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Linear Technology Corp. (NASDAQ:LLTC)

F3Q07 Earnings Call

April 18, 2007 10:30 am ET

Executives

Paul Coghlan - CFO

Bob Swanson - Executive Chairman

Lothar Maier - CEO

Analysts

Ross Seymore - Deutsche Bank

Tore Svanberg - Piper Jaffray

Michael Masdea - Credit Suisse

Craig Ellis - Citigroup

Doug Freedman - AmTech Research

Craig Hettenbach - Wachovia Securities

Chris Caso - Friedman, Billings, Ramsey

Gus Richard - First Albany

Krishna Shankar - JMP Securities

Jeff Rosenberg - William Blair & Co.

Simona Jankowski - Goldman Sachs

Romit Shah - Lehman Brothers

Steve Smigie - Raymond James

Sumit Dhanda - Banc of America Securities

Louis Gerhardy - Morgan Stanley

Paul Leming - Soleil Securities

Rengan Rajaratnam - Sedna Capital

Chris Stanley - JP Morgan

Uche Orji - UBS

Nelly Metha - Baron Capital

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Operator

Good day, everyone. And welcome to the Linear Technology Corporation Fiscal 2007 Third Quarter Earnings Release Conference Call. As a reminder, today's conference is being recorded and will conclude at 9:00 o’clock Pacific time.

At this time, for opening remarks and introductions, I'll turn the call over to Mr. Paul Coghlan, Chief Financial Officer. Please go ahead, sir.

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Paul Coghlan

Hello. Good morning. Welcome to the Linear Technology conference call. I am joined by Bob Swanson, our Executive Chairman, and Lothar Maier, our CEO. I will give you a brief overview of our recently completed third 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 have all seen copies of our press releases, which were published last night. First, however, I would like to remind you that except for historical information, the matters that we will be describing this morning will be forward-looking statements that are dependent on certain risks and uncertainties, including such factors, among others as; new orders received and shipped during the quarter, the timely introduction of new processes and products, and general conditions in the world economy and financial markets.

In addition to these risks, which we've described in our press releases issued yesterday, we refer you to the risk factors listed in the Company's form 10-Q for the quarter ended December 31, 2006, particularly management's discussion and analysis of financial condition and results of operation.

Secondly, SEC regulation FD regarding selective disclosure, influences our interaction with investors. We have opened up this conference call to enable all interested investors to listen in. The press releases and this conference call will be our forum to respond to questions regarding our estimated financial performance going forward.

We issued two press releases last night. The first was our recurring earnings release, which also announced a $3 billion stock repurchase to be done in the form of an ASR, an accelerated stock repurchase, which may take upwards of nine months to complete.

The second press release announced a proposed private placement of $1.7 billion of convertible senior notes. The Company intends to employ approximately $1.3 billion of its existing cash and marketable securities with the $1.7 billion senior convertible notes to finance the $3 billion ASR.

This substantial share repurchase underscores our belief in Linear's future. Repurchasing stock at this time represents an opportunity to use our strong cash position, together with some leveraging of our strong cash flow, to enhance long-term shareholder value.

As a result, the company may be able to purchase up to 25% to 30% of its outstanding common stock, partially funded through debt, raised in an historically attractive debt market.

Should the transaction be completed in a range reasonably close to expectations and if the company grows its revenue and roughly maintains its present profit margin structure as planned, this transaction would present accretive rewards to our equity shareholder base.

With regards to our earnings release, sales for the just completed March quarter were down 5% from the previous quarter, within the range of 4% to 7% that we had forecasted in our last conference call.

Revenue for the third quarter ended April 1st, 2007, was $255 million, down from the revenue of $267.9 million for the previous quarter and down 9% from the third quarter of last fiscal year's revenue of $278.9 million.

Net income for the third quarter was $98.6 million or $0.32 diluted earnings per share, compared with $105 million or $0.34 diluted earnings per share in the prior quarter. On a pro forma basis, without the impact of stock-based compensation, net income would have been $111.8 million or $0.37 per share versus $117.8 million or $0.39 per share in the December quarter.

So the impact of stock-based compensation was 13% of net income or $0.05 at the EPS level. For the quarter just ended, our GAAP return on sales was 39% and our pro forma return on sales was 44%. Cost of sales as a percentage of sales was largely unchanged.

Operating expenses were also largely unchanged in absolute dollars, although they did increase modestly as a percent of sales. Consequently, operating income as a percent of sales was a very respectable 47%, given the decrease in sales.

Our effective tax rate remained at 28%. Diluted shares outstanding also remained constant. During the quarter, the company's cash and short-term investments increased by $24.9 million. For the 84th consecutive quarter, the company had positive cash flow from operations.

During the quarter, the company spent $25.2 million to purchase 766,000 shares of its common stock. The Board of Directors authorized the company to pay a dividend, a cash dividend of $0.18 per share. The dividend will be paid on May 16 to shareholders of record on April 27

Although by historical March quarter standards, the overall business environment continue to be weak, as demonstrated by the reduction in our sales and profits, we did see an improvement in our bookings. Bookings improved each month throughout the quarter. They grew both domestically and internationally. And they grew in absolute dollars in each major end-market, led by industrial and automotive.

Our ending on hand inventory at distributors is within historical turns levels. Cancellations are still minor, and lead times have remained unchanged at four to six weeks.

Even in these challenging times, we continue to have an excellent business model and are therefore able to remain both highly profitable and cash flow positive. Accordingly, we achieved strong performance in various generally regarded financial indices.

I have already discussed our return on sales. Our quarterly return on equity was 18% and our quarterly return on assets was 17%. When you take cash and short-term investments out of these last two calculations, our net return on equity was 113% and our return on operating assets was 67%. Currently, we have no debt and our current ratio was 9.6 to1.

Looking forward, the upcoming June quarter is a challenge to accurately forecast. Although inventory in the marketplace appears to be more balanced than in previous quarters, the visibility continues to be low, and customers remain guarded in their forecasting and inventory management.

In summary, we currently expect revenue to increase 3% to 6%, with operating margins up similarly. Interest income, interest expense, pre-tax, and net margins, as well as diluted shares outstanding, will all be impacted by our ASR share repurchase.

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 increased over the previous quarter. Cancellations were minor, and we had a positive book-to-bill ratio. Bookings were up in all major geographical areas, more so in the U.S.A. than internationally. Within international, Europe and Asia improved, whereas Japan was down.

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. As I stated earlier, bookings were up in all end markets, led by industrial and automotive.

Industrial and communications continue to be our largest areas. Industrial at 34%, grew from 33%. This is a seasonally strong period for industrial, both in Europe and in USA distribution.

Communications increased in absolute dollars while decreasing as a percentage of bookings, going from 33% of bookings last quarter to 31% this 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 remained at 10%. Networking at 15% also remained at similar percentage to last quarter. Power over Ethernet circuits and hot swap circuits, areas rich in technology, lead our presence in this area.

Cell phone handsets at 7% were down from 8% last quarter, although up slightly in absolute dollars. High-end 3G phones have yet to make a significant impact. However, new entrants into the cell phone market may positively impact us over time.

The computer area, at 13% of our business, was similar to last quarter. High-end consumer at 9% also remained unchanged as a percentage and increased in absolute dollars. Automotive at 9% increased from 8% last quarter. This area has grown steadily over the last two years and we believe will soon grow into double-digit percentages of our business. Finally, space level products at 4% of our business were unchanged as a percent from the prior period.

In summary, we believe we have very good diversity in end markets, which contributes to our leadership positioning in high performance analog. Note that 51% of our bookings were created in the U.S.A, up from 47% last quarter.

Moving from bookings to sales. As I said earlier, product sales were down 5% from the prior quarter and down 9% from the similar quarter in the prior year. As we forecasted going into the quarter, seasonal strength in Europe and U.S distribution was offset by weakness, particularly in consumer-related markets in Japan and Asia.

In summary, the U.S.A. was 34% of our sales, up three percentage points from last quarter. There was growth both in U.S. OEM and U.S. distribution. Europe at 20% was also up three percentage points, as Europe has had more business days in this quarter than the December quarter. Japan at 12% was down three percentage points, as was rest of world, primarily Asia-Pacific, which ended at 34%.

Gross margin. Gross margin was 77.8%. 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 one-tenth of a point from last quarter.

Gross margin was adversely affected by fixed factory costs being absorbed over a lower sales base, and also by an increase in our inventory reserves to partially offset the increase in inventory.

This decrease to gross margin was largely offset by a modest change in mix, to more industrial and automotive-based parts, which contributed to ASPs increasing to $1.67 from $1.59 last quarter. ASPs are average selling price.

R&D. R&D increased as a percentage sales from 16.8% last quarter to 17.8% this quarter, while increasing in absolute dollars by only $493,000. Modest increases in headcount, exempt compensation, and stock compensation were mostly offset by decreases in legal and mass costs.

SG&A. Selling, General and Administrative costs also increased as a percentage of sales, going from 12.5% last quarter to 12.9% this quarter, while decreasing in absolute dollars by $790,000. Increases in exempt compensation and stock compensation were more than offset by decreases in legal and communication expenses.

As a result of the above, operating income decreased by $9.7 million. Control over discretionary spending helped to offset the impact of the $12.9 million reduction in revenue. Operating income, as a percent of sales was 47.2% versus 48.5% last quarter, very good performance, we believe, given the reduction in sales.

Interest income increased by $722,000. The increase in the average cash balance, coupled with the increase in the average rate of interest earned from 3.63% to 3.76%, accounted for the improvement.

Our effective tax rate was unchanged at 28%. We had anticipated at 29% rate. Minor quarter-specific discreet items enabled the one percentage point improvement over expectations. Going forward, we expect our effective tax rate to be approximately 29%.

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, the R&D credit, and our foreign sales tax benefits.

The resulting net income of $98.6 million is a decrease of $6.5 million from the previous quarter. Earnings per share is $0.32, down from $0.34 reported last quarter. The average shares outstanding used in the calculation of EPS are largely unchanged, as stock repurchases were offset by stock option exercises.

On a pro forma basis, before stock-based compensation, net income would have been $111.8 million; earnings per share would have been $0.37 versus $0.39 last quarter. Finally, on a GAAP basis, our return on sales of 39% was similar to last quarter.

Moving to the balance sheet. Cash and short-term investments increased by $24.9 million, net of $25.2 million spent to purchase 766,000 shares of common stock, $14.6 million in fixed asset additions, and $54.6 million paid in cash dividends.

Our cash and short-term investment balance is 1.808 billion and represents 75% of total assets and 83% of stockholder's equity. These percentages will obviously change next quarter as a result of our announced stock repurchase.

Accounts receivable of 142.2 million is down 8.8 million from the previous quarter, reflective of lower shipments than last quarter. Our day sales and accounts receivable at 51 days is unchanged from last quarter.

Inventory at 50.7 million increased by 5.4 million from the 45.4 million reported last quarter. The increase was largely concentrated in WIP, primarily die bank. Die bank is the appropriate location to build inventory to give us the ability to respond to customer requests in this period of low visibility.

Our inventory turns was 4.7 times, which was down from last quarter's 5.4 times. Although 4.7 inventory turns is acceptable by industry standards, it is lower than we have historically run. The company has taken steps to slow the growth in inventory.

During this quarter, we will have a one-week shutdown in our wafer fabrication plants and we have modestly reduced production head count and output in our Singapore and Malaysian manufacturing plants.

Deferred taxes and other current assets decreased modestly by 716,000 from the December quarter. Increases in deferred taxes on stock option accounting were offset by decreases in interest income receivable, as the quarter ended on the first day of the new month.

Property, plants, and equipment increased by 3,497,000. We had additions of 14,582,000, and we had depreciation of 11,085,000. Most of the additions were for wafer fabrication and test production equipment, primarily fab equipment in Milpitas and Camas, where we have expanded our wafer out capacity.

For fiscal 2007, including the quarter just completed, capital additions are forecasted to be roughly 55 to 60 million, and depreciation to be roughly 45 million. We spent roughly 70 million in capital additions in fiscal 2006. Other noncurrent assets totaling 65.9 million were hardly changed. They consist primarily of intangible assets relating to technology agreements.

Moving to the liability side of the balance sheet. Accounts payable decreased 3.1 million, due principally to lower payables for capital equipment purchases. Accrued income taxes, payroll, and other accrued liabilities decreased by 35.7 million. The largest items here are our profit sharing accrual and our income taxes payable.

Income taxes payable were similar to last quarter for the provision charge and payments made, except for one additional tax payment for settlement of an item of dispute that arose out of our recent IRS audit. We pay out profit sharing twice a year, so our accrual usually increases in the second and fourth quarters and decreases in the first and third quarters, such as this quarter, when payments are made.

Deferred income on shipments to distribution hardly changed this quarter, increasing by 438,000, as we shipped into U.S. distribution, amounts 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 our inventory distribution to properly position the inventory without any unneeded buildup.

Deferred tax and other long-term liabilities decreased modestly by $342,000. Changes in the stockholder equity accounts were primarily the result of the usual quarterly transactions, for net income, for dividends paid, stock repurchases and employee stock activity.

Last quarter, the company announced its annual quarterly dividend increase from $0.15 to $0.18 per share. This resulted in an increase in the dividend payment during the quarter. This quarter, the company again announced a cash dividend of $0.18 per share, which will be paid on May 16th to shareholders of record on April 27.

Looking forward. As you can tell from my previous comments, March was both a difficult and a transitional quarter. Sales and profits were down for the third quarter in a row. However, the company's margin structure as a percent of sales remained largely unchanged and the company's bookings grew in the quarter.

Consequently, the company is going into the June quarter with a larger backlog and slightly lower turns requirements than previous quarters. Turns are orders that must be booked and shipped in the quarter. Our lead times of four to six weeks, which can support this level of turns, as we have often done in the past.

Looking ahead to the June quarter, we believe most of the major inventory corrections are behind us and that orders on us and our responding shipments to them should reflect true market demand. However, most of our customers continue to be cautious due to lack of visibility.

The general macro-economic trends are reasonable. The U.S. continues to grow, but at a slow rate. Europe is doing reasonably well, and Japan is okay, but not strong. Yet, the overall semiconductor market has been lagging, and as I said, customers are cautious.

When you put these factors together, we currently expect revenue to grow roughly 3% to 6% in the June quarter, with operating margins up similarly. Our $3 billion stock repurchase will affect costs below the operating income line.

Instead of interest income, we will have net interest expense, the effect of which will be offset by a decrease in the diluted shares outstanding. For the June quarter, we don't know the impact on net interest expense or the diluted shares outstanding until the transaction has been completed.

Looking to the long-term; we have told you that we've added to our infrastructure. We have completed and begun occupying the new building at our Singapore test location. And we have 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, either to manage power and portable products, or to sense real-world electronic signals and then to convert them from analog to a digital format for easy storage and transmission.

In summary, we're in a strong segment of the electronics marketplace, namely high performance analog, where we continue to be a market leader. We believe the market is transitioning to a return to growth from the inventory correction period that we have been in for several quarters.

We are optimistic about the long-term and mid-term growth opportunities for our markets and for linear.

To this effect, given the favorable interest rates and the availability of funds to borrow, we decided to enter into the $3 billion stock repurchase program that we have outlined above.

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 hear first from Ross Seymore of Deutsche Bank.

Ross Seymore - Deutsche Bank

Thanks and congrats on both the turning and the fundamentals and finally unleashing the balance sheet.

First on the balance sheet side of things, Paul, I know you said you can't really say what the impact will be in June, but any color you could give us on to when you expect the convert to actually occur, and how you think over the nine months period that you highlighted for the buyback, how will it be weighted over that period. If you could give us any color on that, that would be helpful?

Paul Coghlan

Well, you saw we had two press releases. One reverted to the convertible, and that's a private placement on Rule 144A, so we cannot make any further comments regarding that.

My guess though is the impact on the shares outstanding will probably take place or it will transition over a nine-month period and may be half of that impact would be in the June quarter.

Ross Seymore - Deutsche Bank

Okay. So for the $1.3 billion roughly that you have that you’re going to use of your own cash, there's no limitation on the ability to kind of unleash that right away, is that correct?

Paul Coghlan

Correct.

Ross Seymore - Deutsche Bank

Okay. And then moving over the fundamental side of things, it’s kind of a weird combination of saying your visibility remains very low, but your guidance is still pretty impressive, which is a nice turn.

What really has changed? The customers are staying cautious, according to you, but the bookings have increased. What do you see going on? Is it more end demand, more inventory being worked down any color there again would be helpful.

Paul Coghlan

I think what I referred to is, we're seeing less inventory corrections. So, that I think the inventory corrections that have taken place over the last several quarters seem to taper out throughout the end of the March quarter, with Japan probably being the last place where we saw corrections taking place.

And then we had an increase in bookings for the quarter. Remember, Ross this was a March quarter, historically, the March quarter is a strong quarter for Linear. So that our sales were down, which is a disappointment for a March quarter, but having our bookings up is what we expect in March quarters.

So, that I think from our perspective, we think the inventory correction is over, but on the other hand customers continue to be cautious, lead time are low for everyone, not just us and the visibility isn't great. But given that the sales were down and bookings were up, we think we can grow 3% to 6% in the June quarter.

Ross Seymore - Deutsche Bank

Great. Thank you and congrats again on the buyback, I think it's a good precedent for the entire analog space.

Paul Coghlan

Thank you.

Operator

We'll move next to Piper Jaffrey's Tore Svanberg.

Tore Svanberg - Piper Jaffray

Yes, good morning. A could of questions. I am not sure if you can answer this, but when it comes to the buyback, why now as opposed to, I don't know a couple years ago, just trying to understand why now?

Paul Coghlan

Well I think the company has been buying back stock. It's been buying back stock at each quarter. Some quarters it spent around a $100 million to buyback stock, and those buyback seem to have little or no impact in the marketplace.

The company believes that this is a good time to raise if the debt markets are a reasonably good time now for them. The company believes it's listened to its investor base, it's investors have told them, look, it might be a good time to lever the company a little bit, and I think what we're looking at, at the company is that the smaller buybacks had no impact.

I think what we're seeing now is we'll have a larger buyback now and smaller increase in the interest expense overtime and that may deliver the message. And then finally, Tore, I think there's just been this attitude in our interface with investors that investors seem to have some doubts as to whether Linear can grow at the rate of the market or better, which it historically has and whether it can sustain its margins.

We think we can, we think the debt margins were good time to enter into and that's why we entered into the transaction now.

Tore Svanberg - Piper Jaffray

Fair enough. The second where you mentioned you intend to bring your internal inventories down in the June quarter, could you give us maybe a little bit more color there as far as what your inventory date target or your terms target would be?

Paul Coghlan

I don't think we're planning to bring it down. What we're planning to do is really hold it more constant, and so as Paul mentioned, we've got some shutdowns among our wafer fabs to do that, so really, we manage our inventory very, very carefully and one of the things we're doing is to slow down our wafer fabrication facilities, but the net results of that will probably be the inventory remaining approximately flat, not going down.

Tore Svanberg - Piper Jaffray

Great. Last question. Automotive seems to be really an outline here as far as growth for you. Would you characterize this business for you as diversified, both by customer and geographies as some of your other business units?

Paul Coghlan

Yes. I think certainly automotive is diversified for us, although our primary customers are in Europe and Japan, in the high-end automotive models. We sell some in the U.S, but we have more activity in Europe and Japan.

And then within opportunities within a car, we have a lot of present opportunities in navigation and entertainment. And then we also have opportunities in new applications throughout cars where electronics will become a more prevalent part of the automotive.

That market also is diverse in terms of our products as well. So the automotive market is attractive not just for our power products, but really for a large portion of our product portfolio.

Tore Svanberg - Piper Jaffray

Very helpful. Thank you very much.

Operator

Moving next to Michael Masdea with Credit Suisse.

Michael Masdea - Credit Suisse

Thanks a lot. Paul, just to make sure I understand it in simple terms. So it sounds like the visibility for customers may be hasn't changed a lot. It’s just the fact that the inventory piece is kind of burning off. That's what's helping the orders and giving you a little bit more confidence in the numbers going forward. Is that a correct assessment?

Paul Coghlan

That's correct.

Michael Masdea - Credit Suisse

Okay. And then I guess the follow-up to that would be, we've seen in the industrial segment and to some degree in the auto, we saw a bit of inventory swing relative to distribution and other areas. What's the risk that some of the ordering that we're seeing is relative to sort of a bounce back up to normal levels and what's the risk that we get carried away with that?

Does that take into your thinking and what's the risk of that, you think?

Paul Coghlan

Yeah. I think we took that into our thinking. We made a comment in my introductory points that the inventory at our distributors did not go up this quarter and that our turns actually were fine in this quarter. So we don't see a build up of inventory in the distribution channel relative to industrial or automotive.

And from our standpoint, although those markets improved in the March quarter, again they didn't improve nearly as much as they have in past March quarters. So I think this is going to be a careful, the customers are careful. I don't think -- they're cautious. But if business picks up, they'll certainly reflect that in their ordering on us, but I don't think they've started to order in advance of their needs.

Michael Masdea - Credit Suisse

And so far in this quarter, there are no words of starting it, but everything is kind of holding up with the trends that we've seen in ending March?

Paul Coghlan

Yeah, but this quarter is just barely started, Mike.

Michael Masdea - Credit Suisse

Okay. Yeah, fair enough. Thanks a lot, guys.

Operator

Moving next to Citigroup's Craig Ellis.

Craig Ellis - Citigroup

Thanks and good morning, gentleman. First, congratulations on the accelerated buyback. I wanted to ask, Paul, a little bit more on the background of the program. One, why did you settle on the $3 billion in total? And two, why did you choose to do an accelerated deal rather than say annual $1 billion programs?

Paul Coghlan

Well, there's a lot of decisions you make in this process. We chose $3 billion, we thought we wanted to do a significant; we thought we had the ability to do a significant ASR. We wanted to pick a significant amount. We had some internal debate, as you would expect.

We shared our thoughts with our Board of Directors, and we thought the appropriate amount to make the signal we wanted to do and also an amount that we could finance through the company with our cash flow generations and feel comfortable that we could continue to run our businesses as we have with $3 billion.

Why we chose to do it at once rather than separate segments is, in the past, frankly, we have been doing smaller buybacks that we thought had little or no impact on the price of our stock. We thought a more significant one at this time would have that impact.

Craig Ellis - Citigroup

Okay, that's helpful. And then relatedly, one of the biggest uses, if not the biggest use of your cash flow is your dividend payment. Obviously, with the big buyback, the amount of cash that you're using on a quarterly basis to pay dividends would go down significantly. Does this change the way you think about the annual increase to the dividend, which has marched along at a very nice clip in the high 20's rate overtime?

Paul Coghlan

Well, we address that annually each year and we did in January addresses, as we announced and we increased the dividend at that time by 20%. We're still very committed to the dividend program we have.

As you know, we announced again an $0.18 dividend this quarter. So, I think we continue to be committed to what we've done in dividends in the past.

Craig Ellis - Citigroup

Okay. And then lastly for me, as we look at the business, you're hitting an inflection here, we're seeing some nice growth in automotive and another areas. In the past, at least last year you made some investments in U.S. and international design teams. How should we think about the pace of your expense growth as we move into a period of better growth for the sector and for Linear Tech?

Paul Coghlan

Well, first I would like to say Craig that, relative to expenditures in the R&D area, we don't match those by our quarterly results. So, if we get a great quarter, we don't go hire a few extra peoples, and if we're not having a great quarter, cancel some really good talented people we wanted to get.

Last year, we had some really good opportunities to open some design centers. So, we had a really good opportunity in Munich, one in Dallas, and one in Phoenix. Now we are trying to digest those design centers, by digest I mean hire more people, get them up to speed, etcetera.

Have a little more interface from the corporation's headquarters to make sure the talent knows what we're trying to achieve. So, I don't think in the near-term, we're going to open further design centers.

On the other hand, in the near-term, we're certainly going to hire good technical talent and talent in the sales and other areas as the company needs it. So, I don't think the company is ever felt really constrained by its quarterly P&L performance since that performance has been so good that it would pass up on good opportunities to hire talented people.

Craig Ellis - Citigroup

Okay. Thanks, Paul.

Paul Coghlan

You are welcome.

Operator

Our next question will come from Doug Freedman of AmTech Research.

Doug Freedman - AmTech Research

Thanks, guys and again congratulations on levering up the balance sheet there. Can you give us any guidance on the turn's ratio that you're expecting? What you've achieved this quarter and what you're expecting next quarter? Are -- we seeing bookings grow at a rate faster than your revenue going to grow meaning that we're building backlog here?

Paul Coghlan

The quarter we just completed, we did that. Bookings did grow faster than revenue. We had a positive book-to-bill ratio. But as an analog company, it's not a significant difference. So, that our turns rate has come down a little bit, but it's still around 60%.

Doug Freedman - AmTech Research

And that's expected for the June quarter as well?

Paul Coghlan

Well, as we said, visibility is low. We think we're well positioned going into the June quarter, but we have to see how it plays out.

Doug Freedman - AmTech Research

All right. I guess, moving on, and just a bit of a longer-term thought. You mentioned already your growth in design centers. How do you see the impact of spreading out the design talent to the overall sort of cycles of learning that take place in the analog business? Are the cycles of learning continuing to accelerate, or is the spreading of talent really possibly sort of slowing down the rate of innovation that we're seeing?

Lothar Maier

Hi, Doug, this is Lothar. For Linear now almost 60% of Linear's design engineers are now located in remote design centers. And so, over the years, we've gotten to be very good in not only just opening up these new design centers, but getting them to be just as productive from a design standpoint as the rest of the company.

Just a bit of fact here, this past three quarters of this fiscal year, we've introduced as many new products out of our remote design centers just in three quarters as we've done in the past years and four quarters. So, I think our remote design centers have the ability and have demonstrated the ability to be just as productive and just as innovative as our corporate designers.

Doug Freedman - AmTech Research

All right, excellent. Thank you. That's very helpful.

Operator

Wachovia's Craig Hettenbach has our next question.

Craig Hettenbach - Wachovia Securities

Yes, thank you. Paul, on the inventory front, you mentioned die bank build, any specific customer ramps in the quarter? And then on the CapEx, any early read into fiscal year '08 in terms of what we could expect for CapEx budget?

Paul Coghlan

I think the buildup in die bank was across the board. It wasn't one particular customer specific, and then relative to fixed asset or capital additions next year, we think we'll do about 55 to 60 this year, and will probably do about $50 million we think at the moment next year.

Craig Hettenbach - Wachovia Securities

Great, thanks. And then Lothar and maybe Bob can follow up comments on this as well. Just on a new product front, just what areas within Paul mentioned data conversion, if you can just highlight some of the new products and last year you've introduced that, you think will drive some growth and maybe some of the end market applications within those products?

Lothar Maier

The growth that we have in new products, are really spread out. We don't target our new products specifically for any end market. What we’re trying to do is we try to bring to market new products that are diverse and serve multiple markets.

The new product efforts are probably, I would say, pretty evenly proportional to what our current sales are between power, mixed signal, signal conditioning and high frequency, so they're pretty balanced.

But in the last year, we've introduced some very innovative, high performance analog-to-digital converters that you know have given us recognition of having a leadership position. So, we continue to try as part of our new product effort just to come up with products that our customers find compelling and that are innovative. But we are not really targeting any specific end market.

Bob Swanson

Yes. And let me just add to that. You know, I've read many of these analyst reports in the last four to five months that have been kind of negative about Linear's growth potential. And I think many of them are based on some bad assumptions about just where Linear is in the product and customer positioning.

For example, I think there is a misunderstanding that all of our product activities is in “standard products.” Lothar Maier figured out recently that as much as 30% of our products fall into the application-specific standard product area.

And I think there is a misunderstanding or misconception that we are not in the integration business of integrating PMIC chips or more system on a chip basis. I think most of that concern is that these are products required for consumer or cell phones.

And frankly, I think there is a misunderstanding of just how important those markets are to the overall opportunity in high performance analog. So I think in the interest of time, I am not going to -- I could do a ten-minute monologue on this, and if anybody wants to talk to me offline, I will share with you the actual growth rates for some of these markets that some of our competitors are betting their farm on, and some analysts think are necessary to grow.

But I think the company's position -- I think the company's customer and product position right now are very well positioned for growth.

Doug Freedman - AmTech Research

And if I could just follow-up on that, in addition to some of the new growth applications, even within your existing industrial market, you continue to see new applications arise or need for your technology. Can you just maybe have a quick comment on that front?

Paul Coghlan

Yes. Even in industrial, what you're seeing in your personal lives where everything is becoming more portable, more compact, the same thing is happening in the industrial market. All this equipment that used to be luggable, the industrial market wants to gain additional performance, longer battery life.

So it's not as glamorous as some of the handheld and consumer products, but the same sort of activities are occurring in the industrial market as well.

Bob Swanson

And Craig, one particular area we've talked about from several quarters has been the micro module area. And the micro module area has great applicability in the industrial market. What that is, is basically a standalone power supply in the form of an IC of the size of an IC.

So that's the product that's gotten initially very, very good acceptance in the industrial market from the likes of test equipment people, from the medical people, and from many, many other applications within industrial. So the company does focus its new product efforts on industrial, automotive, as well as the communications and computer and high performance, or high-end consumer areas.

Paul Coghlan

Yes. The company continues to aim its products or skills at any market and in any application that needs and appreciates what we bring to the party. The module area so far has been in the power area, but it's not limited to the power area. There is equally compelling reasons to commit this module strategy, to signal chain products.

Doug Freedman - AmTech Research

Excellent. Thanks for the detail, guys.

Paul Coghlan

You are welcome.

Operator

Our next question comes from Chris Caso of Friedman, Billings, Ramsey.

Chris Caso - Friedman, Billings, Ramsey

Yes. Thanks. Paul, I was just wondering if you could address your turn's expectation going into the June quarter. You are expecting that to be down. Is that a function of typical seasonality for you or a function of what you saw in the first quarter, or maybe you just you don't have the visibility, so you have been a bit conservative with your expectations?

Paul Coghlan

I don't know we're being conservative. I think, what we told you is that, our booking we had a positive book-to-bill ratio, which means we had a little more backlog. You know, that our lead times are low, so to match the lead-time requests from the customers, that's kind of translated into a little lower turns business.

But it's not dramatically lower. We're down in the very low 60s, high 50 range and we were in the mid 60 before. So, I mean, I don't think that, I'm not trying to signal that that's some major sea change. It's positive. It's a good sign. It's a good sign we haven't had in the past three quarters.

So I mean, it's a positive sign in an environment, which is pretty cautious. So we think it's good, but you know, it's just the result of having had more bookings in the March quarter than we had shipments.

Chris Caso - Friedman, Billings, Ramsey

Okay, that's fair. With respect to what you guys expect with seasonality now and you saw a March quarter that didn't see the typical pickup for you guys that you guys have normally seen, I guess as you guys are more dependent on consumer-related markets, should we take that to mean you're going to be a more seasonal company and start to see kind of more revenue acceleration as you go into sort of late third quarter, early fourth quarter as we see from some of your peers with more consumer exposure?

Paul Coghlan

I don't know if I would completely agree with that. I think, what we are telling you is that, this has been a period, which has been a down period for the analog market and for the semiconductor market. So a down period is overall coinciding seasonality with the period that's normally strong, the March quarter for industrial, communications, infrastructure, etcetera.

So, although our bookings were better in those areas, and even though our sales were a little better in those areas, those areas weren't as robust this March quarter as they would have been historically in past March quarters.

Chris Caso - Friedman, Billings, Ramsey

All right.

Paul Coghlan

Looking forward, we think we are well positioned in those end markets, we have told you the automotive end market, we think we are going to grow. And now you are right that as we get into the second half of the year, other markets such as consumer market, maybe cell phone market to some extent, those start to pick up as you get closer to the holiday season.

And those as you know are very volatile markets. We have been successful. We have 9% of our business in that and we’ve -- in consumer and 7% in cell phones. So we have been successful in the past in those, but they are volatile markets.

You got to wait to see how they break out. We like our positioning as long as they fit within the linear -- kind of the linear model of how it does its business and as long as there is a respect for the performance of our parts and a need for the performance of those, which there has been and which we hope and plan that will continue.

Chris Caso - Friedman, Billings, Ramsey

Okay. Okay, its good color. And just as one final and you talked about, it sounds like the inventory situation is getting largely better taken from your comments. Could you comment specifically on the EMS channel? That's one of the areas where at least as the numbers show, where the inventory problem was a little bigger than more areas. Any color you could provide there?

Paul Coghlan

Well, I think the EMS channel for us, I think the inventory excess is there, probably we believed had cleared out largely. Now, how some of those built largely was just to go back to last quarter, what you had is going into the December holiday period in 2006.

If you're an EMS manufacturer, you have a pretty tough job. What you do is you get an estimate from your customer and you're selling two things, three things. You are selling low cost to your customer. You are selling low cost to your customer.

You are selling on-time delivery to your customers, and you are also selling that you will be positioned to match any upward draft in the market that the consumer product inventor finds out in the holiday period.

Chris Caso - Friedman, Billings, Ramsey

All right.

Paul Coghlan

So you are almost forced to be a little over inventory. So then what happens as you get into the late end of the December period and move into the January period, you start to correct that. So, now that the March period isn't very heavily consumer oriented, but it's more an even distribution of product and there is likely to be less inventory we think in those EMS areas and from our standpoint, we think we'll have less inventory problems going forward than we did in the December quarter.

Chris Caso - Friedman, Billings, Ramsey

That's great.

Bob Swanson

I am just going to add there. You know, the whole EMS strategy or the whole EMS reality is that now there is this huge supply chain participant in between us and our customers. So we read analyst reports of EMS inventory and they think we can get jerked around.

I mean, they may decide overnight that they want to go from four-weeks inventory to two-weeks inventory when the end customer, our end customer, their end customer, his business is moving on very smoothly, but the supply chain guy at the EMS subcontractor, he has some other inventory strategy. So we think we lift up by both of them.

Chris Caso - Friedman, Billings, Ramsey

All right. But I guess from what you see going forward, you think the whipsawing is sort of over, and maybe that's a function of seasonality too?

Bob Swanson

I’m personally not sure, but, maybe I don't have all the data.

Chris Caso - Friedman, Billings, Ramsey

Okay.

Operator

Moving next to Gus Richard from First Albany.

Gus Richard - First Albany

Yes. You talked about bookings being up throughout the quarter. If you just step back and take a look at revenue, it's been my perception that customers have been drawing down inventory going into quarter end and then re-accelerating into the beginning of a quarter. Are you seeing that trend exiting Q1 going into Q2?

Paul Coghlan

No. I think, when we went from Q4 to Q1, we certainly saw that. There are a lot of customers that want the year-end balance sheets, particular inventories to look good. I think in the March quarter, there is some of that, but I certainly wouldn't say it's accelerated from the December quarter, Gus.

So, I think, I actually think we are in a situation where a lot of our customers, inventory is tight. They think they have the right amount of inventory. They are cautious going forward. They don't have great visibility. They are optimistic about their parts.

You know, they want to be in a position that to deal with a vendor that can supply them with short lead times. So I think there is kind of a balance now as opposed to maybe some balance sheet engineering.

Gus Richard - First Albany

All right. And then just one follow-on. When you look at your performance in Q1 relative to the overall market, analog market, how do you think you did?

Paul Coghlan

We won't know that until the numbers are out. You mean, how we did -- we were the first guys to announce.

Gus Richard - First Albany

Yes, I know. I was just wondering if you had a sense?

Paul Coghlan

No. We won't know until everyone else's numbers are out.

Gus Richard - First Albany

Okay. Fair enough. Thanks.

Operator

Moving next to Krishna Shankar from JMP Securities.

Krishna Shankar - JMP Securities

Yes. As you consider this stock buyback versus other opportunities to invest more. Can you talk about sort of the trade-offs you made in terms of just increasing R&D, perhaps looking at other product lines, which may have lower growth profits and yet add to your operating profits? Can you talk about the trade-offs that you looked at before doing this huge stock buyback?

Paul Coghlan

Certainly. You know, we have a strategy, Krishna. And our strategy is to be the premier high performance analog supplier. We have, we believe that a great barrier to entry the whole analog industry has is that there is not enough talent. We more so then anyone focus our talent on the difficult things to do in the analog area. We think we have plenty of opportunities there.

So for us to go seek business that would have lower margins, more competitors, it's kind of sharing our analog circuit design talent and getting it to do the same thing some of our competitors are doing.

We've just never viewed that as a good strategy. Our strategy has always been to focus on the more difficult, complex things to do, and we think we have plenty opportunity there to grow our business, and that's why our business is as diverse as it has. That's why we think we ought to stay there.

Now, your point is well taken and then well then why did you do the $3 billion ASR? We are not sure the marketplace thoroughly understands that strategy of ours. We are not sure the marketplace thoroughly understands, but we think we can continue to be successful at that.

So we thought this was a good time than to this ASR, but we think that was the right think to do. Certainly not go down in the market and spread our good design talent out over opportunities has been done by a lot of other competitors.

Bob Swanson

Yes. You know, I think you have to remember after 25 years, Linear is a freestanding, very healthy company, and we always have, and I think always will reject the profitless incremental growth strategy, even if there is a temporary slowdown in our rate of growth, as we smoothly transition away from areas where no profits remain to better profitable areas.

Krishna Shankar - JMP Securities

So you're convinced still that this will give you topline growth opportunities exceeding the industry in the 15%, 20% range in the topline? What's kind of a topline target over the next two to three years, was this sort of continued strategy?

Paul Coghlan

Well, wait a minute. You said you think that what we did will increase our revenue. The ASR's has got nothing to do with revenue.

Krishna Shankar - JMP Securities

No, no. I understand that, but I'm just trying to get a sense that we…

Paul Coghlan

Right, but when we look at our opportunities, we think we can grow at a faster rate than the overall analog market. We've done that historically. From time-to-time, we grow at the same rate and not accelerated rate, but we think we have plenty of opportunity there. Whether that turns out to be 15% or 20%, we'll have to see how the market grows.

Bob Swanson

Yeah. I mean, if you look at the area under the curve, for two to three years or five years, or ten years, we've outgrown the market. So, I think that suggest we have outgrown most of it, not all the competitors.

Going forward, the market ended up at almost $37 billion. It's a big number now. It's not predicted to grow at 15%, it's predicted to grow somewhere between 9 or 10% compounded.

But that's still somewhere between another $10 to $12 billion of incremental growth in just the next three years. So, the market is not going to grow 15%, it's going to grow 8% to 9%. I think Linear's objective is always to at least outgrow the market.

Krishna Shankar - JMP Securities

Right. And switching gears a little bit, you talked about increasing activity in 3G phones with some new customers. Can you talk about sort of the design win momentum there and when you expect the 3G-phone market to show renewed growth going forward?

Lothar Maier

Well, we've talked about that for a while and us like many others haven't seen a lot of growth in the high end true 3G phones. So, we have products that would be potentially successful there, but that market really hasn't grown very much at the moment, Krishna.

Bob Swanson

And we've sort of predicted that it would grow a bit and like others haven't seen it grow. So, probably our projections aren't worth a lot to you.

Krishna Shankar - JMP Securities

Thank you.

Bob Swanson

You're welcome.

Operator

Our next question comes will come from Jeff Rosenberg from William Blair & Co.

Jeff Rosenberg - William Blair & Co.

Hi. Paul, when you were talking about gross margins, you talked about that an improvement in mix that helped gross margin and then you after that referred to the fact that ASPs increased during the quarter. And I don't know whether or not you would apply some cause and effect there, but in the past you basically said that even at lower ASPs, that you've been just as profitable. So, could you clarify a little bit in terms of what exactly in the mix helped improve gross margins?

Paul Coghlan

Well, I mean, if you look at our business, our business improved a little bit in industrial and it improved a little bit in automotive, and it went down a tiny bit in the cell phone area and in the consumer area, it remained about the same, but overall, the margins haven't changed much. So, its I sort of get stuck, Jeff, in these things.

The margins went down one tenth of 1%, I gave some nuances on one tenth of 1%. So, I didn’t say we had dramatic increase in fixed cost offset by dramatic change in mix. So, I'm just trying to give you some nuances there.

The ASP did go up, but overall in a market where the cell phone area, for example, might becoming more and more competitive and people don't have ability to distinguish themselves technically that the end customers just buying on price, your margins would erode a little bit there. And we have less business there in that past quarter and more business in automotive and in industrial.

Bob Swanson

Yeah. The ASP went up because the mix did change.

Jeff Rosenberg - William Blair & Co.

Right. I guess I'm just -- I guess what I'm directly implying is, do you have a different view on some of the higher volume and therefore lower ASP areas than you did in the past when back in the early days of the color phone really ramping, you felt like even though you were selling lower price chips that the packaging was enabled you to be able to be just as profitable as in other areas.

Is that the area that you as Bob you said a moment ago that you smoothly transitioned away from because that the profitability opportunity there has changed over the last couple years?

Bob Swanson

Yeah. It's changed dramatically. And I think, except for some really high-end phones, there's no pot of gold anymore at the end of that rainbow, there's mostly red ink. And I think we can all see it.

Products that we sold two or three years ago we were in the table. They were very profitable for us at those even lower ASPs. But those products now are selling for one-third to one-four or what we sold them for.

And so that whole consumer cycle is very predictable. At some point in the cycle, price always becomes more important than performance and it doesn't even matter who got there first. There isn’t, at the end of the game the result is the same.

Jeff Rosenberg - William Blair & Co.

And how do you factor that into the overall question of your long-term growth opportunity? Is that part of the market that was kind to you for a period of time, is that temporarily gone or do you feel like that really, and is it t wrong to think that that does impair to a certain extent your growth opportunity?

Bob Swanson

No. I think that's one of the biggest misunderstandings of the opportunity in the high performance analog market. For example, consumer products we identified them the same way SAA does. That’s the category that would collect all MP3 players, digital still cameras, GPS devices and so forth. That's going to be the slowest growing piece during the next three years for analog dollars. Not a little slower, but one-third the growth of the rest of the market. And wind up being 8% of the market.

Now, you know, we've always talked about a company that is trying to aim at a quarter to a third of the total market, define the opportunities where the space is less crowded, customers appreciate our contributions and so forth. So that 8% is not a market that a company has to be in to grow. In fact, it's going to be the slowest growing.

And then the cell phones, which is in communication, not a big piece, that's a 22% piece of the market, and it is growing fast. But as I said earlier, there's no pot of gold at the end of that rainbow either. That doesn't mean we'll not be in smart phones or MP3 players. But if you take those two pieces out you’ve taken out 30% of the market.

We've said all we need is a quarter to a third to grow. And so, I don't think anybody who comes to the conclusion that we can't grow if we're not in those markets is I think they're guilty of faulty logic.

Jeff Rosenberg - William Blair & Co.

Again if I might add, this really highlights one of the strengths of Linear's business model. The ability to is transition out of one market into other markets. It's not the first time this has ever happened for Linear. It's happened in the past, it's happened in desktop commuting where it became innovative stalled and became too competitive and it happened in our past even in automotive.

But that's not to say, the innovation stall passes and innovation is valued again that there may be new opportunities for us even again in cell phones and consumer in the future. Automotive for us a number of years ago was not a very attractive market. The automotive market now is really valuing innovation and there we see it currently being a growth opportunity. But again, that's really the strength of the Linear business model.

Paul Coghlan

We were $1.1 billion, out of $37 billion and it's going to be another $10 to $12 billion growth in it. So really, we say to ourselves, shame on us if we can't find a way to grow in such a big area of opportunity.

Jeff Rosenberg - William Blair & Co.

Okay. Thanks a lot.

Operator

And we'll move next to Simona Jankowski with Goldman Sachs.

Simona Jankowski - Goldman Sachs

Hi thank you. And I would like to add my congratulations as well on the recapitalization and just to clarify one thing first. As far as when we account for the reduction in share count in our models, it sounds like we should do that over the course of the three quarters of the buyback as opposed to all up front, is that accurate?

Paul Coghlan

That's not entirely accurate. The accounting in this area is kind of complex. I'd actually suggest you, visit your local accountant to get it, but and f you want me, I go at high hourly rates, Simona, so you can probably get better advice cheaper, but to give you a serious response to your question, as you get physical access to the shares, that's when you can put them in your EPS calculation.

So it's complex how that happens, but to cut to the chase a little bit, the shares come in quicker to your EPS calculation than in averaging over the total time of the ASR program.

Simona Jankowski - Goldman Sachs

Okay. So do you have any advice for us on modeling this, so we have some consistency?

Paul Coghlan

You're asking me to project the future. These transactions haven't been completed yet. I said to an earlier call, maybe roughly 50% of the shares would come into play in the June quarter and then from an accounting standpoint…

Simona Jankowski - Goldman Sachs

Got it. Okay.

Paul Coghlan

And the rest probably, very most of that would probably take place in the following quarter. But I mean we still have done, complete these transactions and we still have to make that happen.

Simona Jankowski - Goldman Sachs

Okay. And then I am not sure if you have mentioned on your inventory increase of why it was up so much? I mean, you guys are pretty much the best in managing inventory in your industry and I was just curious if that was a reflection of maybe your expectation of better trends, for the rest of the year than we're expecting, or is conversely, bookings came in below where you thought they would be and that’s why it went up so much?

Paul Coghlan

Well, I think It's gone up for a couple of quarters, Simon, and to be frank with you, if you go back six to nine months, we expected it to have had better growth back then in the December and the March quarters. So we incurred some capital additions, we had some planning on how we were going to run our inventory and then we've kept our people fully employed and we kept working away at it. The growth didn't materialize.

We are expecting to improve in the June quarter, as we've told you. But we've always run this company very frugally and we think the appropriate thing to do now is to tighten inventory a little bit and just to prevent it from growing further. And in doing that, that's what we've responded to now. So, you could fault us, perhaps, for not having done that sooner.

You know, I think, you could do that but in the overall grand scheme of things, as you said, our inventory turns are superior compared to our competitors in the industry. But from the Linear way, we need to tighten a little bit so that’s what we’re doing.

Simona Jankowski - Goldman Sachs

Okay. And then, a last one if I may, just on your margins, you continue to do a remarkable job on the gross margin line but then on the operating margin line, you've been obviously investing a lot in R&D, so we've seen about 4 points decline in the last seven quarters or so.

And I am just curious when you look at it’s going forward, do you expect operating margin to stabilize at this level, or should we think of it is kind of going back up to the historical level or how do you guide us there?

Paul Coghlan

Well I think when you start going back seven quarters, you start getting back into pre-stock option accounting days.

Simona Jankowski - Goldman Sachs

No, I am just going; I am starting with the first quarter when you put in the accounting. That’s kind of I am going with the…

Paul Coghlan

Okay. All right. Very good, then that's the right way to do it, very good. You know, I think as our sales increase, you mean our sales increase we resume growth. I think then you'll see that our operating margins start to track up a little bit.

But remember, what we do is, as I said to an earlier call, we hire good technical people, good salespeople, and good talent where we find it and not necessarily we're not constrained by, can we afford it?

But I think going forward as our business grows, we would hope that we would start to return to some of the better margins.

Simona Jankowski - Goldman Sachs

Got it. Thank you very much.

Operator

Our next question will come from Romit Shah of Lehman Brothers.

Romit Shah - Lehman Brothers

Yes, thanks a lot. Bob, maybe a question for you. I think this is the first time we've heard you on the call and in some time. I'd like to get your perspective on the company's sales performance over the last one to two years. It seems like you guys are comforted by the fact that you've outgrown your competition.

But looking forward, what needs to happen for the company to get back to their historical or target rates? I think, Paul, you've mentioned in the past, 20% of the target number. Is it purely tied to market growth?

Paul Coghlan

Well. I think it's always tied to some extent to market growth. If the market grows 15% compounded, then our ability to grow 25. Obviously, is a lot easier, the market is growing 4 or 5%. So the market going forward is predicted to grow less than 10% compounded for the next three years. But on a very big number, and we're still a very small piece of it.

I don't think anybody at the company is extremely happy about what's happened for last five or six quarters, or maybe seven quarters. Part of it had to do with the fact that we really outgrew the market and our competitors three to four years back, where we are around the table and a lot of the introduction is smart phones and some sophisticated other handheld consumer products.

But the predictable cycle is coming through where over a period of time price is more important than performance. And as long as that end market is sort of going sideways in terms of innovation, then we have to transition out of it into other markets. And the good news is there always are other markets.

So again, when you look at the area under the curve, we're still ahead of the game because we outperformed or competition so extraordinarily three to four years ago. And now we're repositioning the company a little bit.

Romit Shah - Lehman Brothers

So does us I guess fall in your ability to generate enough new products to get into some of these applications that favor performance over price?

Paul Coghlan

It's always been the case. If anything, I think we may have misjudged our ability to defend some of those high performance analogs, we call them high performance. I don't know if they were ever-high performance.

We got there first with some complex circuitry stuff in a small package and we won and we won big. So I don't know if that was ever-high performance. But getting back to the crotchet equation, in the whole scheme of things, that's a small market area. Okay, relative to our size.

And to a lot of people’s surprise, it's actually not going to grow very fast in the next three years. I am not talking cell phones, that's separate. So I think there is plenty of opportunity for us. And as Lothar said, in the last two or three years we've actually driven up our R&D cost behind a lot of experienced people.

And that means by definition, some of our competitors lost those experienced people. So, I think the company is well positioned to accelerate its new product introductions, which will be needed to reach those many, many smaller volume customers that are spread out all over the place.

Romit Shah - Lehman Brothers

When you look at the competitive landscape, do you -- you go back to the early part of the decade, it seemed like you just Maxim, Linear and ADI that were focused primarily on high performance analog.

Today, it looks like there are six companies, I mean, National and TI have been in analog in the past, but they're more focused on that market today than they were at the early part of the decade. When you look at your competitors, do you see them as being more formidable today than when you were running the company a couple years ago?

Paul Coghlan

Well, I think the answer is no. I think they're more focused to the extent that they're more focused. Maybe they're performing better. As we all know that everybody is abandoned almost every other business but analog, so that brings better focus.

That means they are paying attention more exclusively to analog. I think just because they call themselves high performance analog doesn't mean we're running into them anymore in the marketplace.

We run into all of them if we aim our resources at cell phones or MP3 players. But, I think our interaction with them in the marketplace and other markets; I don't think it’s a whole lot different than what it's always been.

Romit Shah - Lehman Brothers

Okay.

Paul Coghlan

Did that answer your question?

Romit Shah - Lehman Brothers

Yeah, no, it did. I've heard that you are more engaged on a day-to-day basis, we're hearing you on the conference call today for the first time I think in a while. Is there a particular reason, or can you just sort of walk through your role now going forward, at least on a day-to-day basis?

Paul Coghlan

I don't want to infer my role any different than it has been for the last two years. I was on the call initially because I really initiated this big buyback. I was the one at least at first you know brought out the table and said, you know maybe, it's time for us to do something. And then of course when the call gets scheduled, that we realized I really couldn't say very much about it.

So, I really wasn't here to comment on the market. But, I'm no less or no more involved on a day-to-day basis than I was two and a half years ago. So you shouldn't read anything special into the fact that I'm on the call. But, actually I did look forward to answering some of your questions.

Romit Shah - Lehman Brothers

All right. Thank you.

Operator

Steve Smigie with Raymond James. Please go ahead with your question.

Steve Smigie - Raymond James

Great. Thank you. I was hoping you could comment a little bit on your competitive position in power over Ethernet and how you see your position there with some of the other people potentially picking up business at Cisco?

Paul Coghlan

Well, we've had the only functioning IC solution for several years in power over Ethernet. That then other people that have looked at that market and tried to technologically enter it.

And of course while we're in it, we keep improving the products we have there. There have been some folks that have said they gained market share at certain customers, you probably need to verify that with the end customer to see if that's accurate. But power over Ethernet it’s a good business for us.

It's a small piece of our overall business where it's kind of classical Linear with the dominant supplier of high performance functions in that and we have the dominant market share in it. So, at the moment, there are other people looking at it, but we're still the dominant player.

Steve Smigie - Raymond James

Okay, thanks. And the other question was, any sort of sequential guidance on gross margin? I don't know if I missed that, but --

Paul Coghlan

We didn't give any particular guidance on any one particular line item. We just said we thought we grow 3 to 6% and operating margins would grow similarly.

Steve Smigie - Raymond James

Okay. Are you willing to comment a little bit more granular?

Paul Coghlan

We never really give much line by line to be frank with you. But I would imagine the improvement in sales would see the same percentages from an operating standpoint, since it's a small number.

Steve Smigie - Raymond James

Okay, great. Thanks a lot.

Operator

We'll move next to Sumit Dhanda of Banc of America Securities.

Sumit Dhanda - Banc of America Securities

Yes. Hi, Paul. I know you can't give much detail on the convert, but can I ask, does it have the net share settlement feature, I guess my angle here is, are we going to have to include bonds in the diluted share calculation?

Paul Coghlan

Yeah, we really can't say much about the senior convertible. It's a private placement on a Rule 144A and we really can't say anything about that.

Sumit Dhanda - Banc of America Securities

Okay. That's all I had. Thank you.

Paul Coghlan

You're welcome.

Operator

We'll hear next from Morgan Stanley's, Louis Gerhardy.

Louis Gerhardy - Morgan Stanley

Good morning. Couple of questions on the ASR, is there, what’s the minimum amount of cash you want to keep on the balance sheet going forward? And then the second question would be, on the actual repurchase transactions, the $1.7 billion portion and then the $1.3, do you have more discretion on one of those versus the other as to the way you actually execute the buyback? And if you could elaborate on that?

Paul Coghlan

What was your first question?

Louis Gerhardy - Morgan Stanley

First question was just about the minimum amount of cash you want to keep on your balance sheet now?

Paul Coghlan

Well, we're closing the quarter in cash with $1.8 billion. This transaction we're going to invest $1.3 billion of that in the ASR, which would leave us with roughly $500 million. We will grow, we believe, our cash balance from that point, because we've always been cash positive.

So we'll pay, continue to pay dividends in response to an earlier question so that we're going to grow the cash balance. So, I don't know if we've ever looked at it from the absolute minimum amount we can run our business. So we’ll continue to grow cash, relative to the particulars of the ASR, we really are not at liberty to get into that at this call.

The difference between the 1, 3 and the 1, 7 I don't really know, we're not getting into the particulars of that on the call. I'm not sure it makes a big difference.

Louis Gerhardy - Morgan Stanley

Okay. And then in terms of what you said about gross bookings, I just wanted to be understand on the cell phone area, did you say that gross bookings dollars in that area, again the dollars increased sequentially?

Paul Coghlan

Yes, but it was as we said it went down a percent, but went up slightly in absolute dollars.

Louis Gerhardy - Morgan Stanley

Okay, great.

Paul Coghlan

Quote, unquote.

Louis Gerhardy - Morgan Stanley

Okay, great. That's all I have. Thank you.

Paul Coghlan

You're welcome.

Operator

We'll move next to Paul Leming of Soleil Securities.

Paul Leming - Soleil Securities

Good morning. Just wanted to ask a question on the share repurchase program. You talk about in the press release about doing the repurchase over three quarters and I'm just trying to get a little understanding on whether there really is a pretty absolute commitment in your mind to doing the $3 billion over three quarters or if there is some sensitivity to share price.

If you were to see a big response from the stock, saw it up in the mid-40s in a couple of quarters, might you throttle back the share repurchase activity, or is there really just a true commitment to get $3 billion back to the shareholder in three quarters?

Paul Coghlan

It's a $3 billion transaction. And that's what we're committed to do.

Paul Leming - Soleil Securities

And do it literally over three quarters or some flexibility on exact timing?

Paul Coghlan

Again, we don't want to get into the particulars.

Paul Leming - Soleil Securities

Okay.

Paul Coghlan

On this call. I think I answered your basic question.

Paul Leming - Soleil Securities

Okay.

Paul Coghlan

Okay. Getting into the specifics of how I do that week-by-week, I am not sure that's meaningful in the long run.

Paul Leming - Soleil Securities

Fair enough. Thanks very much.

Operator

Moving next to Rengan Rajaratnam with Sedna Capital.

Paul Coghlan

That's been my favorite question.

Operator

And with no response, we'll move to Chris Stanley with JP Morgan.

Chris Stanley - JP Morgan

Hey thanks guys. Just a few quick questions here. On the inventory, it sounds like it's going to be flattish, but its substantially higher than it normally is. Why not get a little more aggressive and burn it down a little bit during the quarter?

Paul Coghlan

Well, I think inventories you want to take a look at where you want to be, how well positioned you are going forward to the business you expect. There is no absolute right answer and we told you we thought flattening it out would be the right thing to do at this moment. That's the route we chose.

Bob Swanson

There's a philosophy here that, to cut it to really burn it down, it means you either tell people to sit on their hands and make less product while you pay them, or you lay them off, which seems to be a pretty drastic thing. And my philosophy has always been, I think Lothar agrees, if he shown to exhibit to say something, if you -- you can sell inventory, you can't sell variances.

Paul Coghlan

And we've always been very conservative when it comes to inventory management, so we do watch it closely and it's one of the ways that we keep our factories running efficiently and thy bank is one of the tools that we have that when business slows down.

We build up a little bit of the inventory and business always picks up again and then we'll burn that inventory down, but I don't think at this particular moment that we should panic and do something dramatic just because our inventory has grown slightly.

Chris Stanley - JP Morgan

True, that's fair. And then you said in response to an earlier question that your expense growth or the way you look at expenses is now based on quarterly results, so I assume it's yearly results. If your estimate of your long-term growth rate were to be lowered from the current 15% to 20% to say 10% to 15%, would that affect your R&D spending, i.e. would we see some potential restructuring there, or are we going to just continue to hire people?

Paul Coghlan

Well, first of all one of the -- that response, if it was taken in isolation would sound a little cavalier on my part, if I am quoted tomorrow saying Linear says, they don't care about their quarter results, they'll spend money how they feel appropriate. We have the blessing and the ability to do what we do because our margins are so high.

So, our business does have a 47% operating margin, which gives us a lot of flexibility in planning for the future relative to talent. In planning relative to talent, we think as Bob answered earlier and Lothar answered, there is a lot of great opportunities for us in the high performance analog area and to take advantage of those, we need good talented people.

So, that's why we expend what we do in those areas. If our growth rate were to change, and we're not saying it is changing, when you’re saying if it were, I think the first thing we would look at is to say, could we continue our growth rate by hiring better more talented people as the first solution to that problem rather than saying, let's stop hiring good talented people.

Chris Stanley - JP Morgan

Sure.

Paul Coghlan

So, I think in the long run, the answer to your question would be, we think we've got plenty of opportunity. We're planning to hire people to help us make that come true.

Chris Stanley - JP Morgan

And you guys have kept the gross margin extraordinarily high. Is it fair to say that you're more concerned with keeping the gross margins around 78% and potentially letting the operating margins drift around I guess the high 40s level?

Paul Coghlan

Yes. We're committed to keeping our margins because we think that's the business we best serve. And we hire people and we compensate people well. We have a very lucrative profit sharing plan and we compensate people to do what's difficult so they can design circuits that are unique, that enable us to get the margins we do, that enables us to hire more of them to continue to do that.

So, that you're right, we are focused on the margin area, because we think we've got really got opportunities in that area. We're focused on the margins because we think we have a lot of opportunities to sell products that get those margins, which already are an acknowledgement in the marketplace that these are unique and, therefore, must have been done by unique caliber people. So, it kind of build on itself.

Bob Swanson

For 20 years now, there is this misunderstanding. I think some people think that we've got this gate here and 78% is some magic number, 40% after-tax profit is a magic number and if it's not above those numbers or equal though those then we don't take the business. That is completely false.

We take business all the way down to break even. What we have shown the discipline to do is to not take any business that can't even pay the overhead.

Chris Stanley - JP Morgan

Okay, thanks.

Bob Swanson

So our margins are a blend of some very, very, very profitable stuff and stuff that's a little better than break even. We're not disposing of business that would be 60% gross profit or even 50% gross profit. What you're looking at is our average.

Chris Stanley - JP Morgan

Okay. Thanks, guys.

Operator

Uche Orji with UBS has the next question.

Uche Orji - UBS

Thank you very much. Just one quick question on the capacity that you mentioned you were adding for which you have the equipments in place. Is it possible for us to quantify what the normalized impact of that will be on your capacity?

Will that be up how much percentage in with the terms or if possible in dollar terms if you are able to kind of give us an idea on an annualized basis when say for this year and also when is awfully equipped?

Paul Coghlan

We kind of look at capacity two ways. One is we look at our capacity from infrastructure standpoint, kind of bricks and mortars, clean rooms, assembly and test facilities, those type of things, and we've got with the projects that we've got in the works right now and those we've recently finished, we've got the infrastructure in place to support sales of about $2 billion.

So, we've got the ability to grow relatively quickly because the infrastructure projects generally take a long time. What we don't have in place for $2 billion is the people and the production capital equipment.

So as the sales grow and as we need to add capacity, what we can do is add the production tools and the production labor to meet the growth curve, but we can do that in a relatively short period of time.

Uche Orji - UBS

Right. And based on what you've added now, once we get past this period of correction, what will be the normalized run rate in terms of how much of what you have in place now that will add to your current base?

Paul Coghlan

Yeah, with just minor additions, the company could support sales on the order of $300 million a quarter with the production tool sets we have in place.

Uche Orji - UBS

All right. I don't know if you alluded to this earlier, but within industrial there's been mixed commentary by your peer group as to what’s happening there. Do you think you're gaining share within industrial, or is it too early to say?

Paul Coghlan

What commentary are you referring to?

Uche Orji - UBS

Well, it's been post Q1 within post Q4 results, people are expecting industrial to be strong in Q1. It wasn't. And I suppose you also, you've seen bookings pick up. We haven't seen the bulk of the results, but you probably are the first to refer to pickup in bookings within industrial. I just want to do if this is an industry-wide pickup, or is it that you're kind of gaining share with industrial at this point.

Paul Coghlan

First of all, we don't know the answer to that I think until the other competitors announce. I think we did pick up in industrial, but as I said earlier, compared to a historical March quarter, it wasn't a strong March quarter for industrial.

Uche Orji - UBS

Okay.

Paul Coghlan

Better than the December quarter and we did pick up. But historically, it wasn't a strong March quarter for industrial.

Uche Orji - UBS

All right. Great. Thank you very much.

Paul Coghlan

You're welcome.

Operator

Moving on to Nelly Metha (ph) of Baron Capital.

Paul Coghlan

Okay. I think this may be our last question. We said we had to terminate our call at 9:00 today. So to respect anyone else that might be in the queue, may we take this as our last question.

Nelly Metha - Capital

My questions have been answered. Thank you.

Paul Coghlan

Okay. Thank you very much. So just in summary, I would like to thank all of you for your attention today. It was a momentous quarter for Linear Technology relative to this accelerated share repurchase that we announced. We thank you for your attention and hope you all have a good day. Bye-bye.

Operator

That does conclude today's conference. Thank you all for your participation and have a great day.

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Source: Linear Technology F3Q07 (Qtr End 3/31/07) Earnings Call Transcript

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