Executives:
Paul Coghlan, Chief Financial Officer
Lothar Maier, Chief Executive Officer
David Bell, President
Analysts:
Craig Hettenbach – Wachovia
Adam Parker – Sanford Bernstein
Ahmed Sharaf[?] - Credit Suisse
Craig Ellis – Citigroup
Ross Seymour - Deutsche Bank
Christopher Caso - Friedman, Billings, Ramsey
Tore Svanberg - Piper Jaffray
Romeit Shaw - Lehman Brothers
Steve Smigie – Raymond James
Lewis Gerhardy - Morgan Stanley
Jeff Rosenberg – William Blair & Company
William Lewis - J.P. Morgan
Krishna Shankar - JMP Securities
Simona Jankowski - Goldman Sachs
David Wu - Global Crown Capital
Robert Burleson - ThinkEquity
John Jares[?]- The Boston Company
Kevin Rottinghaus – Cleveland Research
Linear Technology Corporation (LLTC) F1Q07 Earnings Call October 18, 2006 11:30 AM ET
Operator
Good day, everyone and welcome to Linear Technology Corporation fiscal 2007 Q1 earnings release conference call. Today’s conference is being recorded. At this time for opening remarks and introductions I would like to turn the conference over to Mr. Paul Coghlan, Chief Financial Officer. Please go ahead, sir.
Paul Coghlan, Chief Financial Officer
Hello and good morning. This is Paul Coghlan. I am joined in today’s call by Lothar Maier, who is our CEO and Dave Bell, who’s our President. Welcome to the Linear Technology conference call. I will give you a brief overview of our recently completed first quarter 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’ve 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 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-K for the quarter ended July 2, 2006, particularly management discussion and analysis of financial condition and results of operations.
Secondly, SEC regulation FD, regarding selective disclosure, influences, our interaction with investors. We have opened up this 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.
As we had forecast in our last conference call, sales and profits for the just completed September quarter were roughly similar to the previous quarter. However, the overall business environment was weaker than we expected and consequently our bookings decreased slightly. Consumer bookings grew, but not to the extent we expected as customers remain cautious going into the holiday demand period. Revenue for Q1 ended October 1 2006 was $292.1 million, essentially flat with the revenue of $292.9 million for the previous quarter, but was an increase of 14% over the first quarter of last fiscal year’s revenue of $256 million. Net income for Q1 was $112.4 million, or $0.37 diluted EPS, compared with $115.7 million, also $0.37 diluted EPS in the prior quarter.
On a pro forma basis, without the impact of stock-based compensation, net income would have been $124.2 million and $0.41 per share versus $125.9 million, also $0.41 in the June quarter. The impact of stock-based compensation was 10% of net income or $0.04 at the EPS level. For Q1 just ended, our GAAP return on sales was 38.5% and our pro forma return on sales was 42.5%. Cost of sales as a percentage of sales increased slightly, 3/10 of a percent. Our operating expenses also increased due to headcount additions and increased restricted stock grants in the R&D area, and due to increased legal costs in the SG&A area. The impact on operating income as a percent of sales was partially offset by increase in interest income. Our effective tax rate increased by 0.5%. The resulting return on sales was an impressive 38.5% versus 39.5% last quarter.
Diluted shares outstanding decreased by 3,481,000. During the quarter, the Company’s cash and short-term investments decreased by $5.8 million. For the 82nd consecutive quarter, we had positive cash flow from operations. During the quarter, the company spent $93.1 million to purchase 2,907,000 shares of its common stock. In July, the board of directors authorized the company to purchase up to an additional 20 million shares of its outstanding common stock in the open market over the next two years. A cash dividend of $0.15 per share will be paid on November 15th to stockholders of record on October 27th.
Our bookings decreased slightly, with increases in high-end consumer, cell phones and automotive offset by decreases in communications, industrial and computers. Our ending on hand inventory at our distributors is well within historical turns levels. Cancellations are still minor and lead times have remained unchanged at 4-6 weeks. 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 return on equity was 21% and the return on assets was 19%. When you take cash and short term investments out of these last two calculations, our net return on equity was 155% and our return on operating assets was 78%. We had no debt and our current ratio was 8.6:1.
Looking forward, the December quarter that we are entering is now difficult to forecast. As I said earlier, consumer bookings grew, however not to the extent we expected as customers remain cautious going into the holiday demand period and some customers refer to supply problems from vendors other than other. The macroeconomic trends are reasonable and our positioning in customer programs is good. However, the visibility is low and customers are guarded in their forecasting and inventory management. Consequently, given the usual seasonal slowdown in non-consumer businesses that takes place in December, we currently expect sales and profits in the December quarter to be down roughly 5-7% from 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 our bookings decreased over the previous quarter, our cancellations were minor and we had a book to bill ratio slightly below one. Geographically, US bookings were down, with distribution being down more so than OEM. Internationally, our bookings grew. Asia was up and Europe was down as seasonally expected given the summer holiday period.
At this time every quarter we give you a breakdown of our bookings percentages by end markets, to give you insight into those market that drive our business. As I stated earlier bookings grew in high?end consumer, cell phones and automotive and decreased in industrial, communications and computers. Communications was once again our largest area this quarter. It represents approximately 34% of our business, down from 36% 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 10% of our business was down from 12% last quarter. The networking area at 15% is down one percentage point from the 16% estimated last quarter.
Our Power over Ethernet (PoE) circuits and hot swap circuits, areas rich in technology, lead our presence in this area. Cell phone handsets at 9% of our business grew one percentage point from 8% reported last quarter as some of our new circuits have gained market acceptance. Industrial, at 31% of bookings closely approximates communications. This was down by two percentage points. The summer quarter for industrial is historically seasonably weaker, as it was both this year and last year.
Moving to computers: computers, at 14% of our business, remains unchanged as a percent, but slightly down in absolute dollars. High-end consumer grew. It is 9% versus 6% last quarter. This was expected as we move into the seasonally stronger second half of the year. The automotive area, at 8%, increased by a percent from last quarter, with the strength being in European and Japanese automotive-related manufacturers. Finally, the military products at 4% of our business was unchanged from the prior period. In summary, we believe we have very good diversity by end markets which contributes to our leadership positioning in high performance analog.
Moving from bookings to sales, as I said earlier product sales were essentially flat with the prior quarter and grew 14% from the similar quarter in the prior year. Sales were down modestly, in both OEM and in distribution in the USA and up roughly a similar amount internationally. In summary, the USA at 31% was down from 32% last quarter. Europe at 17% was down two percentage points from 19% last quarter. The summer is always the slower quarter in Europe, which is typically strong in the first half of the calendar year. Japan at 14% was unchanged from the prior quarter. Rest of world, which is primarily the rest of Asia except Japan for us, was 38% and was up three percentage points from last quarter, reflective of the strength in high-end consumer. Note that 50% of our product sales were created in the USA, of which 19% were shipped overseas.
Moving to gross margin, gross margin was 78%. 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 3/10 of a point from last quarter. There were minor increases in various factory costs which did not have an increase in sales to offset them. Also, ASPs decreased to $1.57 from $1.67 last quarter, reflective of seasonal changes in mix to more high-end consumer and cell phone products and less industrial and communications products.
Research and development - R&D increased in both absolute dollars by roughly $2.5 million and as a percentage of sales from 15% last quarter to 15.9% this quarter. Labor costs increased due to additional headcount and stock-based compensation expenses. We have been adding to our headcount and related expenses to continue to maintain our technical leadership position in high performance analog. We have had particularly good success in adding analog technical talent to our satellite design centers where our headcount has increased 25% in the past year.
Selling general and administrative costs have increased modestly, both in absolute dollars by $380,000 and as a percentage of sales, from 11.6% last quarter to 11.8% this quarter. The major area of increase was in legal expenses. As a result of the above, operating income decreased by $4.5 million. Operating income as a percent of sales was 50.3% versus 51.6% last quarter. Interest income increased by $812,000, largely due to the increase in the average rate of interest earned from 3.35% last quarter to 3.63% this quarter. Our effective income tax rate was 31%. This represents an increase of half a percentage point from what we were incurring last year. The main difference is in the R&D credits. Congress has not yet renewed the R&D credit and therefore there is no benefit for it in our rate.
In summary, the major tax savings items that currently support our effective tax rate are the benefits from our tax holidays overseas, our tax exempt interest and our foreign sales tax benefits. The resulting net income of $112.4 million is an decrease of $3.3 million from the previous quarter. Earnings per share of $0.37 is the same as last quarter. The average shares outstanding used in the calculation of earnings per share decreased by 3,481,000 shares during the quarter, largely due to share repurchases both this quarter and last quarter, which were partially offset by stock option exercises.
On a pro forma basis before stock-based compensation net income would have been $124.2 million, or EPS of $0.41 again the same as last quarter. Diluted shares outstanding would have decreased by 1.9 million shares, as there are less shares outstanding under prior accounting standards than under FAS123R.
Moving to the balance sheet, cash and short term investments decreased by $5.8 million, net of $93.1 million spent to purchase the 2,907,000 shares of common stock, $24.6 million in fixed asset additions and $46 million paid in cash and dividends during the quarter. Our cash and short term investment balance is $1,813.8 billion and represents 76% of total assets and 86% of stockholders equity. Accounts receivable of $154.3 million is unchanged from the previous quarter. Our day sales and accounts receivable at 48 days is also the same as we reported last quarter.
Inventory at $42 million increased by $3.1 million from the $39 million reported last quarter. The increase was generally evenly divided among raw material, work in process and finished goods. Our inventory turns was a respectable 6.3 times which was down slightly from last quarter’s 6.6 times. Deferred taxes and other current assets decreased $2.4 million from the June quarter. A decrease in deferred taxes on stock option accounting was partially offset by an increased in pre-paids relating to software maintenance contracts. Our property, plant and equipment increased by $13.5 million, as we had additions of $24,591,000 and depreciation of $11,058,000. Most of the additions were for wafer fabrication, test and assembly production equipment, to support anticipated sales requirements.
For fiscal year 2007 including the quarter just completed, capital additions are forecasted to be roughly $65 million - $75 million and deprecation to be roughly $45 million. Other non-current assets which total $65.5 million were hardly changed. They consist primarily of intangible assets relating to technology agreements and also a minor equity investment in a digital power company.
Moving to the liability side of the balance sheet, accounts payable increased $6.9 million due principally to payables for capital equipment purchases that are referred to above. Accrued income taxes, payroll and other accrued liabilities increased by $5.3 million. The largest items here are our profit sharing accrual and our income taxes payable. Fluctuations in these two accounts tended to offset one another this quarter. We pay out profit sharing twice a year, so our accrual increases in Q2 and Q4 and decreases in Q1 and Q3 such as this quarter when payments are made. There was an increase in income taxes payable this quarter since we had no estimated income taxes payable or payments in Q1, and will have two payments in Q2.
Deferred income on shipments to distribution increased by $7 million as we are managing our distributor inventory rather tightly. The industry is gradually moving towards lead-free, integrated circuits. We are closely managing this transition. Therefore, we shipped less into distribution this quarter than they shipped out to their end customers, and this resulted in the decrease in deferred income. Our accounting on shipments into US distribution is conservative. We do not record a sale nor income in our results of operations until the distributor ships the product out to its end customer. We continue to closely control our inventory distribution to properly position the inventory without any un-needed build up.
Deferred tax and other long term liabilities decreased modestly by $1.3 million. The 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 November 15th to stock holders of record on October 27th.
Looking forward, as you can tell from my previous comments although we met our sales and profits forecast, the quarter did not close with the same energy in bookings we had expected going into it. The external market is a little bi-polar. The general macroeconomic trends are reasonable, the US continues to grow – be it at a little slower rate, although the Fed’s position on interest rates is a little unclear. Europe is doing reasonably well and Japan is okay but not strong. The US stock market, in particular the DOW, is climbing, which generally signals investor faith in medium term growth. Yet the overall semiconductor market has been lagging and customers are cautious.
Electronics customers in the consumer segment seem unsure as to the strength of the upcoming holiday season. The customers are not negative, just cautious. Lead times for most IC companies have come in, giving customers the opportunity to more match inventory purchasing with actual consumption. On the other hand, the customers in other end markets – industrial, communications and automotive with its increased electronic content, generally communicate that 2007 will be a good year. Consequently for Linear, the December quarter is hard to forecast. Consumer business is hard to predict, although we sense there will be some softness in electronics in the holiday period. There is also generally a seasonal slowdown in non-consumer business that takes place in the second half of the December quarter and is further impacted this quarter by some inventory tightening. Historically, this is subsequently offset by good growth in the March quarter.
Our turns requirements are similar to last quarter. Turns are orders which must be booked and shipped in the quarter. Our lead times are 4-6 weeks, which can support this level of turns as we have done often in the past. Therefore, when assimilating these inputs, we currently expect sales and profits in the December quarter to be down roughly 5-7% from the September quarter just completed.
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 also completed our projects to add capacity to our wafer fabrication plants in Camas, Washington and Milpitas, California and have added equipment in these areas within the last quarter. These projects are important additions to our capacity. We sell into many diverse end markets that are rich in analog circuitry, easy to manage power and portable products or to sense real world electronic signals and then convert them from analog to a digital format for easy storage and transmission.
We recently announced a new family of module products. 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. Also, our growing family of high speed A to D converter products is gaining acceptance in the base station and industrial markets. In summary, we are in a strong segment of the electronics marketplace, namely high-performance analog, where we continue to be a market leader. We met our projections for the September quarter. Although the December quarter may be difficult, we are optimistic about the long-term and medium term growth opportunities for our markets and for linear.
I would now like to briefly address the ongoing issue of stock option pricing and stock option backdating. As we have told you, 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 the SEC, the United States Justice Department and the Internal Revenue Service. On September 7, the company filed its annual report on time on SEC Form 10-K for the fiscal year ended July 2, 2006. In the legal proceedings section, item three, and also in its notes to the audited financial statements – note seven – the Company addresses this issue. The Company stated that it has reviewed its historical option-granting practices and option grants with the assistance of outside council and an independent forensic accounting firm.
Based on findings of this review, the Company has concluded that there is no need to re-state any previously filed financial statements. The Company found no evidence of fraud or misconduct of any kind in the Company’s practices in granting stock options. The allegations against the company are largely based on statistical analyses, where the underlying premise is that the daily stock prices are essentially random. However, as is common with high growth technology companies, Linear’s stock price is more volatile at and around earnings release dates. The Company granted its stock options on a quarterly basis in connection with its regularly scheduled board meetings. Board meetings are scheduled far in advance to coincide with the Company’s quarterly earnings releases. The Company did not employ backdating. The Company very much appreciates the open-mindedness of those investors and interested third parties who have refrained from passing judgment until the investigations are complete. The Company regrets the attention and legal costs these allegations have caused.
Finally for all of you that are stockholders, please read the annual report and vote your proxies prior to our November 1 annual meeting. I would now like to open up the conference call to questions to be addressed to either Lothar, David or myself.
Question-and-Answer Session
Operator
Operator instructions. We will take our first question from Craig Hettenbach – Wachovia.
Q - Craig Hettenbach - Wachovia
First, great job on consistent execution on gross margins. Can you discuss the current inventory management we’ve seen in the channel? It looks like distributors are managed much more closely compared to 2004 when things overheated and we had a bigger correction. What’s your expectation going into the calendar Q4 and maybe into the calendar Q1 next year, when that management of inventory will ease up, if you will?
A - Paul Coghlan
First of all, we found that same management of inventory that you’re alluding to, Craig – as I mentioned in our opening comments, our deferred income was down a fairly large amount for us. Certainly, the distributors are managing their inventory more tightly. Normally, the December quarter, particularly the month of December, is not a good month for sales through the distributors. Their business then picks up, often times significantly, in the March quarter. The reasons for that are there are less holidays in the March quarter so there are more days to sell into distributors and secondly, a lot of smaller companies I believe are annual companies who have their annual year end coincide with the calendar year end. In the new year end, their budgets are more likely to be opened up for more spending and they tend to focus on capital equipment more in the first half of the year than the second half. I think those two factors, one relative to the number of days in distribution and two, relative to the spending environment of smaller companies, impact a stronger March than December quarter.
Q - Craig Hettenbach - Wachovia
Dave, if you will, within the communications market we are getting some mixed signals. Wireless infrastructure appeared weak in the September quarter for a number of companies, maybe some lumpy 3G build out. Can you just differentiate between the trend you’re seeing in wireless infrastructure and enterprise networking again into the December quarter here.
A - David Bell
I think as Paul mentioned in his monolog, we didn’t see bookings pick up quite as strongly as we anticipated at the end of the last quarter. Seasonally, the December quarter also is not a really good one for infrastructure – that’s both telecommunications and networking infrastructure, Craig. I think there’s a little bit of softness we’re perceiving in general out there and that’s causing us to revise our estimates for the December quarter down just a little bit.
Operator
Our next question comes from Adam Parker – Sanford Bernstein.
Q - Adam Parker – Sanford Bernstein
You used that phrase ‘just a little bit’. I was looking and outside the bubble, there are only a couple of quarters ever in the history of the company that are worse than your guidance implies in terms of sequential growth. I’m still not sure I totally understand why if macro conditions are okay, you think things are this weak in December. Maybe you could talk about whether or not you think it’s share loss, less opportunity in the near term for stuff at the margin you compete at – do you think your situation is looking worse than it is for other companies? Or should we expect all the other companies to guide down the same amount? Exactly why do things look so bad, given there were only three times in the past where the bubble hit some of the big macro downturns?
A - Paul Coghlan
Adam, I think there are a couple of factors. One, when we were going into the quarter, we expected bookings to pick up, particularly in the consumer area. We thought that bookings in other areas would be slow in the summer quarter as they typically are historically and have been for many years. The consumer business grew for us, it was 6% of our bookings in the June quarter and went to 9% in the September quarter. But if you go back just a year ago, it was 14% in the September quarter. We’re in the same programs, so we haven’t lost any market share where we are in the consumer area. It’s just we picked up some hesitancy from some of the consumer customers to book out or to book into the holiday season. Some of that is lead times have come down for a lot of folks I think, but some of it is also just that consumer customers are a little nervous I think going into this Christmas season.
Q - Adam Parker – Sanford Bernstein
But your lead times are always below fall rate, you guys never…
A - Paul Coghlan
I don’t mean just our lead times, Adam. There are a lot of our competitors, for example, their lead times have gotten less than they were six months ago.
Q - Adam Parker – Sanford Bernstein
Maybe I’m missing something - how does that impact demand for your products? How do I get comfort around the fact that you’re not disproportionately getting a lack of orders versus your peers? I’m trying to understand how much of this is the market versus how much is just Linear maybe under?performing here, either temporarily or more cyclically?
A - Paul Coghlan
First of all, let’s address our peers. Several of our peers, when they gave their guidance going into the summer quarter, guided down, so their guidance was worse than our guidance. We had other competitors who towards the end of the quarter revised our guidance downwards. If you look at the population of competitors that we have, we may be the only one that kind of stuck to his guidance and whose guidance wasn’t negative going into the September quarter. Maybe one other guy did that.
Q - Adam Parker – Sanford Bernstein
So over the six-month timeframe you’re saying look, it’ll be about the same, we just – you know, they pre-released and we didn’t and so at the end of the day it’s the same. Your view is you’re not a share loser?
A - Paul Coghlan
That’s what our belief is, although we have to see what these folks say when they come out with their estimates for the December quarter. The question about lead times, I think overall, there was a time when lead times – we always stay at 4-6 weeks. There are times when other folks are substantially higher than us, and there are times when they come closer to us. When they come closer to us, generally, the overall customer base feels confident that overall it can lower its inventory levels and can be ordering more closely to match floor usage.
I do think there’s been a little hesitancy at the robustness of what this Christmas or holiday season will bear. We don’t think we’ve lost any market share, we think we’ll get off to a good start in 2007, although we have to see how 2006 wraps up. On the other had, to be frank with you, we thought our bookings would have been stronger towards the end of September than they were. That’s what’s led us to guide down.
Q - Adam Parker – Sanford Bernstein
The only other question I have – I know, Dave and Lothar, you guys have talked about this a little bit in conferences, I am not sure I understand why you’re not seeing more in 3G wireless handsets. In other words, I remember you guys saying look, you know, the power management complexities are about to accelerate with converged devices or – it just seems to me like if the external forecast is for 200 million units in 2007 for UMPS, you guys ought to participate more than you are in that market. What am I missing here?
A - David Bell
Alan, this is Dave. I think part of the problem is that when you say 3G it means more than one thing. As we’ve mentioned on some previous calls, I think a lot of the 3G phones that are being deployed right now really don’t have much differentiation from the feature set of the existing 2.5G phones. The ones that I think create a bigger opportunity for us are the ones that have the real high speed HSDPA protocol, which allow you to send at over 1Mb per second. Those are just beginning to get deployed. In addition, 3G phones that have real live video capability, so those that have mobile TV capability. Those again are fairly small in market share, they are being deployed now in Korea and some places like that. Those are the high-end 3G phones where we think they truly need better power management capability and more types of functions than the existing 2.5G and a lot of the other run of the mill 3G phones. One thing that Paul pointed out during his monolog as well is we have seen an up tick in our percentage in cellular phones during the last quarter. We are beginning to see the effects of some new programs going into production, where we actually have more content in some of these phones because there are more of these features than mobile TV capabilities and the need for greater power conservation. I think we’re starting to see the beginning of that trend, but again don’t confuse normal, run of the mill 3G phones with the upper end phones that really need our features.
Q - Adam Parker – Sanford Bernstein
So the bookings are picking up in absolute dollars for some of these? Because I couldn’t tell if it was just the percentage was up because the other stuff was down, or not.
A - David Bell
Well again the percentage was up basically on flat sales, so yes, I think the absolute dollars were up slightly in cell phones.
Operator
Your next question is from Michael Mezbia - Credit Suisse.
Q – Ahmed Sharaf[?] - Credit Suisse
This is [Ahmed Sharaf?] calling in for Michael Mezbia. Could you comment a little further into the consumer end market? Is there any particular areas within consumer that weren’t growing or didn’t meet expectations going into the quarter versus other areas?
A - Paul Coghlan
I think generally across the board in the consumer area, what we had was – it wasn’t like it was bad by any means, it just wasn’t as robust as we had expected. If you look across the area into which we sell, I think we generally felt there was – it didn’t meet our expectations.
A - David Bell
Let me add to that a little bit – this is Dave again. I think certainly one of the key questions here that you guys are asking in different ways is, is this an overall business slowdown or are we losing market share? I think across the board, I would say we’re not losing market share. In the consumer business, as Paul alluded to, we see a number of our major consumer customers that are being more cautious entering the December quarter but it’s not a loss of market share whatsoever. The same could be said in the infrastructure and industrial market places. We actually feel comfortable with our market share gains in some areas but it’s just that there seems to be some real cautiousness amongst their broad customer base as well.
Q – Ahmed Sharaf[?] - Credit Suisse
You also mentioned your expectations to the level of turns is about similar to last quarter. If you see robust demand for the December quarter, do you believe you’re in a full position to be able to supply all that demand?
A - Paul Coghlan
Well our lead times are 4-6 weeks, so certainly we can respond very quickly if there’s a pick up in demand. These customers that we said didn’t book to the extent that we thought, who we think are unsure about the holiday season – they’re quite aware of our shipment capabilities so certainly if there were a significant pick up in demand, I think we could assist them in that area and they could respond pretty quickly.
Operator
Our next question comes from Craig Ellis with Citigroup.
Q - Craig Ellis - Citigroup
I just want to start with some further clarification on what you’re seeing on the consumer side of the business. The softer bookings activity that you see and the cautiousness, is that something that manifested in the September timeframe, or was that evident throughout the quarter?
A - Paul Coghlan
First of all, just a point of clarification, again consumer bookings went from 6% in June to 9% in September. What it didn’t do, we had expected it to do better than that. There was some softness, but not relative to June. Some softness relative to our expectations. That softness I think was more prevalent in September because we really expected most of the consumer bookings to come in, in the month of September, given our 4-6 week lead times and the tightness with which they want to respond to their antennae in the marketplace and building product for the holiday season.
Q - Craig Ellis - Citigroup
When does that window close for them on the holiday build? Does that close mid-October, end October?
A - Paul Coghlan
You know there are some folks actually in November in past years that have ordered product from us that we’ve shipped in November and they’ve shipped it in the holidays.
Q - Craig Ellis - Citigroup
The second question, if I take a longer term view on the market share question just by backing in and using the ASP information you provide for unit shipments, versus September 2004, unit shipments are up about 3.7% to the current quarter. Revenues are up a much nicer 15%, so mix has done a great job for you guys. When are we going to see those units really accelerate? That really goes back to Adam’s question earlier.
A - Paul Coghlan
First of all, we pride ourselves on being diversified. We’re talking a bit about consumer here, and that’s the area where you’d see units accelerate the most. Remember, that’s 9% of our business, and if you look over the past couple of years, it’s been a low of five to a high of 14. Certainly that leaves 85%-95% of the rest of our business in areas where ASPs are more robust, with infrastructure, industrial, automotive – so we really value ourselves being diversified. When units will accelerate rapidly – that depends on two things, these markets growing and our product penetration in some of them. In areas like automotive we think we’ve got good products and we expect some growth there. In consumer in the high end side of it you know we have products that we think are attractive but we don’t expect that ever to be 20% of our business. In infrastructure areas, I talked about A to D converters and other types of products. You know, we’re not – if I understand from your question a bit, if you expect our ASPs to drop a lot and our units to grow a lot, I’m not necessarily thinking that would happen over a full year.
Q - Craig Ellis - Citigroup
I’d be happy to see the ASPs stay flat and then get some real acceleration on the units.
A - Paul Coghlan
Yes, so would we.
Q - Craig Ellis - Citigroup
Lastly, as I look at the comments around hiring intensity, I think you’re up about 27%, 25% year on year in R&D. You were up strongly last quarter, but it looks like it’s impacting operating margins. In my model at least, we’re going to be down a couple hundred basis points sequentially and down about 400 versus two or three quarters ago. Can you keep up the same hiring intensity in R&D that you had over the last three to four quarters as you look out over the next three to four?
A - Paul Coghlan
I think I’ll take a first stab at that and then Dave can address it. We had some really good opportunities in the past six months. We took advantage of those. We opened some new design centers in the last year or so. We’ve opened one in Phoenix a little over a year ago, we opened one in Dallas and in Munich, Germany, in the past year so we’ve been adding people to those design centers at an even higher percentage rate than the 25 we talked about in our satellite design centers. I think as we get these up to a mass, that we think a critical mass that’s effective, we would probably not hire as many going forward. I think this 25% YoverY, I doubt we’ll continue to do that through each of the next subsequent quarters, but whenever we find really good, talented people we’ll hire them.
Operator
Operator instructions. We’ll take our next question from Ross Seymour - Deutsche Bank.
Q – Ross Seymour - Deutsche Bank
Taking a look at this pick up in the December quarter versus two years ago in 2004, it looked like in 2004 you had that extra week of business and your business was roughly flat including that, so it mathematically looks to be about the same, down 5-7%. Can you tell me what you see as being different from an end demand or inventory perspective now versus 2004?
A - David Bell
I’ll take a stab at it – this is Dave. I think the biggest thing that we see is not really anything happening at Linear Technology, it’s what’s happening in our customer base. Kind of saying the same thing we said a few times already, when we were getting near the end of the September quarter, we didn’t see bookings pick up for the high end consumer products entering the Christmas season, and when we look at our biggest consumer customers, there’s a host of various different, unique situations at our biggest high?end consumer customers that, taken collectively, just mean that we’re also kind of cautious about what kind of bookings and shipments we’re going to see during that season. That, combined with a little bit of softness in the infrastructure and industrial area – again a whole bunch of unique situations there with a much broader customer base has led us to guide downwards. Again, I don’t think that there’s any real change at Linear Technology, we’re comfortable with our design wins that are going on, we’re comfortable with our market share. It’s really that our customers on a broad basis aren’t doing as well as we’d anticipated going into December.
A - Paul Coghlan
Ross, this is Paul. I didn’t really look at 2004. We didn’t go back a couple of years and say, let’s see if we can see a similar analysis or trend between this and 2004. We tend to be more looking where we are and how to correct those issues if there are or how to relate to the marketplace in a move forward. Your percentage analysis sounds accurate and from what I remember, 2004 had a little bit of the inventory correction climate that we see now and we did pretty well in March after that. To be most honest with you, we really didn’t do an in?depth study comparing 2006 with 2004.
Q – Ross Seymour - Deutsche Bank
I guess what I was getting at is the inventory versus demand side. From Dave’s side, in his answer it sounded like it’s more of a demand issue than an inventory issue. At least as far as Linear Technology is concerned. Then I guess, Paul, that you answered my follow up question, which was in March of 2005, then, you guys had a nice return to growth and nothing you’re seeing now would stop that from occurring next March?
A - Paul Coghlan
Yes, that’s correct.
Q – Ross Seymour - Deutsche Bank
One last follow up. I don’t know if you guys can answer it, because you have to be sensitive to your customers. Within consumer, I realize it did grow nicely, just not as much as you would have thought. Is there any sort of end of life or just general segment that didn’t grow as fast as you thought? Or is even talking about that going to be too sensitive?
A - David Bell
I’m certainly not going to give you customer names, Ross, but what I will say is that when we look at our biggest high-end consumer customers, it seems like most of those big customers had their own unique scenarios that were causing them to reduce their forecast down. They were all different circumstances. Some were component shortages, some were regulatory issues – on and on. Taken on a whole, when you look at the whole high-end consumer market, it meant that it wasn’t going to grow nearly as rapidly as you expected during the December quarter.
Q – Ross Seymour - Deutsche Bank
If it’s an accumulation of unique things, that sounds to me like slightly weaker demand overall from your customers, that they’re seeing from their customers. Is that fair?
A - David Bell
I think there’s probably part of that going on. They’re certainly looking at their forecast for the Christmas sales, but some of the factors that are affecting it and some of these big guys aren’t even really demand-related. Some are supply-related. Some as I say end up being kind of regulatory issues. You name it. There’s a real mixed bag of stuff that’s affecting it. I think there is some demand concern on the part of some of those guys. It was a real mixed bag, Ross.
A - Paul Coghlan
Ross, we actually came to the same conclusion your question implies. When you’re in the trenches, fighting away, you find one customer has one issue, another guy has another issue. When you start to get to the third, fourth and fifth, you begin to say look, this is somewhat of a trend and we ought to consider that going forward. Although there are unique circumstances in each case, there are enough of them with unique circumstances that that’s what led us to think there was some form of demand issue going on and that it was part of the reason for our guidance.
Q – Ross Seymour - Deutsche Bank
Especially when you consider how many analog companies are seeing similar weakness. It can’t be unique across every one. That’s it from me, thank you.
Operator
We’ll take our next question from Christopher Caso - Friedman, Billings, Ramsey.
Q - Christopher Caso - Friedman, Billings, Ramsey
Just a clarification on an earlier question, perhaps. I guess maybe if you could clarify what you’re seeing or what your expectations are with respect to inventory at your customers right now? As you look forward into the March quarter, is the level of inventory what’s giving you some confidence that you’ll see a little bit of a resurgence into the March quarter?
A - Paul Coghlan
I think, particularly in the distribution area, distributors were telling us that their end customers were tightening their inventory a bit. Whether it was to get their balance sheets ready for year end, whether it’s because they had lead times come down, whether it’s because there were some demand issues across the marketplace – whatever it was, we were told there was some basic inventory tightening going on there. If you look at that area of the market, just about every year, December is a tight quarter and March is a very strong quarter. It just feels kind of like we’ve been there before, to us. It feels that way and that’s what makes us think the March quarter will do better in those channels.
Q - Christopher Caso - Friedman, Billings, Ramsey
Just to remind us on your revenue recognition, I believe you guys recognize revenue differently at different geographies. In those geographies where you’re recognizing on a sell-in basis, are those distributors cutting inventory as well? Is that having something to do with this as well?
A - Paul Coghlan
I think it depends on geography. In depending on the different geographies, you have different issues. Among the geographies in which you record a sale when we sell in. In some areas, like Asia, Japan and Europe, they don’t always react the same way and haven’t always reacted and haven’t reacted the same way last quarter. It was probably a little more tightening in the US, but still some tightening in other parts internationally as well.
Q - Christopher Caso - Friedman, Billings, Ramsey
Maybe looking at it from the longer term, what do you guys think about your long-term growth rate? I’m not sure even now that you want to peg it to a number, but as I’m looking at our model here, going back to early 2005, the growth rate has dropped off on a YoverY basis and I know there’s a lot of moving parts and a lot of reasons for that. What are your expectations going forward and what do you think needs to change to get there? Maybe it’s something within Linear or something within the market itself?
A - Paul Coghlan
Our long term growth – this is a tough time to answer the question. We say we think our sales would go back 5-7%. There would probably be some skeptical looks in the audience. This is just one quarter and our YoverY growth rate has been picking up. We think our YoverY growth rate – we’re managing the company internally, driving product introductions, driving expansion in the sales force area etc. to maintain in a reasonable end market with a reasonable amount of new inventions taking place throughout the electronic channels that we would grow in the 20% range. If you have a decent market, if some of that is driven by new products, a good percentage of it, be they new products in automotive or new products in cellular or new products in high-end consumer industrial, internally we think we can grow in the 20% range. Saying that in a quarter when we’re saying we’re going back 5-7% I can see would raise some skepticism. I think maybe when we talk this time in the March quarter it’ll be a little easier to answer that question, but we have to see how that plays out. Certainly, running the company, we think we’ve got really good opportunities. We think they’re great opportunities for the very highest end of analog, so our strategy of staying at the very high end and thinking there’s enough growth in the high end so that we can grow 20%, we continue to think that’s the right way to run it. We continue to think that’s the right way to employ the talent we have and continue to hire talent that can help us accomplish that, so nothing’s changed internally.
Q - Christopher Caso - Friedman, Billings, Ramsey
Is there something that you guys would see as we go forward the next couple of quarters, if you didn’t return to that 20% level, that you would feel the need to make some changes in terms of the focus or the customer mix, anything like that?
A - Paul Coghlan
Obviously you have to look at the numbers and you have to look at what happens, but it would be inappropriate for me now to say well, if something significantly adverse happened in the next six months, not knowing what it is, to tell you what I think we would do to react to it. It’d be just so much speculation on my part. I mean, you know, we’re very diversified, Chris. As you know we’re across a lot of end markets, high performance analog is still in demand. The digital revolution really helps high performance analog. All the basic trends – more products being hand held, more running off small batteries like lithium batteries, higher speed in areas like A to D converters etc., all of those trends. We still think they’re there and they’re going to be prominent as long as we have a pretty reasonable market and reasonable rate of innovation. To say well, what if none of that happens, what would you do – I think it’s premature to answer that question because we don’t expect that to happen.
A - David Bell
Chris, this is Dave. I think long term, some of the investments that we’ve been making, talking about our growth in our design organization and some additions in our sales organization, those things although they had a short term impact on operating margins, I think those are precisely the kind of things long term that are going to continue to allow us to gain market share.
Operator
We’ll take our next question from Tore Svanberg - Piper Jaffray.
Q - Tore Svanberg - Piper Jaffray
There seems to be a lot of focus on your consumer business, but if we look at it versus a year ago, we’re only talking about a $10 million delta. If you look at some of your non?consumer markets, and as you talk to your customers there, what is the hesitance? Is it that people are afraid about [air price?] spending really coming down these next couple of quarters? It seems that it’s a little bit more than just balance sheet management by the end of the year.
A - Paul Coghlan
When I mentioned that I certainly didn’t meant to imply it was only that, Tore. That was just one of the things I mentioned. Interest rates have moved up a little bit. In the US now it looks like the Feds are going to stay steady – I don’t know if that’s impacting a lot of industrial companies. I think the distribution business, certainly that quarter to quarter change was a little more dramatic this quarter than it was a year ago. That’s not consumer, that’s a broad breadth of products. It’s a question we don’t have the answer to. We don’t really know, with the customers overall, if they’re expecting a slowdown to continue. That’s what your question kind of implies, but what we’ve been hearing and feeling is more a sense that 2007 will actually be a pretty reasonable year. A lot of these companies are pretty flush with case. Some capacity is getting a little higher, the percentage of capacity, so there may need to be more investment. I think we’re probably not ready to say there’s some groundswell that’s going to move forwards several quarters yet. I think that’s what your question’s implying.
Q - Tore Svanberg - Piper Jaffray
Fair enough. As you noted, March tends to be a strong period for you. When would you start to get more comfortable around that? Do you see it towards the end of the year, or do you actually have to wait into January and February before you get that sense?
A - Paul Coghlan
Normally, towards the end of the year, you know, you have holidays and stuff like that. It really picks up right after the end of the year generally.
Q - Tore Svanberg - Piper Jaffray
Great. The final question, could you comment a little bit about the current linearity? You mentioned bookings down slightly sequentially, but can you talk a little bit about July, August and September?
A - Paul Coghlan
It was down only slightly, we told you that. I think there is reasonable linearity. We might have liked to have a little stronger September so that’s one of the few times I probably would have preferred to answer your question that there was less linearity. I think it was probably pretty reasonably linear.
Operator
We’ll take our next question from Romeit Shaw - Lehman Brothers.
Q - Romeit Shaw - Lehman Brothers
Thanks. A question about calendar Q4 into Q1, Paul, what specifically do you need to see exiting Q4 in order to feel more secure about no worse than normal seasonality for the March period?
A - Paul Coghlan
A lot of that’s feedback from customers. Certainly we’ll get feedback from the distribution channel, what are their plans as the year turns. Customers, some kind of big programs – we’ll have to see what the launching in those will be. The bookings, some of them may come in the December quarter but a lot of them, given our low lead times of 4-6 weeks, probably won’t take place until the March quarter. I think it’s generally just keeping in touch with the customers, asking them what’s going on, reading what they have to say – we do spend a lot of time with our sales forces before we have these talks and kind of talking with them about what the climate is in their markets, going over maybe some of their biggest customers and what are the trends in the recent discussions they’ve had with those. That kind of takes place late – it can’t be too late in the December quarter, because you’re running into the holiday period particularly here in the US and Europe, but that’s generally how we do it.
Q - Romeit Shaw - Lehman Brothers
Inventories are up 7-8% sequentially. It doesn’t seem like it’s out of your comfort zone. Are you planning to adjust your fab loadings?
A - Paul Coghlan
No, at the moment I think we’re probably going to keep fab loadings pretty close to where they are. Inventory was just – I told you it was evenly spread out between raw material, WIP and finished goods. It is up $3 million, you can say that’s 7% but if you look at the turns, at 6.3 times I think inventory is pretty well controlled.
Q - Romeit Shaw - Lehman Brothers
Should we assume that the lower volumes will pull gross margin down this quarter, or do you expect to offset that?
A - Paul Coghlan
It’s kind of early to tell. Gross margin went down a little bit last quarter. It might be able to go down a little bit, but that would be related more, if it occurs to having expenses that have to be absorbed over a lower sales base than it would with having anything to do with the overall margins we have on selling our products.
Q - Romeit Shaw - Lehman Brothers
You’re saying production is not really going to change and ASPs generally don’t have an impact on the margins, that’s correct?
A - Paul Coghlan
That’s correct. So you may have a little bit come down, but you know there’s a lot – this is also a time when you can try to adjust some of your spending, you can kind of have your belt notched up a notch or two to try and offset some of the negative ratio.
Operator
We’ll take our next question from Steve Smigie – Raymond James.
Q - Steve Smigie – Raymond James
How quickly can you get the R&D and SG&A down in this coming quarter, that you guided for, in order to keep your operating margins in line or will you not do that?
A - Paul Coghlan
We hope to keep our operating margins reasonably in line with where they are. There may be little tweaks, but I don’t think there’ll be something significant. We addressed an earlier question, saying we probably wouldn’t hire as many people, or definitely wouldn’t hire as many people. There are other expense items you look at that tend to be discretionary, events you may have planned that you may decide not to carry through with that impact these lines, there are some other expenses in the legal areas and areas like that that you may try to see if you can manage your expenses a little better there.
Q - Steve Smigie – Raymond James
Any thoughts on continuing to see shares being bought back in this coming quarter?
A - Paul Coghlan
The board authorized us as we went into the new year to buy 20 million. We were buying on a pace kind of equal to that. We bought 2.9 million last quarter. Our estimate is we’ll probably continue along the same pattern at this stage.
Q - Steve Smigie – Raymond James
You mentioned that consumer was a little bit less than you expected. Are you typically selling directly to OEM now, or is it all for sub contractors or distribution to sub contractors? Or a mix of that?
A - David Bell
This is Dave. It’s certainly a mix of that, but obviously the consumer guys tend to be fairly high volume so most of those products go to contract manufacturers, principally in Asia.
Operator
We’ll take our next question from Lewis Gerhardy - Morgan Stanley.
Q - Lewis Gerhardy - Morgan Stanley
I just wanted to clarify, when you talked about consumer, are you referring to your high end consumer specifically or just consumer products in general, that would include things like cell phones?
A - David Bell
We do break out the cell phones separately. We actually include the cell phones in our communications piece and as Paul talked about in his monolog, that was about 9%. The rest of the high end consumer products we break out was also coincidentally about 9%, those would be products like mp3 players, digital still cameras, GPS equipment and the like. Really there are those two separate categories there.
Q - Lewis Gerhardy - Morgan Stanley
What I’m trying to ask is when you’re talking about consumer bookings being up but not as much as you expected, are you referring just to your narrow definition of high end consumer, or just consumer products in general?
A - Paul Coghlan
A more narrow definition of high end consumer.
Q - Lewis Gerhardy - Morgan Stanley
The bookings were up roughly 40% sequentially in that area. Was your expectation before that maybe it could double sequentially?
A - Paul Coghlan
If you look at the previous year, the consumer was 14% in the similar quarter of the previous year. It’s 9% now. We probably expected it to be a double digit number.
Q - Lewis Gerhardy - Morgan Stanley
For your gross bookings in the December quarter, would you expect any big shifts in the mix between the different application systems and markets?
A - Paul Coghlan
I don’t know if we’d have substantially different changes. Consumers sometimes could come off a bit because what hasn’t shipped into the holiday season by the middle of the quarter certainly won’t be robust. Some of the other areas, you may get some increase in bookings as they get ready for spending going into the new year. There is often times a shift but if I look a year ago, for example, the second quarter consumer went down from 14 to 11 and communications and industrial went up a little bit. It’s kind of more the first quarter in the calendar year when you see really more of a shift. Comparing the March quarter to the summer quarter, the personalities are more dramatically different than comparing the December quarter to the summer quarter.
Q - Lewis Gerhardy - Morgan Stanley
Would you expect to grow your backlog in the December quarter sequentially?
A - Paul Coghlan
We’d have to see how that’s going to play out. If we look, recently we’ve been running pretty close to parity on book to bill ratios. In the last several quarters. That’s kind of early to call, but in giving you the forecast we gave you, we did not expect within that a significant pick up in bookings.
Q - Lewis Gerhardy - Morgan Stanley
Is it safe to assume then that your turns requirement for December will be similar to what you did in September?
A - Paul Coghlan
Yes, we mentioned that, it is safe to say.
Q - Lewis Gerhardy - Morgan Stanley
On your factory loading and inventory, you mentioned you’ll keep the factory loading the same. Should we expect inventory to go up a little more in the December quarter?
A - Paul Coghlan
We’re planning to run the factories about where they were run in the previous quarter. Since some of the increases that we saw from inventory were things like raw materials, I don’t expect those to repeat themselves. There might be a little bit of up tick in the inventory, but I wouldn’t say anything significant.
Q - Lewis Gerhardy - Morgan Stanley
You mentioned earlier in the call some supply problems other than Linear Technology. Can you just elaborate on what you meant by that?
A - David Bell
Lewis, you’re talking about when I was referring to some of our client consumer customers?
Q - Lewis Gerhardy - Morgan Stanley
I believe that was what you were talking about, yes.
A - David Bell
I’m not going to mention names of customers, but I think what I was referring to is we have had a number of instances where our customers pointed to some specific shortages of components as one of the reasons that their forecasts are down for the coming quarter. I hope that’s enough information for you but I can’t really give you any more details on that of course.
Operator
We’ll take our next question from Jeff Rosenberg – William Blair & Company.
Q - Jeff Rosenberg – William Blair & Company
When you think about the efforts you’re making to gain market share, can you talk about that relative to competition, in other words particularly in high volume markets like consumer or cell phone. I think there’s a perception that you’re seeing more competition. Do you agree with that? Or if you are seeing more competition, is there anything differently you’re doing to keep your share the same and growing?
A - David Bell
Jeff, this is Dave. Certainly the cell phone markets are very visible, large markets, so there’s no question that there’s a lot of competition there. As our business strategy has always been, we focused on the high end products, whether they be cell phones or MP3 players, you name it. We’re focusing on the customers and the products where they really need the kind of performance that we bring. If you look back a year or so ago, percentage in cell phones I think was probably in the 13% range or something like that, maybe a little bit more than a year ago. If you look now, it’s come up a little bit from the 7-8% up to 9%. I think we’re gaining some of that back and a lot of that is because we’re now starting to see new models and some high end phones with video capability and the like, where they really need our kind of features. Again it’s a very competitive market. We need to pick our battles and make sure we’re focusing our energies, both our sales energies and our product development energies, on places where customers value the performance that we bring.
A - Paul Coghlan
Jeff, this is Paul. It wouldn’t be fair I think to conclude that where we see our growth is only in the high end consumer area. Actually some of the newer products we’ve talked to you about in recent quarters, products like the module, the micro module product and our A to D converters etc., are more aimed at our diversity, more aimed at growing not just in consumer but across the board. Areas like industrial areas, communications infrastructure areas. We hope we’ve communicated to you that it’s not just high end consumer where we see we’ll be able to grow. We look at automotive as a good opportunity for us and just some of these products we talked to you about have more characteristics of the broad based market than they do necessarily consumer. We also, as Dave says, have efforts in the consumer area, coming out with products directed there, we continue to be the leader in battery management and operating off lithium batteries etc. Hopefully you’ll focus on the diversity as opposed to just one of the particular markets.
Q - Jeff Rosenberg – William Blair & Company
That’s fair, but I also think – and I think you just touched on it – that you have said to us that over the past couple of years, there’s more opportunity for you in some of these high-end consumer products that have more interesting analog applications. I guess my question was, as you look to gain your market share there, are you seeing that you need to do anything differently competitively given the nature of those markets?
A - David Bell
I think we need to continue doing what we have been doing for years and that’s coming out with the products that address the design challenges of our customers before competition does. As long as we stay ahead of that power curve and address those with leading edge products before our competition does, I think we’ll continue to see good sales in high-end consumer. As I’ve mentioned a couple of times so far, I don’t think any of the problems that we’re seeing in this present quarter are due to market share loss. If anything, we’re seeing some market share gain back again in the cell phone area, but it’s an overall, industry-wide problem, kind of the summation of a whole bunch of unique stories I suppose, from these high end consumer companies. Keep it in context as well, as Paul was kind of alluding to. The combination of cell phones in our high end consumers is 18% of our sales. It’s an important portion of our sales, particularly in December, but there’s a lot of focus in the company and all these other areas as well.
Q - Jeff Rosenberg – William Blair & Company
I also wanted to ask – just to clarify, when you’re talking about the increase in headcount from a design engineering point of view, the 25-26% number you’ve talked about the last couple of quarters, that’s your satellite design centers I think. If that’s right, could you talk about what the overall total design engineering headcount growth has been? Should we think about that as being in line with the 20% you were talking about driving for long term growth? Or is there a productivity growth there that helps you get the new product introduction target you need?
A - David Bell
You’re right, the 25% number we referred to was for our satellite design centers, and right now our satellite design centers account for roughly two thirds of our design engineering headcount. You can kind of do the math. It’s probably somewhere in the slightly under 20% growth then for the overall company. We’ve had a pretty good six months, or even last year in hiring. You can probably anticipate that is going to slow down given the current conditions.
Operator
We’ll take our next question from William Lewis - J.P. Morgan.
Q - William Lewis - J.P. Morgan
Just a quick clarification on the guidance, then I have a question. Relative to profits being down in the December quarter similar to the revenues, I know you mentioned essentially with margins flat to down a little bit, operating expenses are going to need to come down a bit. Could you just maybe elaborate a bit more on specifically where you’re going to save money? Because it would imply significant dollar reduction in both R&D and SG&A assuming you’re adding headcount – if you could just talk a little bit more about where you’re likely to save?
A - Paul Coghlan
This is something we’ve done in the past, Bill, so if you go back to the big downturn in 2001, Linear, its sales dropped off dramatically by 47% but its return on sales went from 43% to 38%. The company has demonstrated a history of having a fair amount of variable costs. Variable costs in the labor area in particular, and then variable costs and other kind of big expenditures like certain product events or communications events. The company has always demonstrated an ability to be able to tighten those when it has to, relatively quickly. An area you may see is in those variable portions of our labor that we may be able to share some of the pain between the investor and us so that if sales don’t meet the goals we and you expect them to do for us, we view that as not just an investor issue to be dealt with, but partly an employee and partly an investor issue.
Q - William Lewis - J.P. Morgan
Will options expense remain at this level for the fiscal year, or will that trend down as well?
A - Paul Coghlan
Option expense may actually trend up slightly next quarter, and then probably flatten out a bit. So I don’t think the increases will be as dramatic as they were in this past year. The past year, we hired more people, we addressed certain issues, we think we’ve addressed those and addressed those well so that we may not need to do that. But yes, those costs are in your base, Bill, they’re in your base for a while. The fact that you slow down maybe grants in those areas – if you do it doesn’t mean your expense will go down, it means it won’t rise as quickly.
Q - William Lewis - J.P. Morgan
I guess my question is, you know there’s been a lot of discussion today about the consumer business – I just wanted to ask you about your computing business. Looking back over the last four or five quarters, it’s not been an area of emphasis for you, but it’s held pretty steady as a percent of bookings. Could you talk about where you’re seeing bookings coming in the computer segment? Where the strength is there, and then what the longer-term trend is there? I think we’re generally expecting it to tail down as a percent of bookings, but kind of at what point, over what period of time?
A - David Bell
Let me take a stab at the first part of it, this is Dave. A lot of our growth in the computer area and a lot of our sales recently has been in the area of servers. Obviously with the Internet continuing to grow and so forth, servers is a good area for growth. Therefore, a lot of the focus has been for new product releases, and I think long-term that’s where we expect to see our sales growth as well. I don’t know if that answers your question or not.
Q - William Lewis - J.P. Morgan
It does. I guess looking forward over the medium to longer term, what’s your expectation for this market? How long do you anticipate the server market will remain an opportunity for high performance analog? Or is this something that you see kind of having to exit, much as you did in desktop and notebook?
A - Paul Coghlan
On the contrary, I think it’s going to probably get to be an even better market for us in some respects as more and more focus goes on power conservation. We probably have all read some articles recently about how the annual electrical cost for a big server firm can exceed the purchase price of the servers, so there’s a lot of focus now and in the future on increasing the efficiency of those power systems. I think that’s good news for us. People are going to be pushing for higher and higher performance in those power systems.
Operator
We’ll take our next question from Krishna Shankar - JMP Securities.
Q - Krishna Shankar - JMP Securities
As I look at calendar 2005, it looks like your revenues in calendar 2005 probably grew about 12% and with your guidance now for Q4, it looks like your calendar 2006 revenues will probably grow somewhere in the 7-8% range. Do you feel that the high-end analog market, if there is a whole slope down to that extent? Or are you seeing more competition? Can you talk about the dynamics of chips in the high-end analog market?
A - Paul Coghlan
We had a big royalty in early 2005, so that’s part of the fluctuations year to year. I think if you look at that, Krishna, so you probably want to adjust your percentages a little bit with that $40 million that took place early in 2005. But the overall analog market, I mean when we look at the percentage the overall analog market in 2005 grew less than 2%. So the market and then this year it’s growing more than that in 2006, but early in 2006 it was projected to grow faster than it has and then it probably was likely to grow when the year was done. I think what you’ve had is just the overall IC market that’s typically grown in the mid teens, is in a couple of years period now where it’s grown substantially less than that. So we’re impacted to some degree, since we’re a billion dollar company and we articulate so much in communicating with you our diversity, that to some degree means we’re impacted by the overall markets. But certainly we don’t believe we’ve been losing any market share.
Q - Krishna Shankar - JMP Securities
In the high-end consumer space, just to switch gears, would you include within that things like next generation games consoles, where there have been some much talked about delays, and also perhaps next generation set top boxes, would those be included in high-end consumer for you?
A - David Bell
Both of those products, Krishna, would be in the high-end consumer space. To be honest with you, we really don’t have any significant participation in the game console area. Potentially if there is some high performance needs that come along down the road there might be a market, but today we really don’t have any significant participation there. Set top boxes, on the other hand, is a market for us and as that continues to grow that could help us with our sales growth there as well.
Operator
We’ll take our next question from Simona Jankowski - Goldman Sachs.
Q - Simona Jankowski - Goldman Sachs
Paul, just a quick question on your capex guidance for the year. It seems like it came down and now it’s $65-75 million, where it was previously guided $80-90 million. I was just curious if you can give us a little more detail on the assumptions or anything you’re seeing that’s causing this.
A - Lothar Maier
This is Lothar – I mean, as we’ve seen some cautiousness in the market, you know, we’re adjusting our capital expenditure. We have the ability to react fairly quickly in terms of our factory capacity, so I don’t think by taking our expectations for capital spending down that’s going to in any way impact our ability as the market turns around very quickly, to be able to respond to it.
Q - Simona Jankowski - Goldman Sachs
A quick follow up with Dave, if I may, on your previous comment that if you compare your programs in consumer right now versus a year ago, I think you said, Dave, that you’re pretty much in all the same programs. I just wanted to clarify if you also had visibility that you’re still single source in all of those. Secondly, if you also have a meaningful number of new programs that you’re in as well?
A - David Bell
Let me see if I can remember all of your questions, Simona. Probably most importantly, yes we tend to be single sourced. As you probably know, almost our whole portfolio are unique, single source, proprietary products so when we get designed in, we are almost always single sourced in that socket. That isn’t to say that the customer couldn’t in some cases redesign a product and find another function to replace it with, but in general we have held on to our existing sockets we’ve had for the last year or so. Looking forward, we’re fairly comfortable, even with additional sockets that we’ve been gaining in some high-end consumer products. I think going forward, with a lot of these areas – mp3 players, GPS units and portable media players, satellite radio and so forth – in general we’ve been fairly comfortable with holding our position and even gaining some additional sockets as their performance requirements increase.
Q - Simona Jankowski - Goldman Sachs
So we can’t really assume that maybe some of the decline on a YoverY basis would be from some customers redesigning the products to include a second source? That’s not something that would be a meaningful contributor?
A - David Bell
No, that really hasn’t been happening. Again, as Paul as mentioned in the past, it’s not that our consumer business is going backwards, it just didn’t grow as much as we’d hoped going into the December quarter. The bookings in consumer actually grew during the last quarter. When we look at all our various customers, they in turn are revising some of their estimates down as we look towards the Christmas season.
Operator
Operator instructions. We’ll take our next question from David Wu - Global Crown Capital.
Q - David Wu - Global Crown Capital
Can you talk a little bit – I just want to make sure I got the message right. We spent so much time talking about consumer, I forget whether you mentioned about the non-consumer side. Do those kind of customers show the same hesitancy as your consumer customers? That’s one. Two, if I hear this call correctly, essentially we’re talking about – unless the macroeconomic conditions deteriorate much from here, what is to stop you from having a flat March quarter relative to the December quarter?
A - Paul Coghlan
Let me try to answer those two questions, David. The first question – consumer is normally strongest in the December quarter. Consumer grew for us, but not to the rate that we had expected and not to the rate to match what it had grown at in the past year. The reason it didn’t grow wasn’t because we weren’t in particular programs or fell out of programs or there were alternate sources in those, it was just that the consumer customers we deal with, either because of some hesitancy about the robustness of the holiday season or because of some particular individual issues, didn’t order as much. When you go on to ask how about the rest of the business, the rest of the business – particularly smaller business and things like industrial communications to some extent – normally there’s a seasonal slowness in December that reverts or turns around in the March quarter. For those kind of customers, it’s the end of their fiscal year end. For some of them it’s just a slowness in the December period. They have more holidays, they sometimes have plant shutdowns etc. so the December quarter for the non-consumer business seasonally isn’t as robust as the March quarter. The second part of your question is should there be no changes in the economy, will things roll out as they have historically and would that imply that the March quarter would be more attractive or better than the December quarter? The answer to that would be yes.
Operator
We’ll take our next question from Robert Burleson, ThinkEquity.
Q - Robert Burleson, ThinkEquity
Just a couple of quick ones. In terms of the revenue slowdown for December quarter. How much of that is a strategic decision for you guys to walk away from some business where gross margins might not be as attractive? Then also, on inventories, we’ve talked a lot about the distribution inventories being leaner this time around. Is there another place where they may be accumulating? Are you seeing anything on the EMS or contract manufacturers side in terms of excess inventory? Thanks.
A - Paul Coghlan
Can you repeat your first question?
Q - Robert Burleson, ThinkEquity
The first question was whether or not some of the revenue slowdown in the December quarter was a strategic decision to walk away from lower margin business?
A - Paul Coghlan
Now I remember, thank you for repeating it. No, the reason for the slowdown is not because we’ve walked away from any business because of pricing pressures. As both Dave and I have said, we haven’t lost any programs. We’re in the same programs we anticipated being in so that’s really not the cause of the slowdown. It’s just more the general customer base and the consumer area. We don’t believe it has as robust an outlook for this holiday season as they had for the past one. Then the other question is has there been build up outside of the distribution area such as in EMS and those areas – we don’t believe there’s been a build up there. They’re kind of two different customer bases. The EMS customer base is typically the bigger customers, where they do manufacturing for very, very large electronics customers generally. Then the other channel, the distribution channel, although it had some of that in it, it has a lot of the smaller companies in it. It wouldn’t move from distribution to the contract manufacturers necessarily for our type of products.
Operator
We’ll take our next question from John Jares[?]- The Boston Company.
Q - John Jares[?]- The Boston Company
I have a couple of questions. The first one would be, as you look out into next year and you think about the design win activity you’ve had recently and the potential for the products that you’ve won, how do you guys generally feel? Do you feel like you’ve had good activity and hopefully some of those products will be as big as some of the ones you’ve had in the past? I know not all design wins are created equal, I was just curious of what your feelings would be.
A - Paul Coghlan
Our feelings are very good in that area and to take it out of an abstract word like ‘good’ into a more positive, you know we’ve been hiring more technical people over the past couple of years. Generally, the technical people, the type of products we manufacture and make and invent, they typically take a couple of years period from when they’re first conceived into when they’re designed and researched and introduced, RPL’d[?] and sold. We told you how we’ve been increasing headcount over the years in different design centers and adding to the technical talent. That talent, you know, we believe we’ve deployed very well into good opportunities. Certainly about a half an hour or 45 minutes ago on this call we talked about growing – the internal goals that will grow the company in the 20% range. In order to do that, you need to hire good talent, focus them where you want them to be and you could look back and see that we have added talent. We should be in good programs, we should be adding to the base of products we have and we think we are.
Q - John Jares[?]- The Boston Company
The second question is if you look at the high end consumer business, last year there were some tremendous products. If you think about how popular the mp3 category was at Christmas time and the fact that the mp3 market is kind of maturing – growing last year at triple digit rates and now growing this year at 15-25% rates, is that more what’s going on in consumer do you think? Is it more of a maturation or is it something that’s more macro in nature, that we should be more worried about?
A - David Bell
This is Dave, John. There could be a little bit of both going on here. When you take collectively all these unique stories from our high end consumer customers, that might in some be kind of a macro thing going into the Christmas holiday season, but I’m no economist so I can’t really give you any predictions there. When you look at the mp3 space in particular, I think there could be some maturation going on there. Like you said, there was tremendous growth last year. It would be hard to believe you’d see the same kind of percentage growth in mp3 players going into this Christmas holiday season. What I will say is I think we’ve got outstanding market share when you look at all the key players in the mp3 space. We all know the big gorilla in that space, but even all the other secondary players, we’ve got great market position with our products in those mp3 players. I think a lot of what we’re seeing might be some realism setting in, in those customers when they look at the kind of growth they actually expect for the holiday season.
Operator
We’ll take our next question from Kevin Rottinghaus – Cleveland Research.
Q - Kevin Rottinghaus – Cleveland Research
Just to be clear, you mentioned some softness in telecom, but would you broadly say outside of consumer, you’re booking net targets, which you expect to go on into the calendar fourth quarter?
A - Paul Coghlan
Yes, broadly. I think by end market area, yes. Maybe the distribution channel in and of itself was a little less than we expected, but certainly the lion’s share by far and away was in the consumer area.
Q - Kevin Rottinghaus – Cleveland Research
Then on the shortages from some of your competitors, first up was that unique to consumer? Secondly, have those been resolved at this point or was that kind of an ongoing issue?
A - David Bell
This is Dave. It wasn’t unique to consumer, no, and I know you guys would love me to mention names and that and I can’t do that, of course. We’ve heard several instances of component shortages being used, at least as an excuse for why the volumes that were forecast from our customers were being revised downwards. Some of those situations, I understand are being remedied but perhaps not resolved completely.
A - Paul Coghlan
Some of those would not necessarily – you’ve alluded to them being ‘our competitors’. Those could be products that aren’t analog products, but are critical products in the end customer’s end product. You shouldn’t conclude that what we’re saying is that competitors of ours have had problems meeting their deliveries. It could be other components.
Q - Kevin Rottinghaus – Cleveland Research
Just to clarify on consumer, the forecast that you were given for the calendar first quarter were weaker than you expected – it’s not cuts in the forecast over the past month or so? Is that correct?
A - Paul Coghlan
I don’t see the difference – can you repeat the question please?
Q - Kevin Rottinghaus – Cleveland Research
The forecast that you were giving right now for Q4 came in weaker than you thought, but it’s not that they planned for X and they’re coming in at X minus one? They haven’t cut forecast for Q4?
A - Paul Coghlan
No, it’s not like we got an order and they’ve now cancelled it, if that’s your question. This isn’t cancellations. Cancellations were very minor, both in Q3 and we expect they’ll be minor in Q4.
Q - Kevin Rottinghaus – Cleveland Research
On the consumer, is there any way you can tell geographically if it’s weaker for a particular area or not, and I wonder if – Chinese new year is three weeks later this year – 2007, than 2006. Does that have any impact to you, could things pick up later in the year than you expect, say into December versus ending in November?
A - David Bell
To be honest with you we really don’t look at those numbers geographically. You can actually look at it two ways. You can look where we ship our product, not surprisingly most of the consumer products are built in Asia so most of our components ship to Asia. Where they actually get consumed around the world, quite honestly, we don’t pay a whole lot of attention to that. We just look at the overall total number. I’m not sure if that helps you out or not.
A - Paul Coghlan
I don’t think it’s a Chinese new year phenomenon. I think we feel it’s more – at this stage, we think it’s more kind of a general holiday season demand.
Operator
At this time it does appear that we have no further questions. Mr. Coghlan, I’ll turn the call back over to you for additional or closing remarks.
Paul Coghlan
All right. Thank you very much for your attention. As you know, we’ve told you we’re going to face a little bit of a difficult quarter in December. We don’t think it’s anything fundamental. We think our business is very strong, and we look forward to a good, strong calendar 2007. Thank you for your attention and have a nice day.
Operator
Once again that does conclude today’s conference, thank you for your participation, and have a nice day.
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