quarter, the Christmas holiday period, sometimes there's a shutdown, but we don't know about that yet. So I don't think there'll be the shutdown environment in 2014 that there was in 2013, but I think sales will grow at a faster rate than expenses probably.

Christopher B. Danely - JP Morgan Chase & Co, Research Division

Great. And then for my follow-up, forgive my longer-winded question, so you guys clearly have industry-leading gross and operating margins. You had them for decades. And in terms of your cash generation, it's unbelievable. You talked about repaying the convert in June, but you still have $3, I think, in net cash. You probably another $1 in net cash by then. And even though your margins are very high, if you look at your dividend, your payout ratio, your buyback, it actually ranks near the bottom of your peers. This wasn't true a decade ago, but definitely things have changed in semis over the last 10 years. So I was just wondering if you guys could sort of address the fact of the industry-leading margins yet the payout ratio or in terms of returning that cash to shareholders sits towards the bottom of your peers, and if you plan on changing that.

Paul Coghlan

Well, as I said in my comments for fiscal 2013, we return to shareholders 25% of our revenue. My guess is none of my peers are doing that. But -- so I think we have been returning it, and we have made it clear that one of our objectives was to pay down the convert. So that we don't really, at the moment, plan to add more debt to use it to return to shareholders our debt-generating capability. We do believe that once the debt is behind us, we'll be able to buy back more shares because we'll have -- we won't have a need for the cash we continue to generate to reduce debt and...

Robert H. Swanson

[indiscernible] the debt can go as far, yes.

Paul Coghlan

Yes. And then the dividend, we've grown it every year. So we think we're being responsive. We hear your question. But I guess, overall, we think we're being responsive.

Operator

And now moving on to Gus Richard with Piper.

Auguste P. Richard - Piper Jaffray Companies, Research Division

Just want to talk a little bit about Dust Networks and how that acquisition has been progressing for you. And can you give us any color on where you are with them?

Lothar Maier

We've got a little over a year behind us on this thing, and the acquisition from integrating into the company has gone well. We've been able to retain all of the key employees that came along with the Dust acquisition. Our products continue to gain traction in the market. We had a better quarter last quarter in terms of the sales of Dust products. But again, this is -- the target customers for this market are really the industrial market. And this is something that's going to have to play out in the next several years. The -- from the product side, we're -- I think we've announced the next-generation Dust product going to be released to the market. We're sampling it. It's gotten good traction from customers. So it's kind of like business as usual on this thing. It's kind of making progress as we expected.

Auguste P. Richard - Piper Jaffray Companies, Research Division

All right. And then as a follow-up...

Paul Coghlan

Gus, if you remember when we first announced the micromodules, we said it would take time for those products to become widely accepted in the marketplace. And they are widely and getting more widely accepted now, and it has taken time. So we think Dust will kind of have the same path that the micromodules had.

Auguste P. Richard - Piper Jaffray Companies, Research Division

Okay, very helpful. And then just on the industrial cycle, it seems like we're in a bit of an upgrade cycle. And I was wondering if you could talk a little bit about how long those typically last, and how you see this one versus prior cycles.

Lothar Maier

I'm not sure I could predict how long it lasts. But the industrial market, they have sort of longer-term trends. And the trends that we're seeing in the industrial space is obviously, the industrial customers are focused on bringing products that distinguish themselves from their competitors. And things like energy efficiency, portability, providing automation, those are all trends that we see presently, which aren't a 1 or 2 quarter phenomenon. We think those kinds of trends are going to go on quite frankly for years. So the industrial business is somewhat connected to the macro. So if the macro issues are out of the picture, then I would say the industrial businesses is looking at sort of many, many year cycle of product enhancements.

Paul Coghlan

And, Gus, there's a real emphasis in the industrial world to get more productive. I mean, 5 years ago, you wouldn't have dreamt companies in the U.S. would be talking about bringing manufacturing back to the U.S. And now you're hearing companies talk about bringing manufacturing back to the U.S. They're not saying they're bringing it back and necessarily hiring a lot more people. They're saying they're getting more productive. They're trying to get more productive. They're looking at energy efficiency ways, smart manufacturing ways, using more electronics. So all of that, we feel that we hear more of that from our customers in the last year than we ever did before. So it's that, that makes us confident that this cycle could have a lot of likes to it and could go a long way. But as Lothar says, it's really hard to predict. Its hard to predict the plane at which it will advance, and you don't know the overall macro environment. But overall, it's just a more innovative electronic area than it was 5 years ago.

Operator

And next we'll hear from Sumit Dhanda with ISI Group.

Sumit Dhanda - ISI Group Inc., Research Division

A couple of quick questions. Is the implication that for the September quarter you're going to need lower terms than you actually did in the June quarter to hit the midpoint guidance?

Paul Coghlan

Yes, it's slightly lower, Sumit. It was the high 50s in the June quarter, and that's about the mid-50s in the September quarter.

Sumit Dhanda - ISI Group Inc., Research Division

Okay. And then just as a follow-up, and sorry for the nuanced discussion here, but is the expectation, given the typical seasonality you see intra-quarter, the bookings stay at this level to hit the midpoint of guidance, or -- so August maybe a little softer and September picks up? Or is the expectation that bookings will actually pick up from July for you to hit the midpoint of guidance?

Paul Coghlan

Well, normally when we forecast -- we don't forecast hoping for an end zone catch late in the quarter. So what we do is we look at what our bookings are, what they're running, look to see if there is any dramatic shift that would go one way or the other, and then give guidance that we think we can meet. So we've given you guidance that we're, at this stage, we're comfortable with based on the bookings we have. We'll see how the bookings progress.

Operator

And next we'll hear from Romit Shah with Nomura Investments.

Romit J. Shah - Nomura Securities Co. Ltd., Research Division

I had a question on ASPs. And I think you can do this with any period. But I looked at June '09 to June '13, and your revenue CAGR is about 12%, which is pretty impressive. But, Paul, over half of the growth has come from higher ASPs. And if I look at mix, it seems like the biggest driver, your core business, I included military plus auto, industrial and comm, today it's about 86% of bookings. So it's come up a lot over the last 4 years. My question is, given how important ASPs have been to revenue growth, do you guys think you can continue to drive ASPs higher either via mix or some other levers?

Lothar Maier

I'll take a cut at that. There's really -- our ASPs are driven by 2 things. One is the fact that historically we've exited a lot of consumer business, and that really has helped the ASPs. And that's a relatively quick phenomenon, so it helps the ASPs very quickly. The other thing that's presently helping the ASPs is that really for the last 4, 5 years, all of the products that have been in design are really targeted not for the Consumer business, but for the industrial, automotive and communications business. And those products that are in design that are now going to the market and being sold, all have functions that warrant significantly higher ASPs. And so as we've shedded the, kind of, the consumer part of our business, ASPs have ticked up, and these new products and modules, BMS products, that's going to carry the ASP ball going forward. And for us, I think last quarter was $1.86, we used to have historical ASPs of over $2. There's really nothing that I see from an ASP standpoint that we can't be up at $2 again sometime in the future.

Romit J. Shah - Nomura Securities Co. Ltd., Research Division

That's helpful, Lothair. And what are your thoughts on the unit performance thus far over the last several periods?

Paul Coghlan

Well, let me jump in. In '09, we had much more consumer sales. So we're selling more into consumer and computer products. So the parts were less complicated or smaller, so that we knew we were going to shed units as we moved out of business that we thought was going to become more -- significantly less profitable and move more into businesses where we'd sell fewer units at more complexity per unit we were selling and have a better ASP. So I think just looking at units, I think the only conclusion I would hope you could draw is, that hey, it corresponds with them moving out of consumer and consumer-related products.

Romit J. Shah - Nomura Securities Co. Ltd., Research Division

I see. Okay. And this is maybe more of a comment than a question. But you mentioned that you've returned 25% of revenues back to shareholders, at least, that was the case in fiscal '13. But yet share count still went up. And if I look at it at that number as a percentage of free cash flow, it's around 60%, so 60% of free cash flow back to shareholders. What we're seeing from some of your peers is that they're giving somewhere between 80% to 120% of the free cash flow back. So I guess to Chris' earlier question, it does feel like you guys could do more.

Paul Coghlan

Well we probably reduced debt more than any of our other competitors in this 2-year period.

Robert H. Swanson

Remember what that debt was for.

Paul Coghlan

E

And that debt had [indiscernible] share. So I think if you add debt to -- debt reduction to dividends and to share buybacks, we'd look pretty good.

Lothar Maier

Yes, I think this doesn't factor in the fact that when we did the convert, we took 25% shares off the market. So even though maybe in the last couple of years, it doesn't compare favorably, if you go back further and factor in the fact that we did the convert, I think it probably looks pretty good.

Operator

And now we'll move to Aashish Rao with Bank of America.

Aashish Rao - BofA Merrill Lynch, Research Division

Paul, I wanted to again follow up on these 2 questions on cash returns. And then I understand the debt issue and the fact that debt has been paid down, but -- or has decreased and you expect to pay it down by June next year. But just conceptually, longer term, is that something close to 100% of free cash flow returned to shareholders benchmark that's been set by your peers something that you might aspire to match?

Paul Coghlan

I don't know necessarily if we would aspire to match 100% return on free cash flow. One of the examples given by the previous questioner, which he sounded like he might have been applauding was someone returning 120% of that cash flow. So I mean that there -- a long-term investor would probably be worried about someone returning 120% because they couldn't keep that up. So what we looked at is returning a reasonable amount to the shareholder, having enough money to grow our business, and we think what we've been doing so far, coupled with reducing the debt, has matched that. I don't really know if we'd ever get to returning 100% of cash flow. We may have other uses for cash flow internally.

Romit J. Shah - Nomura Securities Co. Ltd., Research Division

Got it. And then, Lothar, a question for you. I wanted to ask a question on sensors. And we've seen adoption of sensors in various consumer gadgets increase fairly rapidly. And there appears to be a similar very high growth opportunity in industrial, auto, aerospace, medical and other adjacent markets, and many of your competitors have been building up their IP around sensors. I mean we've seen Maxim-acquired company, ADI, has traditionally been strong. So could you just comment a little on Linear's view on this sensor opportunity? I mean, do you currently participate in this market? Do you see vectors for growth or perhaps even uses of cash for, say, an acquisition in this market?

Lothar Maier

Well, earlier somebody asked the question about Dust. And one of the reasons that we were interested in Dust is how their products work, and how they work in an industrial environment. The way the Dust products work is you use this product, which is basically a radio, and attach a sensor to it and an antenna, and you can make measurements wirelessly. So we realize that there is, particularly in the industrial and we even see opportunities in the automotive space, that people want to make a lot more measurements and collect a lot more data than they presently are doing. And one easy way of doing it is doing it wireless. And so I think we agree with you, to some extent, that there is a lot of interest in sensors. We're not going to be in the sensor business, building the sensors themselves, but we will be in the business in anybody who wants to make a measurement and move that data around. And the same thing is true with the energy harvesting products. We introduced the family of energy harvesting products several years ago. And again, it's the same thing. You harvest energy from the environment, you get a sensor, then you get a radio, and you transmit that information somewhere else. So I think the movement towards communicating -- everything communicating to everything is real. And we've made some bets both on the Dust side and on the energy harvesting side, specifically for sensors.

Aashish Rao - BofA Merrill Lynch, Research Division

Cool. And then, Paul, just one last question. You noted inventory trends have stayed at the 3.7 range for the last 2 quarters. But when I look historically, I mean, you operated in the 5-plus turns range. So are there any structural changes that this customer inventory hubs or other factors that might be causing you to hold on to more inventory?

Paul Coghlan

I think it's really been more reflective of our sales dropped from $388 million to roughly $300 million. We wanted to keep the team intact. Part of what we do is not just introduce really innovative new products, but we're also spend a lot of effort in factory efficiencies, which show up in low lead times, good quality, reliability. So keeping the team intact has been important. So what we've tried to do is use shut down, to some extent. But when we are having sales at the low 300 level, to keep the team intact meant we were building some inventory. Now in our business, we think the inventory we build is sellable and will be sellable for a long time, so we weren't too worried about obsolescence becoming a problem. But we made that decision consciously. Probably as we get to higher sales levels, you'll see where as you would expect the inventory to grow, it might be more steady with a company like Linear. So we'll probably be kind of counter to what you would expect most companies given the strategy of being a very good manufacturer.

Operator

And now we'll hear again from Will Stein with SunTrust.

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

It relates to the operating margin comment. I just wanted to clarify, and I apologize if this has already been amplified, but I think you said that we should expect operating expenses to go up on a dollar basis and to expect operating profit to be flat sequentially into September, is that right? And maybe, help us understand why we're not seeing more leverage on the operating line.

Paul Coghlan

I don't think that's right. I'll go back to the exact comment I gave in the monologue, but that's not what I said. I thought I said that operating margin in absolute dollars would improve as a percentage of sales. I said I thought it'd be roughly similar to slightly up. So just as in this past quarter, where operating margin improved, and the percentage went slightly up roughly a point. That's the sort of what -- that is what I said in my opening comments.

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

So operating profit margin on a percentage basis should be flat to up slightly in the -- in this September?

Paul Coghlan

Right, in operating -- if we meet the sales forecast and operating dollars should be up.

Operator

And now we'll hear from Doug Freedman with RBC Capital Markets.

Doug Freedman - RBC Capital Markets, LLC, Research Division

I was hoping you can help out with a little market intelligence. We've been hearing from a competitor, overlaps with you a little bit, that being TI, that they've been gaining share in analog. Are you seeing them at all in the high-end side of the market? Or should we believe that they're really doing a little bit better at the lower-end side given National, them highlighting that it's the National business that's doing well?

Lothar Maier

I guess what I can say is that, we see a number of competitors in the market, and I guess I can say that in terms of how frequently we see them and what markets we see them, I don't think anything of significance has changed. And I don't track TI's comments very closely, so I can't comment on what they say. But from a competitive standpoint, I haven't seen a lot of big changes.

Doug Freedman - RBC Capital Markets, LLC, Research Division

Are there any places that you can highlight where you believe that you have opportunities to gain share?

Lothar Maier

Well, I mean, we're already doing it in the automotive and the industrial markets. So that's where we have a lot of focus and concentration. It's where -- markets that value what we do, and in particularly markets that require a lot of support from the supplier. So we do -- we have a very talented worldwide sales and field application engineering organization. And we obviously leverage those skills with our customers. So -- and clearly in the automotive and the industrial market, those are important support that we give our customers.

Robert H. Swanson

So maybe I can add something to that. In addition to the picking the right markets, 5 or 6 years ago, there are a number of areas like the micromodule, like the BMS area, like PoE, like what we call Power System Management that most people still call Digital Power System Management. There's a lot of these areas that are growing, and I think we're very well positioned. And so, yes, there are some areas that we are counting on growing faster than the market.

Doug Freedman - RBC Capital Markets, LLC, Research Division

Great. And if I could, just my last one, I believe I heard you say, Paul, that notebook was a little bit strong in the computing market. What are you seeing in that market that's allowing that to grow, if I heard that correctly?

Paul Coghlan

Well, you did hear it correctly. I should caution you that it's only 10% of our business, so that it's a relatively small number. And that's just, I think, some 1 or 2 particular customers ordering more in that area that last quarter. I wouldn't read too much into it. Our experience is probably different than the overall market in that we went up a little bit in computer.

Operator

[Operator Instructions] And with no further questions in the queue, I would like to turn the call back over to your host for closing remarks.

Paul Coghlan

All right, well thank you very much for your attention this morning and for the good quality of your questions. We wish you a good day. We look forward to a good quarter as we've guided up 2% to 5%. And we hope you enjoy the rest of your summer. Have a good day. Bye bye.

Operator

Ladies and gentlemen, this will conclude your conference for today. We do thank you for your participation.

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