Linear Technology (LLTC) reported second quarter earnings of 62 cents, beating the Zacks Consensus by 4 cents. Earnings were up 4.2% sequentially and 87.2% year over year. However, Linear’s guidance continued to disappoint, driven by lower orders that weighed heavily on investor sentiment. As a result, the shares slumped 3.82% after-hours.
Linear reported revenue of $383.6 million, down 1.3% sequentially, up 49.6% year over year and within management’s guidance range of a 0-4% sequential decline. Street expectations were pegged below the middle of the guided range, at around $379 million, when Linear reported earnings.
It appears that the softness in end demand continues. This is surprising, considering the fact that Linear stated on the call last month that customers were holding back orders because lead times had increased. It was felt that as lead times got back to historical levels, orders too would be back.
Our sources indicated that Linear picked up some market share during the past year and we think the company was not equipped to handle the increased demand, which was the reason for expanding lead times.
Linear has now stated that lead times are back to the historical 4-6 week range, as promised. It also added that customers perceived sufficient product availability and were therefore keeping their internal inventories down. Therefore, although orders were starting to trickle in, they showed yet another decline in the last quarter. Bottom line, demand appears sluggish to our mind, possibly because of continued softness in the consumer and computing markets. We expect the situation to improve in the next quarter.
The gross margin for the quarter was 78.5%, flat sequentially and up 250 bps from the comparable quarter of the prior year. We note that ASPs have been trending upward over the preceding 5 quarters (excluding the last quarter for which information is not yet available). We think the gross margin expansion from the prior year was at least partially on account of the significantly higher ASP. And if Linear’s earlier comments are anything to go by, this trend should continue. The offsetting factor here appears to be the additional capacity that Linear has brought online, the negative effect of which should continue only until utilization picks up again. There were no one-time items in the last quarter.
Operating expenses of $100.0 million were slightly lower than the previous quarter’s $100.3 million. However, the operating margin of 52.4% was down 23 bps sequentially, as R&D expenses increased as a percentage of sales. The operating margin was up a whopping 732 bps from last year, almost equally attributable to lower cost of sales, R&D and SG&A expenses as a percentage of sales.
The net income for the quarter was $143.7 million or 37.5% of sales, compared to $137.3 million or 35.3% in the previous quarter and $75.5 million or 29.5% of sales in the year-ago quarter.
There were no one-time adjustments in the last quarter. Therefore, the GAAP net income was same as pro forma at $143.7 million (62 cents per share) up from $137.3 million (59 cents per share) in the September 2010 quarter and $75.5 million (33 cents per share) in the December quarter of last year.
Inventories jumped 10.3%, although inventory turns dropped again to 5.1X from 5.7X. Days sales outstanding (DSOs) went down by 5 to around 43. The company ended with cash of $3.22 per share, down from $4.27 at the start of the quarter.
The guidance for the fiscal third quarter was extremely disappointing, with Linear expecting revenue and earnings to decline 6-10% sequentially. Normalizing for the 14-week fiscal second quarter, this implies a sequential revenue decline of 0.9% and a sequential earnings decline of 7.0%.
Linear Technology is a very well-run company. Management has skillfully navigated the company through the downturn (as it has done in past downturns). Consequently, even with reinstatement of base pay and increase in profit-sharing, profitability has continued to improve. However, recent results are evidence of weak demand and the guidance indicates that the softness will continue for at least another quarter. Lead times coming in is a positive in our opinion, so as demand improves, Linear will deliver the kind of growth rates we are more accustomed to seeing.
Considering the end market scenario, Linear Technology shares have been assigned a Zacks Rank of #3 (short-term Hold recommendation), similar to peers Intersil Corp (ISIL), Semtech Corp (SMTC) and Maxim Integrated Products (MXIM).