Linear Technology's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Executives

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

Lothar Maier - Chief Executive Officer and Director

Analysts

Craig Berger - FBR Capital Markets & Co., Research Division

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

John Pitzer - Crédit Suisse AG, Research Division

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Unknown Analyst

James Covello - Goldman Sachs Group Inc., Research Division

David M. Wong - Wells Fargo Securities, LLC, Research Division

Craig A. Ellis - Caris & Company, Inc., Research Division

Uche X. Orji - UBS Investment Bank, Research Division

Auguste Gus Richard - Piper Jaffray Companies, Research Division

Mark Lipacis - Jefferies & Company, Inc., Research Division

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

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

JoAnne Feeney - Longbow Research LLC

Shawn R. Webster - Macquarie Research

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

Linear Technology (LLTC) Q2 2012 Earnings Call January 18, 2012 11:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Linear Technology Corp. Fiscal 2012 Second Quarter Earnings Conference Call. Just a reminder, today's conference is being recorded. Now for opening remarks and introductions, I'd like to turn the conference over to Mr. Paul Coghlan, Chief Financial Officer. Paul, please go ahead.

Paul Coghlan

Hello, good morning. Welcome to the Linear Technology Conference Call. I'll be joined today by Lothar Maier, our Chief Executive Officer; and Bob Swanson, our Executive Chairman. I will give you a brief overview of our recently completed second quarter 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 the press release which was published last night. However, first, 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 October 2, 2011, 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'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're free to respond to these questions.

As you can tell from our press release, although we are in a difficult business environment, we believe our business will improve in the upcoming March quarter. We reported revenue results for the quarter at the midpoint of our guidance. Going into the quarter, our expectations were low. We did not expect any pickup until the new calendar year. Following that guidance, bookings were down in October and November. However, that changed and they were stronger in December than we had anticipated.

Generally, throughout this quarter, customers continued to be very cautious and concerned over general global macroeconomic conditions. They acknowledged in-demand opportunities but were in a wait-and-see mode and running tight inventories. However, after the pickup in our December bookings, bookings activity has continued improving in January. We did not see many cancellations or push-outs but did experience some pull-ins late in the quarter. In summary, our bookings were down from the prior quarter and we did have a negative book-to-bill ratio, although closer to parity than in recent quarters.

Sales decreased by 11%. Gross margin decreased from 75.8% to 74.9%. We again had shutdowns in all our factories and this, coupled with absorbing fixed costs over a lower sales base, detracted from gross margin. ASP improved modestly from $1.78 to $1.83, largely due to overall mix. Operating expenses decreased 5.5% or $5.1 million as we reduced some variable spending, primarily in the labor area by having shutdowns in the holiday weeks and by reducing profit sharing.

Operating income at 45.2% of sales, down from 47.8% last quarter was within our forecasted range, having been impacted mostly by the decrease in sales. Below the operating line, interest income expense was unchanged. However, we did incur $3.2 million in acquisition costs related to our purchase of Dust Networks.

Finally, income taxes decreased due to lower profits, resulting largely from decreased sales. Our effective tax rate of 26.25% was similar to the prior quarter. The resulting net income of $87,885,000 is a 30% return on sales. Although down from last quarter, still a very strong result especially in these economic times.

Headcount decreased slightly as increases in the technical talent from our acquisition of Dust Networks was more than offset by reductions in direct labor at our overseas manufacturing plants. In summary, the effect of the items I just listed on the published quarterly results was that revenue was $294.3 million for the second quarter of fiscal year 2012, compared with the previous quarter's revenue of $329.9 million and $383.6 million reported in the second quarter of fiscal year 2011.

GAAP earnings per share of $0.38 decreased $0.09 from the previous quarter's EPS, of which $0.01 was due to acquisition-related costs this quarter, and EPS decreased $0.24 from the $0.62 per share reported in the second quarter of fiscal 2011. GAAP net income was $87.9 million compared with $108.4 million last quarter and $143.7 million reported in the second quarter of last year.

Earnings per share would be $0.45 on a pro forma basis, which excludes the impact of stock option accounting, acquisition costs and the amortization of debt discount, which is the theoretical difference between the company's convertible debt actual interest and the interest it would have potentially had to pay if it had used straight bank debt.

During the December quarter, the company's cash and short-term investments balance increased by $69.8 million to $1,037,500,000 million, net of spending $25 million to purchase Dust Networks. The company announced that it would increase its quarterly dividend from $0.24 to $0.25 per share. The company has raised its dividend every year since it began paying a dividend. This marks the 20th consecutive year the company has increased its dividend. The company's commitment to increase its dividend despite various economic cycles underscores its belief in the strength of its business model and its strong financial position. This cash dividend will be paid on February 29 to stockholders of record on February 17.

Looking ahead to the March quarter. We believe that although we are still in challenging global economic environment, we can see improvement on the horizon and are at an inflection point in our business. We believe that macro conditions are not worsening, particularly in the USA, and that inventories worldwide at customers were tight exiting the calendar 2011. Our bookings improved in December and continue to strengthen in January. Historically, the March quarter is strong for us as there are fewer holidays in the USA and Europe, which generally helps our industrial business to get off to a good start. Accordingly, we are estimating that we will grow quarterly revenues sequentially in the 4% to 8% range.

Operating profits, we expect to grow also but at a slightly lower rate than sales, as the March quarter will have fewer shutdowns and a modest impact from the Dust Networks acquisition.

Now I would like to address the quarter's results on a line-by-line basis, starting with the bookings. Bookings decreased this quarter over last quarter but did gain momentum at the end of the quarter. We again had a negative book-to-bill ratio, although closer to parity than recent quarters. Geographically, bookings were down in all major geographic areas.

By end market, bookings in absolute dollars were down in most areas, relatively flat in automotive and up modestly in computer. 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.

Industrial and communications continue to be our largest areas. Industrial was 39% of our bookings, down from 41% and down in all major geographic areas. Our industrial business is very broad-based, both geographically and by end products.

The communications area at 22% was similar to last quarter, although down in absolute dollars. The wireless infrastructure area was weak, whereas networking equipment showed some improvement. Cellphone remained at roughly 1% of our business.

Computer grew to 12% from 11% last quarter. Within computer, we service opportunities in notebooks, desktops, tablets, servers, storage devices and printing and imaging end products. Solid-state drives showed the most improvement within this quarter.

Automotive increased from 16% to 17% of our business, after having increased significantly in the prior quarter from 12% to 16% of our business. Japan was our strongest area, as continuing recovery from the Japanese earthquake was one of the positive contributors in the automotive area. Expansion of existing Linear parts into new car models and also new parts for new programs, especially in the hybrid and electric vehicle area, continue to help us. Automotive is an area that we have been focusing on given the increasing electronic content in automobiles. 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 increased from 3% to 4% of bookings, largely due to rounding. Finally, the military, space and harsh environments products were down from 7% to 6%, again largely due to rounding. The U.S.A. and Europe are the predominant geographic areas for this business. Note that we have a good balance of where our bookings are actually created, with 45% of them created in the U.S.A. and 55% internationally, versus 42% and 58% respectively last quarter.

Moving from bookings to sales. Net sales decreased 11% from the prior quarter, while decreasing 23% from the similar quarter in the prior year. Sales decreased in all major geographic areas. In summary, the U.S.A. at 30% of sales was up 1% from the prior quarter, and Europe at 17% of sales was down 3 percentage points. The seasonal holiday period and the macroeconomic issues in Europe contributed to this reduction. Japan, at 16% was similar to the prior quarter, and Asia-Pacific, at 37% of sales, was up 2 percentage points from the prior quarter, largely due to an increase in broad subcontractor business.

Gross margin. Gross margin at 74.9% of sales declined from 75.8% in the previous quarter, largely due to absorbing fixed costs over a lower sales base. The factories continued having shutdowns in the quarter. ASP increased from $1.78 to $1.83, largely due to slight changes in mix, and there were also lower profit sharing costs in the quarter. These latter benefits were partially offset by an increase in inventory reserves on inventory.

R&D. R&D at $52.5 million decreased $2.4 million from the $54.9 million reported last quarter, however, increased as a percent of sales to 17.8% from 16.6% due to lower sales volume. Labor costs decreased primarily due to shutdowns during the holiday weeks and lower profit sharing and stock compensation charges. Also, other R&D-related expenses decreased modestly.

SG&A. Selling, general and administrative expense at $34.9 million decreased by $2.8 million, however, increased as a percent of sales to 11.9% from 11.4% due to lower sales volume. Labor costs decreased largely due to reduced profit sharing, shutdowns during the holiday weeks and lower stock compensation charges. Also, non-labor-related SG&A costs decreased modestly in the period.

Operating income. As a result of the above, operating income decreased by $24.5 million or 15.5%, and as a percent of sales, decreased to 45.2% from 47.8% last quarter. Spreading fixed costs over a reduced sales base largely contributed to the decline. However, this is still strong profitability and clearly puts us ahead of our peers in this financial performance measurement. Both interest expense at $7 million and the amortization of debt discount at $4.9 million were similar to last quarter. Interest income of $1.1 million decreased slightly by $100,000.

We did have acquisition-related costs during the quarter. During the quarter, the company purchased Dust Networks for $25.2 million plus the future payment of some minor previous Dust commitments. Dust is a leader in wireless sensor networks, which helps customers initially in the industrial area enable their products to have more wireless attributes. Initially, we expect sales to be roughly $2 million per quarter. We are optimistic that we can grow this emerging business opportunity. Also initially, we expect to incur losses of $1 million to $2 million per quarter, most of which relate to the amortization of intangibles derived from the acquisition. Finally, we expect Dust to be cash flow positive in early calendar 2013.

As a result of all of the above, the company's pretax profits were $119.2 million, down $27.8 million from last quarter. Pretax profits are now 40.4% of sales versus 44.6% last quarter, with the reduction due primarily to the lower sales volume and also due to acquisition-related costs.

Our quarterly effective income tax rate was 26.25%, similar to last quarter. And once again, we had no discrete tax items. Absent discrete tax items, our annual effective tax rate for the rest of fiscal year 2012 is currently estimated to remain at 26.25%. Any changes in U.S. legislation relative to taxes could impact this going forward.

The resulting net income of $87.9 million is a decrease of $20.5 million from the previous quarter, due mostly to lower sales volume and partially to acquisition-related costs. The resulting return on sales was 30%, down from 33% last quarter. The average shares outstanding used in the calculation of earnings per share decreased by 580,000 shares. The company did not purchase any shares on the open market this quarter.

GAAP earnings per share was $0.38, which was a decrease of $0.09 from the prior quarter. On a pro forma basis, without the impact of stock-based compensation of $14.9 million, non-cash interest expense of $4.9 million and acquisition-related costs of $3.2 million, diluted earnings per share would've been $0.45 per share compared with $0.53 last quarter and $0.70 in the second quarter last year.

Moving to the balance sheet. Cash and short-term investments increased by $69.8 million. $143.6 million was provided by operations, and $18.6 million was provided from the exercise of stock options by employees. $55.8 million was paid in cash dividends, $24.8 million was dispersed in the Dust acquisition, $7.5 million was used to purchase fixed assets and $4.1 million was used to repurchase restricted stock. For the 103rd consecutive quarter, the company had positive cash flow from operations. Our cash and short-term investments balance is now $1,037,500,000 and represents 60% of total assets.

Accounts receivable of $139.3 million decreased by $22.6 million from last quarter due to the decrease in shipments. Our day sales and accounts receivable were 43 days, down from 45 days last quarter. Inventory at $78.7 million increased $4.1 million from last quarter. Dust inventory was about half of the increase. Linear raw materials decreased in response to lower sales, whereas WIP inventory at the die bank stage increased. We believe investing modestly in die bank inventory will again enable us to better service customers when demand increases. In summary, our quarterly average inventory turns is 3.9x, down from 4.3x last quarter. Deferred taxes and other current assets of $64.9 million were similar to last quarter.

Property, plant and equipment decreased by $4.7 million. We had additions of $7,478,000 and depreciation of $12,135,000. Most of the additions were for buildings to complete fitting out our renovated R&D building here in California and for test and assembly equipment. Fixed assets associated with the Dust acquisition were minor. For fiscal 2012, we expect additions of roughly $35 million and depreciation of roughly $45 million.

Other noncurrent assets increased by $17.8 million. This was largely due to the Dust acquisition, which generated some long-term intangible assets. Identified intangibles of $17,100,000 were recorded, which relate to the appraised value of Dust technology and customer lists, which will be amortized over a 5- to 10-year period. Goodwill of $4.9 million was also recorded, which is the residual value between identified intangibles and our purchase price for Dust. This goodwill is not amortizable.

Finally, on the asset side of the balance sheet, our return on assets was 20.8%, down from last quarter's 26.4%, due primarily to the reduction in sales. Our current ratio was 8:1, up from 7.5:1 last quarter.

Moving to the liabilities side of the balance sheet. Accounts payable increased by $2.8 million, largely due to differences on recurring payable items. Accrued income taxes, payroll and accrued liabilities decreased by $8.2 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 a semiannual interest payment this quarter. The profit sharing accrual increased as we had our quarterly charge and no payout since payouts are made in the first and third fiscal quarters. The largest change was a decrease in our income tax accrual as we had 2 quarterly federal tax payments this quarter and no fiscal 2012 required quarterly tax payments last quarter.

Deferred income on shipments to distribution was similar to last quarter since it decreased only $374,000, as our shipments to U.S. distributors were similar to what they shipped out to their end customers. Our accounting on shipments to U.S. 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 inventory at distribution to properly position the inventory relative to potential demand.

Our senior convertible notes increased by $4.9 million. This increase reflects the non-cash amortization of debt discount charged to the income statement. Deferred tax and other long-term liabilities of $162.4 million increased $5.8 million, largely due to deferred taxes on the earnings of our foreign manufacturing plants.

Changes in the stockholder equity accounts were primarily the result of the usual quarterly transactions for net income, for dividends paid and for employee stock activity. The company announced that it will increase its quarterly dividend to $0.25 from $0.24 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 3% yield.

Looking forward. Going into the March quarter, we believe we are at an inflection point, and we expect business to improve from here. First of all, the bar to go over is definitely lower, as we have had 3 down revenue quarters in a row and our sales are down 23% from this time last year. The sense has been that inventories at our customers have been reduced more than their end demand has shrunk.

To the best of our knowledge, the contraction in our business has not resulted from lost programs. Rather, we see our opportunities in our end markets expanding. In our industrial end market, our reduction in sales appears to be more the result of inventory tightening than lost opportunities. In the communications end market, wireless infrastructure spending has been less than it would appear will be necessary to support the added demand from new smartphones and tablet computers. We believe more funds are about to be spent in this area. In the automotive end market, we have been winning designs, some of which are about to go into production. Finally, in the computer end market, we see improving business, particularly in the solid-state drive market.

These subjective beliefs that business should improve have been supported by objective results. Our bookings in December were substantially better than the month of November. So far in January, our daily bookings rate is exceeding our December actual rate and also exceeding our original estimates for January.

On a cautionary note, customers are still concerned about the global macroeconomic environment. Europe still seems burdened by its sovereign debt issues. On the positive side, the U.S. appears to be growing again. Recent economic news out of China is good and is expected to grow its economy this year, but not as robustly as in recent years. Weighing all these factors, customers, although cautious, appear to want to stop reducing inventories and invest modestly in demand.

Summarizing these inputs, particularly the improvement in our bookings and the fact that historically, March has more business days than December, we are estimating that revenues in March will grow in the 4% to 8% range. Operating income, we estimate, will increase but also, operating margin as a percent of sales will be roughly similar to last quarter, as it will have fewer shutdowns and will absorb some modest impact from our Dust Networks acquisition.

In summary, we continue to believe that 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 a more reliable supplier with consistently lower lead times, 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] We'll take our first question today from Tore Svanberg with Stifel, Nicolaus.

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

A few questions. First of all, Paul, you talked -- in regards to your guidance, you talked about some new design wins and some new markets that you're penetrating, but then you also talked about distributors having very low inventories. If we look at the 4% to 8% growth in the March quarter, is there a way to quantify what comes from one over the other?

Paul Coghlan

Let's see, let me think about that for a minute. There are some new programs that we're in that we think will pick up some in the March quarter. There's probably more programs we are already in that we think there'll be more volume in the March quarter. And I don't think a lot of our growth in the March quarter is going to be a result of changing in ending inventory balances at distributors, comparing the end of December to the end of March.

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

Very good. And as a follow-up to that question, you obviously talked about your bookings by end market. If you look at sales growth in the March quarter, what areas would you expect to be relatively stronger?

Paul Coghlan

I think we see the improvement in bookings kind of across each of the end markets, I think usually industrial. Industrial has dropped from 43% of sales to 41% to 39% now. Normally in the March quarter, industrial, which is kind of predominant in Europe and somewhat in the distribution sectors of the U.S.A., that normally picks up in March but we also see good opportunities in computer. We see good opportunities potentially starting in communications, maybe wireless infrastructure will pick up a little bit. And then in automotive, we've kind of continued on a pretty good run in automotive. So I think that the growth that we anticipate isn't concentrated in one area.

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

Very good. Last question, you made an acquisition this last quarter, Dust Networks. I believe that's the first acquisition you have ever made. Could you talk a little bit about what the company strategy is going forward? Should we expect this to be the beginning of more to come? And maybe you could talk a little bit about why now when it comes to Dust? Are they about to hit an inflection point? Just trying to understand the timing of buying the company now because obviously, you probably could have acquired them before as well.

Lothar Maier

Tore, this is Lothar, maybe I'll try to answer that. In the past, Linear, we've looked at companies all the time. There's opportunities for technology purchases and acquisitions available to us all the time. And so we see things from time to time, and in the past, we've done some small acquisitions, mostly related to technology. And when we first became aware of the Dust opportunity, quite frankly, it was looked at more as a technology purchase where they had some wireless technology that we felt that would complement some of our energy-harvesting products. And that's really how we initially got interested into it. And once we became further involved in looking at the company, we saw that their products were well aligned with LTC's end markets as well, particularly the industrial end market. And so even though this is really our first true acquisition where we purchased technology as well as some employees along with it, it's still a modest acquisition. And probably the purchase price of this is not even twice what we've done in the past so it's not a big departure. So what I'm trying to say is this is not a departure from our past strategy of doing growth organically ourselves. This was an opportunity to add some technology to the company and pick up a complementary product. So I think it's been 30 years since we've done our first acquisition. I wouldn't put too many marks on your calendar as to when we'll do the next one.

Operator

We'll go next to Jim Covello with Goldman Sachs.

James Covello - Goldman Sachs Group Inc., Research Division

Maybe a bigger picture question to start. It always comes up from investors in quarters like this where you have very good results, maybe that people didn't expect, or guidance that people didn't expect. How do you think about measuring your growth rate versus peers? What are fair comparison points for us to think about when you think about your revenue growth versus your peer group?

Paul Coghlan

You mean, do we think we'll under or over perform our peer group?

James Covello - Goldman Sachs Group Inc., Research Division

Well, I don't mean so much a projection looking forward. I guess it's more of a question, when you measure it looking backward, how exactly do you think about it? It's obviously a point of controversy because so much of it depends on starting points and ending points and the differences in your lead times and product cycles and market exposures versus some of your peers. But the investment community is always asking us about how we think about your growth rate versus your peer group, and I'm kind of curious as to how you think about that historically?

Paul Coghlan

Well, I think first of all, we really focus mostly on ourselves and our opportunities and not view what we're doing necessarily relative to our competition. Sort of like when you get into these football playoffs you see teams saying, "If we execute, we don't have to worry about what the other guy does. We just need to execute, and then we'll win the Super Bowl." And I think that's really kind of how we operate here. You know we're more predominant other end markets than our competitors, so that industrial is our biggest market. Automotive, we've been talking to you for several years how we intended to grow that, and we've grown that from low single-digits to now in the high teens. And we've also told you that we think, by and large, the consumer and the cellphone market are more commodity markets and not ideal place for us. So we let our competitors, I don't know if let's the right word, but our competitors choose to spend more time in those areas. They do well in it, I think. They're well profitable. But we really focus on what we're good at and what we do, and we don't spend much time at the end of a quarter saying, "Well, how did we do relative to TI or ADI or Maxim?"

James Covello - Goldman Sachs Group Inc., Research Division

Okay, that's helpful. Now, if I could just ask a follow-up. I mean, you talked about some of the markets that you're less focused on. Consumer is one of them but you have had good opportunities in some of the tablet areas from time to time. One of your big historical customers is launching a new product there. Is there any benefit in the March quarter from the ramp of one of the new tablet devices?

Paul Coghlan

Well, we don't talk about specific customers, but I don't think any of the results in the March quarter for us are tablet-oriented.

Operator

And we'll take our next question from JoAnne Feeney with Longbow Research.

JoAnne Feeney - Longbow Research LLC

I'd like to get a little bit more into the details of bookings patterns. I was wondering, relative to revenues last quarter, you said that book-to-bill approached -- you're getting closer to one. Can you tell us by how much bookings were down as a percentage quarter-over-quarter in the December quarter?

Paul Coghlan

I don't have that right in front of me. They were down, but they were down less than sales, but I don't have the exact number. Sales were down 11%. Bookings were down, but they weren't down by 11%.

JoAnne Feeney - Longbow Research LLC

Right, okay. And then in the current quarter, if the current trajectory continues, what you've seen from December to January, would you expect book-to-bill to exceed 1 in the March quarter?

Lothar Maier

Well, we don't want to get in the habit of forecasting book-to-bills. We don't do that. We kind of forecast sales, but I think our present belief is that we would probably end the March quarter with a positive book-to-bill ratio.

JoAnne Feeney - Longbow Research LLC

Okay, great. And then if I could one follow-up. On the utilization side, you were keeping utilization up, I think trying to take advantage of being able to stock die bank inventory. Do you see utilization rising this quarter or staying level with the December quarter?

Lothar Maier

Our factory utilization, I think, will stay about flat this quarter versus the December quarter. We'll continue to have factory shutdowns in the current quarter, about the same as we had last quarter.

JoAnne Feeney - Longbow Research LLC

Okay, great. And how many days of shutdowns did you have? Did I miss that?

Lothar Maier

It varies, but from factory to factory, it's 1 to 2 weeks.

Operator

And we'll take our next question from John Pitzer with Crédit Suisse.

John Pitzer - Crédit Suisse AG, Research Division

Paul, you mentioned in your prepared comments that there's an opportunity for perhaps wireless infrastructure to come back. Is that embedded in the guidance for the March quarter, or is that something do you see is more kind of in the first half of the calendar year? And I guess what's giving you confidence that the wireless infrastructure opportunity could be coming back?

Paul Coghlan

Yes, I don't think we have much of that in the March quarter. We're starting to see some percolation in, especially offshore in that infrastructure area. So it's at what I'd call its embryonic stages but there's breath in the body, and that's been a pretty kind of down market for, I think, all of us. We've just seen a little bit of pickup so far, but I think that would impact sales more after the March quarter than the March quarter.

John Pitzer - Crédit Suisse AG, Research Division

And Paul, is this more 3G-related or LTE initial build starting to happen or how would you characterize that front?

Paul Coghlan

It's more just existing business that we had coming back again.

John Pitzer - Crédit Suisse AG, Research Division

Perfect. And then, guys, you also talked about the auto opportunity. I'm just kind of curious, Paul, when you think about the 3 big buckets of autos, there's kind of infotainment, powertrain and sort of safety. And I guess I'm trying to get a sense of how much of your business is in each one of those buckets, or how levered are you to kind of the sales of hybrids and EVs? Can you give us any sort of color on how the auto business breaks down?

Lothar Maier

I don't have it broken down in those 3 buckets but generally, the infotainment navigation-type dashboard electronics is roughly about half our business, and then the rest is in other areas.

John Pitzer - Crédit Suisse AG, Research Division

And then, Paul, my last question, just on the compute strength in December. You talked about SSDs being a component of that strength. I guess I'm a little confused. Help me understand what your leverage is to the SSD side of the story, and do you see that as a trend that persists into the March quarter as well?

Lothar Maier

Maybe I can answer that. Well, there's a couple things that have helped us along is certainly the floods in Thailand had an impact on a number of hard disk manufacturers. And so that put some pressure on the solid-state drive manufacturers to ramp up and kind to fill the gap, and that's exactly what happened. And I guess more by good luck is we were designed into a number of solid-state drives that were available in the market. So it's just a bit of being in the right place at the right time.

Operator

We'll take our next question from Uche Orji from UBS.

Uche X. Orji - UBS Investment Bank, Research Division

Let me just understand how we should think about inventory exiting the March quarter. So if utilization rates are staying where they are now, and you're at the midpoint of your guide, I'm not sure how -- can you characterize for us how you see your inventory? And also, if you look at the inventory levels you built this quarter, even if you took out Dust Network, it's probably at the higher end of the range where we're used to. I understand the confidence in the recovery that you're seeing, but is the strategy to keep inventory at these levels now, or do you -- are you looking to work it back down at some point?

Paul Coghlan

I think we're pretty comfortable with where the inventory is. It grew a little bit. I can tell you going into the quarter we were trying to keep the inventory approximately flat, it came up a little bit. I guess we were a little bit surprised at how productive we were in our factories during the last quarter, and that really contributed to the increase in inventory more than anything else. So our goal this quarter is again to keep inventory roughly flat. We're guiding to that from what we're loading our factories with, and assuming we don't get surprised again by some outstanding productivity on the factory side, inventory should hang in there right about flat.

Uche X. Orji - UBS Investment Bank, Research Division

That's helpful. Can I just probe a little bit on industrial recovery? Now I understand this is no nature of industrial in Q1 versus Q4, but any insight you can provide to us as to what's happening within the end customer's inventory at industrial? The perception we all have, and you mentioned it that you are on the shipping end consumption, based on what you see today and even within the guidance you've given, do you still see yourself on the shipping end consumption? Or are you about even with where end consumption is on the industrial side?

Lothar Maier

Industrial is the hardest area for us to know what the end customer is doing. First of all, there's many, many, many end customers, it's not concentrated in a few as some other end markets are. And secondly, a lot of the sales we make into the industrial business goes through the distribution channels. A higher percentage going through the distribution channels than other end markets typically go through the distribution channels. So a lot of what we do is we look at inventory at distributors. So inventory at distributors has come down a bit. We saw towards the end of the quarter, there was some bit of pull-ins in some areas so we don't have the granularity that you're looking for by end customer and their inventories. When we talked to some of the end customers, a lot of them use subcontractors, a lot of them use distributors. It's really hard to get a read as to how they feel their ending inventories are. So I think in that area, we more look at kind of current booking trends from distributors, and we look at historical trends, particularly March having more day sales in Europe and the USA.

Uche X. Orji - UBS Investment Bank, Research Division

Right. And then just one last question please. On your dividend strategy, this has been consistently one of the strong points of Linear, your pay-in and how you raise it. Let me just ask you, is there any limitation as to your ability to continue to maintain the dividend payment? And by that, I mean do you need to have your U.S. cash flow as the source of paying dividends? Or is this something you can maintain even if there is no change that allows people to bring money outside from the U.S. in? So I'm just trying to understand how sustainable and what the strategy is around dividends?

Lothar Maier

Well, we have been committed since we announced the dividend in 1992 to make sure investors viewed it as a long-term commitment so that they'd clearly understand the cash flow properties and capabilities of the company. That theory hasn't changed now. The fact that we earn some of our cash offshore, and it remains offshore, we still think we'll have enough cash in the U.S.A. to continue to pay the dividend. We also, at this stage, believe we’ll generate enough cash internally to pay off our debt, which is due in 2014. And should we do that after that period in time, we wouldn't have further debt to pay off. So I think we'll be in a reasonable position to continue to pay a dividend in the near future, again, depending on business circumstances.

Operator

We'll take our next question from Chris Caso with Susquehanna Financial Group.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

I just wanted to talk a little bit about the margins going forward. And I think the comment you made was you're expecting these operating margins about flat into the next quarter because of the factory shutdowns. Could you give us a bit of a roadmap for how that might improve, assuming that business improves later in the year? I think right now your operating margins are down about 8% from where they were last year. At what point do you think or how do we see the roadmap for kind of getting back to where we were last year?

Paul Coghlan

Okay. First of all, we will continue to have shutdowns in the factories, as Lothar mentioned when he addressed what he thought would happen relative to inventory. However, we don't believe we'll need any shutdowns this quarter for the non-factory personnel, so that I'll have more labor costs, if you will, in R&D and SG&A for a good reason. That business is picking up and we don't need the shutdowns. There's also some impact as you heard from Dust. So that once I'm back on, if you will, full employment in the operating expense areas, and if we continue to grow our business, which we would hope to do, I don't see any reason why we wouldn't then start to increase the gross margin. So the only kind of continuing issue that's different than recent quarters would be the Dust expenses, which I've told you are -- they are there, but they're not -- they're kind of in the small area or the minimal area. But beyond that, I think we would then start moving back up our operating margin close to where we had been in the past.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Okay, that's good color. And with regard to the bookings improvement that you talked about at the end of December into January, one of the things that some other folks had talked about this year is the early nature of the Chinese New Year holiday. And I guess taking a look at your bookings patterns, do you think there's anything to do with that? Or is it broad-based enough that confidence that this is a more broader trend?

Lothar Maier

We don't have a lot of business in the consumer side so I don't think the timing of Chinese New Year helps or hurts us in any way.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Okay, good. And I guess just as a final question, as we look into next quarter and you've made some comments with regard to the growth into next quarter. But just notable, your bookings percentage from the industrial market, it did decline a bit on the last quarter. I mean, is there anything to read in that? I guess maybe the question is, as we look into next quarter into the March quarter, the sort of contribution of revenue growth among the different end markets, should we expect that to be fairly broad-based across the different end markets?

Paul Coghlan

Yes, I think it would. And I think the reduction in bookings over the last several quarters has been relatively broad-based in our end markets. One of the things in industrial is many industrial companies have the same calendar year end. Many of them are smaller companies or non-public, is probably a better phraseology. So they typically like to tighten their inventories a bit at the end of the calendar year for their financial statement presentations relative to any debt they may need to get. So that I wouldn't read too much into the industrial dropping a few percentage points. Also, you know that industrial is in -- by geographic markets, the European geographic market for us, more of its business is concentrated in industrial than say the Asian end markets or even the U.S. end market, and you know Europe's been having its troubles with its sovereign debt issues, et cetera. So if that continues, that might impact European industrial a bit. But other than that, I think it'll be fairly historical in how it performs.

Operator

We'll take our next question from Steve Smigie with Raymond James.

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

I was just curious, when I first looked at your guidance of up 40%, it seems relatively robust but I think you indicated that you'll get, I think, about $2 million from Dust, and then you have the extra days this quarter. And then you talked about some of the improvement being from, I think, less pressure from distributors reducing inventories. So just wondering if you could comment on how we should take the 40% guidance? Do you think that's indicating sort of a strong pickup with regard to the inflection point here, or should we just think it's sort of a modest pickup?

Lothar Maier

Well, we have a sample size of the month of December and early January, and in that sample size, which is relatively small, if you want to look at it that way, our business has picked up. It's picked up across a lot of end markets. It's not been concentrated in one end market. There's been a general feeling prior to that which we couldn't substantiate with data, that to us in talking to customers, it appeared that they had been reducing their inventories more than their demand. So whether this is a signal that across every end market, people are realizing that they need to take on more inventory, whether it's a combination of that and some end markets, which we think will have a little more life. We've talked to you about the infrastructure -- wireless infrastructure market, which I think everyone realize has been in the doldrums. We think that may have some life, well, that probably will impact maybe March bookings a little but more shipments later than that. So there's always kind of cross-sections of signals here, and we're kind of analyzing these signals in a short period of time. And from what we see, we think it trends that business will pick up and probably continue to pick up, but we have to see how it plays out.

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

Great. And if I could just do one more. In terms of that pickup, given the magnitude of decline we've seen up to now for yourselves and for others, does that make you feel like we could potentially see sequential growth throughout the rest of the year?

Paul Coghlan

I think it's early to call that. I mean, we don't really -- we don't call several quarters out. Obviously, at this stage, we feel pretty good about that. But we have lead times of 4 weeks, so we have lead times that cover basically 1.25 months, not 6 months. So I mean I'm hopeful that's what’ll happen, but we have to see how it plays out.

Operator

We'll take our next question from Jill Moore [ph] with Morgan Stanley.

Unknown Analyst

My question’s about your philosophy towards the consumer smartphone tablet types of opportunities that you've talked about kind of weaning yourself away from. If you see these opportunities within those markets that are very high margin, very high value-added functions, sort of the classic Linear market but it looks like sort of a 12-month product life, where eventually you sort of get designed out as they do sort of cost down versions, what's your appetite to take advantage of those types of opportunities?

Paul Coghlan

We're pretty agnostic. We're happy to take any business that meets our profile from a margin standpoint. And so if it's a good piece of business, we're not going to turn our noses up at it. But on the other hand, I don't think we spend a lot of time actively chasing that business. So if it comes our way and a customer wants to place an order, we're not going to turn it away.

Lothar Maier

Yes, I mean you described the characteristics that typically aren't available. Typically they aren't high margin, high value-added.

Unknown Analyst

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Okay. But historically, I mean, you have had those opportunities. They just -- the duration of the design win was sort of not in multiple years like a lot of your other markets?

Paul Coghlan

Yes. So nothing’s really changed in terms of our appetite to take on that kind of business. It's just that it's got to meet our margin profiles.

Operator

We'll take our next question from Gus Richard with Piper Jaffray.

Auguste Gus Richard - Piper Jaffray Companies, Research Division

I had a couple on Dust Networks. Are you going to operate this as sort of a stand-alone entity? Or are you going to fold it in with -- more tightly into Linear?

Paul Coghlan

I mean, there's 4,000 of us and only 30 of them so I think there's sort of this inevitable force that they're going to be folded in with us. I think there's a lot of value with them knowing LTC products, working with the LTC engineers. We've got some ideas for some new products. So I think there's a lot of benefit from having them closely work with the LTC people. In fact, this sort of synergy was one of the -- part of the equation of why we did do the acquisition. Some of the people may come to our corporate headquarters, others may stay where they're at presently but we plan to work very closely with them and not keep them pushed off to the side.

Auguste Gus Richard - Piper Jaffray Companies, Research Division

And then as you integrate these 2 companies, I can see great synergies between the 2 of them. And just thinking about the nodes of the network in an installation, and sort of a per port, roughly what kind of content in terms of just energy harvesting, the RF and the signal processing, do you get $5 or $6 a node? Is that a good guess?

Paul Coghlan

It really varies largely in terms of what it's going into. If it's just a simple node and a simple sensor, it would be less. If it's a node that’s attached to a more complex sensor and maybe some power storage and energy harvesting, it'll be a lot more. But it's closer to the high single-digits than it is to the low single-digits.

Auguste Gus Richard - Piper Jaffray Companies, Research Division

And then the last one, I'll [indiscernible] as you integrate the 2 companies, I would suspect you get a lot of leverage with the Linear sales force for the smaller company, and I was wondering if you could talk a little bit about maybe the end markets where you're currently engaged and where you see the biggest opportunities as you work on this?

Paul Coghlan

I think initially, our strength in the industrial market is where we'll probably see the quickest leverage from these products. I think that's where the bulk of the sales presently are. But I think the sales team, even in the short time that we've had them be aware of the Dust, have had opportunities that maybe we didn't play in because it really wasn't a good fit from a product standpoint. Going back and thinking about those opportunities, we now see some opportunities where the Dust products, coupled with the LTC products, could be complementary. And this is just -- we purchased this not really for necessarily an acquirer sales stream, it's really how it complements our current products and some future products. And so some of the emerging wireless opportunities that are out there, even some of the stuff that Dust has already, is very interesting. And I think there's, among the company, there's just a general belief in many markets, particularly the industrial and factory automation markets that wireless is the direction that they're going to be going in the future.

Operator

We'll take our next question from Craig Ellis with Caris & Company.

Craig A. Ellis - Caris & Company, Inc., Research Division

Paul, just at a high level, can you help us understand what you're seeing relative to what you might have seen a little bit less than a year ago in the June timeframe when there was some modest sequential growth that came in business, and versus maybe a couple years ago when mid-2009, there was a recovery in your business but it proved to be much more forceful? Would those trends continue? And where are you right now in terms of what you're seeing?

Paul Coghlan

Well, we're very early, I think, in the recovery now. What the pace of that will be, what the rate of that will be, we don't know. Certainly, as you allude to, when you go back to 2009, the recovery then was more rapid than we had expected. And actually, you may recall we told you having had a lot of die bank when we went into that turned out to be very helpful to us in maintaining industry-leading lead times and servicing our customer base. But I mean, it's early for us to say is this going to be a carbon copy of that? It's early for us to say that. We've just told you we've had an uptick in the month of December and so far through the new year. So it's hard to tell the slope of that curve.

Craig A. Ellis - Caris & Company, Inc., Research Division

Okay. And then going back to John's question earlier, he was asking about some of the common infrastructure stuff. Can you talk a little bit about what you're seeing on the networking side, Paul? Are you seeing a turn there or how are the networking trends playing out?

Paul Coghlan

Networking’s a little bit customer-specific so without getting into any names, we're seeing some customers last quarter that actually our business picked up with them, picked up well, and then some others still hadn't picked up. So networking overall was much stronger than the wireless side, but it tended to be customer-specific.

Craig A. Ellis - Caris & Company, Inc., Research Division

Okay. And then lastly, you mentioned an inventory charge when you talked about gross margins. That's typically something that doesn't come up in the call. Can you just quantify how big that was?

Paul Coghlan

It wasn't very big. I mean, I think I've actually mentioned it in past calls. Just generally when our inventory grows, what we do is that growth is a net growth. What we have done is we have taken certain reserves and stuff on the gross amount of inventory increase. And just telling you that whenever you see inventory grow, there's generally been a charge to abate some of that growth.

Operator

We'll take our next question from Romit Shah with Nomura Securities.