Linear Technology's (LLTC) Q2 2016 Results - Earnings Call Transcript

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Linear Technology Corporation (NASDAQ:LLTC)

Q2 2016 Results Earnings Conference Call

January 20, 2016, 11:30 AM ET

Executives

Don Zerio - VP Finance and CFO

Lothar Maier - CEO

Bob Swanson - Executive Chairman

Analysts

Ambrish Srivastava - BMO Bank

Craig Hettenbach - Morgan Stanley

Tore Svanberg - Stifel

John Pitzer - Credit Suisse

David Wong - Wells Fargo

William Stein - SunTrust Robinson Humphrey

Chris Caso - Susquehanna Financial Group

Ross Seymore - Deutsche Bank

C.J. Muse - Evercore ISI

Craig Ellis - B. Riley & Co

Harlan Sur - JPMorgan

Steve Smigie - Raymond James

Vivek Arya - Bank of America

Steven Chin - UBS

Operator

Good day and welcome to the Linear Technology Corporation Fiscal 2016 Second Quarter Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Don Zerio, Vice President of Finance and Chief Financial Officer. Please go ahead, sir.

Don Zerio

Good morning. Welcome to the Linear Technology Corporation conference call. I’m joined today by Bob Swanson, our Executive Chairman and Lothar Maier, our CEO.

Firstly, I would like to mention that we are hosting this call from Hong Kong where it is 12:30 A.M. So I tend keep my opening comments brief and I am hopeful you will cut us some slack during the Q&A, given the late hour.

Secondly, I would like to remind you that in our presentation today and our answers certain questions that may follow, we may make forward-looking statements that are dependent on certain risks and uncertainties, including but not limited to our financial results for future periods, our ability to produce and sell existing products, the timely introduction of new products and processes and general conditions in the world economy and financial markets.

In addition to these risks, please refer to the risk factors listed in the company’s Annual Report on Form 10-K for the fiscal year ended June 28, 2015. Also, SEC Regulation FD regarding selective disclosure influences our interaction with investors.

Accordingly, this conference call will be our forum to respond to questions regarding our estimated financial performance going forward. Should you have questions regarding our estimates of sales and profits or other financial matters for the upcoming quarter, this is the time we are free to respond to your questions.

As noted in our press release, which was released yesterday just after the market close, revenue for the December quarter came in at the midpoint of our guidance at $347.1 million, up 1.5% from the September quarter. Due to higher sales, more production days and related manufacturing efficiencies, gross margin increased from 75.1% to 75.7%.

Operating income was affected by the extra week this quarter, as the extra week added higher operating expenses primarily in labor-related costs, including stock compensation, so certain other operational cost increases as well.

Just to clarify, fiscal 2016 is a fiscal 53-week year and we add that week to the December quarter, making it a 14-week quarter versus the typical 13 weeks.

As a result of the added expenses, operating income dropped to 43.1% of sales versus 43.8% last quarter. Net income received the benefit from the lower tax rate of 19.5% compared to 25.75% in Q1, due to the permanent reinstatement of the R&D tax credit.

Net income and earnings per share were $121.5 million and $0.50, of which $0.04 was due to the lower tax rate. For the 24th consecutive year since the company began paying a dividend, the Board of Directors has once again approved the dividend increase, raising the dividend $0.02 to $0.32 per share, payable on February 24, 2016.

Recent history shows that December quarter is usually a down quarter for us, in part due to seasonality. We are pleased that we showed some sequential growth in a difficult economic environment. Yes, we had an extra week to the quarter revenue, but as I indicated last quarter, the calendar year-end timing of that extra week simply does not translate into much additional revenue. That in fact turned out to be true. It is difficult to say exactly what that amount was due to year-end shipment patterns and the lack of full visibility of third-party POS data.

So, we believe it was not much at all, if any, on the direct OEM business and it is definitely less than the two extra days on average I estimated it might be from distribution. But I can’t say for certain how much it was, so I won’t guess, and I’ll let you to make your own estimate.

Bookings on the other hand are easier to quantify and they did pick up at the end of the month. Unlike sales, we did get about three additional days of bookings on average from the extra week which is more than we expected for that period.

In the early part of the current quarter, bookings per day have improved over the December quarter and a positive book to bill ratio has given us some extra backlog heading into the March quarter. That gives us reason for optimism, but the macroeconomic picture is no better than last quarter, if it is not worse. And all you have to do is read the paper and check the markets to know that.

Naturally, there is a lot of caution out there among our customers. In light of all this, we are currently projecting revenue to be up 2% to 5% in the March quarter. This forecast assumes that the current run rate for bookings does not slow considerably and that the industrial market continues to improve from the recent low we saw in the September quarter. These are not assumptions that can be guaranteed in the current economic climate.

Turning to bookings by regions and market sector, as a reminder, we have posted bookings by market and revenue by geography for the quarter on our website at linear.com. Just click Company, Investor Relations and Supplemental Information. We post this information by the end of our business day on the day we release our results.

Total bookings increased for the quarter and we had a positive book to bill ratio. Bookings increased in both North America and the international market.

Within international, bookings were up in Europe and Asia-Pacific, but were down in Japan. Despite the relative turmoil in the China market, it continues to be a bright spot, as bookings were up the most in that geographic region on the strength of automotive.

With respect to bookings by market sector, our three biggest markets, industrial, transportation and communications were all up modestly, led by transportation in both dollars and as a percentage. Of our smaller markets, military, space was up following the weak September quarter, while computer and consumer were both down. The computer market particularly PCs and notebooks continue to be particularly weak and we are certainly not alone in feeling that.

Industrial continues to be our largest market at 43% of our bookings, the same as the previous quarter, but we did see some improvement in bookings as we hoped coming off of weak Q1. The increase in bookings was led by North America, followed by Asia-Pacific and Europe. Japan was essentially flat. We are encouraged by the increase as a whole, but we would not yet characterize it as a sign of strength as we are still away from the bookings level we had a year or so ago. So, I won’t characterize it as less weak and I think that is a good way to put it right now.

March is historically a stronger industrial quarter, so this quarter should shed some better light. The overall increase in bookings was led by transportation which increased to 23% of our business, up from 22%. The increase in bookings in transportation was driven primarily by Asia-Pacific and to a lesser extent Europe, while North America was flat and Japan was down.

Asia-Pacific is showing continued strength from China, due in large part to the success of our battery management products for hybrid and electric vehicles. China is currently offering significant incentives to both businesses and consumers to build and buy electric, and our BMS products have helped us capitalize on that. Korea is also a good transportation market for us as well is Asia-Pacific.

Bookings in the communications market increased is North America bookings bounced back a bit from a weak first quarter, Europe and Asia were up as well but just slightly and Japan was flat. Communications remained at 18% of our bookings for the quarter. The computer market was 7% of our bookings, down from 9% last quarter, with the decrease primarily in North America where the majority of this business is booked. As stated previously, this market is suffering due to weaker notebook sales and to a lesser extent, storage devices such as solid-state drives.

This market may continue to (Inaudible) a bit for us over the short term, as notebook sales continue to decline as expected. Longer-term, we’re still very much in this market and expect growth opportunity to come to fruition as we have products that address the high-end in this market. Bookings for military, space and harsh environment products were higher this quarter, pushing its share back to 6% of our business as has been the norm. Military bounced back from a weak first quarter, while the space business has been somewhat flat for the past year. We do expect the space business to improve a satellite launch activity picks up. This is predominantly a US market, so we do book some business in Europe. Finally, consumer, our smallest end market and one we don’t focus on remained at 3% of our bookings. So booking were down in the quarter. With regard to where our bookings are actually created, 62% were created internationally and 38% in North America was a 61% and 39%, respectively, last period.

Moving on sales, sales increased by 1.5% from the prior quarter and were down 1.5% from the prior year quarter.

Geographically, sales were up both in North America and rest of world which is primarily Asia-Pacific, Europe was essentially flat, why Japan was down. On a regional basis, not the medical was 27% of our business, compared to 28% last quarter, Europe and Japan each remained at 19% and 15%, respectively. Asia-Pacific increased from 38% of sales to 39%.

Turning to less of the income statement, gross margin was up from 75.1% to 75.7%. This is relatively a large increase on a modest sales increase. And it is unusual the cost of sales is actually less in dollars in the September quarter on higher sales volume. This results from several factors.

Firstly and obviously, the higher sales base allows us to spread factory overhead over more units sold. Secondly, gross margin in the prior quarter fell an entire point after the sharp downturn and revenue and our manufacturing plants were relatively inefficient from the quick and sudden drop in production.

It has turned around to some extent during the current quarter as production stabilized. Also, despite a one-week closure during the holiday week, we had four more production days on average netting the shutdown days we had in each quarter. We also had an improvement in our average selling price to $0.04 to $1.92. Finally, we had some improvement due to foreign-exchange particularly the Malaysian ringgit, lowering the cost of our foreign plants. Overall, that nets up to a very nice gross margin under the circumstances, but it is more than expected from the modest increase in sales. I do not expect a similar improvement in gross margin next quarter, as we will lose some of those manufacturing efficiencies with our backend plants in Penang and Singapore closing for Chinese New Year, so I don’t expect a decline either. R&D increased $3.3 million sequentially to $69.9 million, primarily due to higher labor cost and stock compensation from the one extra week in the quarter. In addition, legal costs were up slightly, as were other costs, such as supplies, small equipment, travel and entertainment.

SG&A increased $3.2 million sequentially to $43.4 million, also due to the higher labor cost and stock compensation from one extra week in the quarter. In addition, other costs increased primarily for advertising and travel. Due to the extra week in the quarter and the holiday period that included shutdown days for all Linear employees, this was an unusual quarter for operating expenses. So operating expense ratio at 32.2% is unusually high.

Just like revenue, it is difficult to say for sure what the extra week was worth, that of the impact of the date that we shutdown, because I believe you’re more concerned about what the expenses would be going forward. I expect that our operating expenses, with modest improvement in sales, to be more in line with our first quarter in the 31% range, if not better. One thing to remember is non-cash stock compensation is rising faster than our cash expenses as older, lower-priced grants vest and are replaced by new higher-priced grants.

Recently though it appears that the stock market is trying to take care of that difference. Operating income declined slightly by $0.5 million to $149.5 million, representing 43.1% of sales, again impacted by the extra week in the quarter. Interest and other income increased to $500,000 to $1.5 million. Interest income was up about $300,000, due to a slightly higher investment yield. Other income included a $200,000 change gain on foreign currencies held.

Our quarterly effective income tax rate was significantly lower this quarter at 19.5% versus 25.75% last quarter, entirely due to the reinstatement of the R&D tax credit. Next quarter, absent discrete tax items, if any, we expect our annual effective tax rate to be in the 24% to 24.5% range. Net income for the period was $121.5 million, up $9.5 million and was 35% of sales, up from 32.8%.

The average shares outstanding used in the calculation of earnings per share decreased by 272,000 shares. The weighted average of stock repurchases, both this period and last period, more than offset increases from stock option exercises, investing of employee restricted stock awards.

GAAP earnings per share was $0.50, up from $0.46 in the prior quarter. Without the impact of stock-based compensation of $20.3 million, which includes an extra week of stock-based compensation expense, diluted EPS would have been $0.56 per share. Given the late hour here, I’m going to skip the balance sheet commentary. I’m sure there are many of you who are not disappointed by that. Looking forward, using the data points we have at this time from our customers and the sales force, (Inaudible) someone on history that suggests the weak industrial market will continue rebound from the seasonally lower December quarter, we are guiding revenue to be up 2% to 5% sequentially in our third quarter. In the early part of this quarter, we’re seeing recovery from certain geographies and certain customers.

Also, the oversupply condition that occurred from the drop in demand through the three quarters ago has been mostly corrected. We believe in general oversupply is no longer a key issue for our OEM customers or in the distribution channel. We are seeing signs of life, but the macroeconomic climate is still fragile. So we’re not calling the down-cycle (Inaudible) up again a few quarters ago over just yet. I would now like to open up the conference call to questions to be addressed by Bob, Lothar or me. Hello.

Question-and-Answer Session

Operator

(Operator Instructions) And we will now take our first question from Ambrish Srivastava from Bank of Montreal. Your line is open.

Ambrish Srivastava - BMO Bank

Hi, thank you, guys. A pretty solid execution given the microenvironment out there. My first question is on the guide, is that the – is the right way to think about it is you had, you were shipping below demand in the quarter before December, so in December sort of caught up to that and now you are guiding for a quarter which seems to be more in line with seasonality, is that the right way to think that now you are shipping mostly in sync with the demand? And then I had a quick follow-up

Don Zerio

Yes, I think that’s correct.

Ambrish Srivastava - BMO Bank

Okay. And then my follow-up is on the geography side, you mentioned that China was strong in automotives, what is your read outside of the automotive market? Thank you.

Don Zerio

Well, China is also a good industrial market for us and actually, the market as you know has been relatively weak, we are seeing signs of pickup, but China has been holding its own in industrial. So that’s growing as well. So, you are right that transportation is growing stronger, but industrial market is doing just fine in China.

Operator

(Operator Instructions) And we will now take a question from Craig Hettenbach from Morgan Stanley.

Craig Hettenbach - Morgan Stanley

Yes. Thank you. Just following up on the China commentary, certainly there's been

some stimulus on your automotive side, so just wanted to get a sense from you as you kind of went through the quarter just your view on the sustainability of strength in China autos?

Lothar Maier

I think the strength in the China auto business is just beginning, I mean based on what we are seeing and based on what the amount of stimulus that Chinese government is putting in place, I think we are kind of on the early stages of what could be a pretty good piece of business for us. We’ve done very well in the BMS portion of the Chinese automotive market and actually, I should say the transportation, because it is not just cars, buses and taxis and vehicles as well. And it’s not just BMS. If you win the BMS business in a car, you’re likely to win the other sockets as well. So, I think we are kind of just in the early stages of this opportunity here in transportation in China.

Craig Hettenbach - Morgan Stanley

Got it. And just as a follow-up just staying with automotives, China kind of stands out, but there's your concerns around the North American market, anything else more broadly on a global basis that you are seeing in automotive?

Lothar Maier

It’s just the amount of electronics that’s going into cars. So, there may be some regional either regional or global softness in vehicle sales, but I don’t think that’s going to really deter the amount of electronics that goes into cars. We spend a lot of time talking about BMS, but we’ve got opportunities in many other applications in the cars. There’s all this ADAS stuff that people are talking about. That’s just beginning. And from our perspective, we see virtually every car manufacturer having some program that deals with this ADAS. And I’m not going to say that cars going to be driving themselves here in the next year or two completely by themselves, there is just a lot of stepping stones to get to that point and we are seeing those stepping stones happening right now.

Operator

(Operator Instructions) And we will take our next question from Tore Svanberg from Stifel.

Tore Svanberg - Stifel

Yes. Thank you and good night. First question, the Japan business was weak and it looks like bookings remain weak too. Is there anything structural going on there or is this just simply perhaps due to their strong currency?

Don Zerio

I think that’s an interesting question, because we notice that as well. Japan is actually a little weaker than maybe some of the other regions right now. And I think there’s some economic – internal economic reasons in Japan, but I think they are being affected by more than some other regions by what’s going on in China. I think the imports into China are probably slowing and their consumption is more domestic and I think Japan is killing that. On the bookings side, we are – the bookings going into the March quarter, March is the fiscal year end for most Japanese companies, so you get the typical sort of push-outs for shipments as they want to dress up their balance sheet a little bit. That’s sort of normal seasonality, but it’s more than that for sure. We think that China has something to do with it.

Tore Svanberg – Stifel

Very good. Thank you, Don. And just as my follow-up, I know you didn't want to discuss balance sheet items but could you

Don Zerio

Ask your question, go ahead.

Tore Svanberg – Stifel

Yes. Could you just update us on the CapEx number that we should use for the fiscal year, please?

Don Zerio

Sure. Our capital expenses was about $11 million.

Tore Svanberg – Stifel

Okay. And what are you expecting for the year?

Don Zerio

Pretty similar each quarter, nothing major.

Operator

And we will take our next question from John Pitzer from Credit Suisse.

John Pitzer - Credit Suisse

Good afternoon, good evening or good morning, good evening, guys. Don, in your prepared comments, you talked about sort of daily booking trends being better thus far through January than they were in December and that linearity in the December quarter improved. I'm kind of curious, is that typical and can you help me understand sort of normal linearity in the March quarter especially given Chinese New Year is in February this year?

Don Zerio

Chinese New Year, every year when it comes, it’s not always the same week. So, to be honest, it’s the same – we don’t get the same pattern every year. Sometimes, you get some strength going into Chinese New Year and then maybe a little bit of weakness afterwards. Sometimes, you get a little bit of weakness before and strength afterwards. So, it’s not always the same pattern, but as you know, the March quarter overall is a stronger industrial quarter for us. So, I think just on average taking out sort of the macroeconomics of it all, you generally see bookings sort of accelerate somewhat through the quarter. But again, these are not normal times.

John Pitzer - Credit Suisse

That's helpful. And then either for Don or for Lothar, industrial is such a large sort of umbrella bucket for all of the analog companies, yourself included. And I guess one of the questions I'm getting is given that you are guiding to normal seasonal roughly for the March quarter, but still have kind of a cautious view on the macro, what are kind of some of the sub buckets within industrial that you guys worry about as being sort of the most macro sensitive in an area where you could be caught by surprise if the macro remains weak or gets weaker?

Lothar Maier

Yes. The industrial business for us is thousands of customers, so it’s spread across a lot of markets. Obviously, medical is a portion of it that’s doing okay. If you ask me here is where I probably and from a industrial standpoint worry about a little bit is that we know that with the relatively low price of petroleum right now, that it’s affecting some of our industrial customers who have business into the exploration market. So, I think we are going to see a little bit of softness on those, but I think overall because of the mix of customers and where the industrial products get sold into, I think there is other factors that will probably balance that out. I mean, this last quarter, the industrial business grew actually pretty good even in the face of those headwinds.

Operator

And we will take our next question from David Wong from Wells Fargo.

David Wong-Wells Fargo

Thanks very much. Could you give us some idea roughly how much our automotive revenue is rising year over year for you and what you expect for automotive growth in 2016 or transportation?

Don Zerio

No, we don’t – David, I think you know by now that we don’t break out the dollars or the growth rate for each of our markets and it would be a guess anyway, but I think what we have said is you’ve seen a steady rise in our business of automotive from the teens to 20%, 21%, it’s just pretty much we are going up almost a point quarter to quarter. So, we sort of see that continuing that beginning to be more and more of our business, I mean, obviously, 25% is clearly within reach and we wouldn’t be surprised to see it go north from there.

David Wong-Wells Fargo

Great. And my follow-up, forgive me if I missed this, but did you say what ASP was during the quarter?

Don Zerio

Yes, it increased $0.04 from $1.88 to $1.92.

David Wong-Wells Fargo

Great, thanks.

Operator

And we will now take a question from William Stein from SunTrust.

William Stein-SunTrust Robinson Humphrey

Great, thanks for taking my question. I'm trying to reconcile your comments about the weak macro environment on the one hand with two other things. First, your comments about improving bookings trends and second, your one quarter out guidance that while in line with normal seasonality, you are coming off of a 14-week quarter, so it would appear to be even better than what I would've expected on a seasonal basis. So can you help me sort of put those two together?

Don Zerio

I think that’s a pretty good call actually. I think you are right. I mean, we are able to still grow in a weak December quarter, but remember, we came off a pretty weak quarter before that. So, bookings I would have to say increased better than we expected towards the end of that December period. And as I said, there are looking pretty good right now. There is definitely a step increase over what we experienced throughout the entirety of the December quarter, but again, this early in the quarter, there is no question still a week out there, it’s too early to say if the bookings will stay at that rate or even accelerated, like John Pitzer asked before that based on history, would expect that. But it is just too early to say, but the optimism that we have is based on what you just said, is pretty good towards the end of the quarter and the beginning part of this quarter.

William Stein-SunTrust Robinson Humphrey

So a follow-up if I can would be whether maybe it's this – would you be concerned that the better bookings rate you are seeing now that's leading to what are in a sense better than seasonal guidance could be a head fake if oil stays below $30 a barrel that continues to pressure the whole sort of industrial complex?

Lothar Maier

That’s a hard call to say, but if you’re asking me my opinion, my sense is that that headwind we’ve already faced. I think it’s – we’ve had these relatively low prices for quite a while now and I think most of the customers that have exposure to that market have probably reacted already.

Bob Swanson

I guess so. All I wanted to add was that although we are seeing strong bookings the beginning of this year, at the end of this quarter, I mean, we are still bothered by the lack of any real good macroeconomic news. And so, if it’s a head fake, but we have to be mindful of that.

Lothar Maier

If you kind of take a longer view, low-price petroleum is probably in the long term a pretty good thing. So, even there might be some near term pain. I think long term, this is going to be a positive.

William Stein-SunTrust Robinson Humphrey

Helpful, thank you.

Operator

And we will now take a question from Chris Caso from Susquehanna Financial Group.

Chris Caso-Susquehanna Financial Group

Yes, thank you. Just wondering if you could provide just some commentary. I understand what you are seeing with the bookings itself. Maybe if you have some color about the customers themselves, what they are telling you and you guys are in Hong Kong right now. I'm sure you are doing some customer meetings right now. Are you getting that feeling from the customers that perhaps they are feeling a little bit better about things now and perhaps better than what the stock market seems to be suggesting?

Lothar Maier

I think there is probably a different approach to the growth that we are seeing. I think if you look at all of our markets, there is three of them that the company has focused on for a while, the automotive, the industrial, and the communications markets and the bookings in those – all three of those markets have ticked up and those are really the markets that are driving our growth. And I think what we are seeing is the fact that we’ve concentrated our sales efforts our product design efforts and really the markets, the analog markets that are growing and I think that’s what helping us. I think it’s less of some customers doing a great job or some is doing well. I think we picked the right market, and we have been at it for quite a while and we are seeing the benefits of it.

Chris Caso-Susquehanna Financial Group

Okay. And as a follow-on, if you could talk a bit about a little more color on what you were talking about with respect to inventory levels. I mean, it sounds like your customers were burning through inventory toward the end of last year and perhaps some of the improvement you are seeing now is I guess the resumption of orders from some customers who were burning through inventory?

Don Zerio

Yes, I think that we are closer and I think this question was asked in a similar way before, I think we are – we feel like we are shipping to demand right now that we burned off the inventory layer that arose once the end customer demand declined. And so, customers sort of took the layer down their safety stock that was their expecting higher run rate, so I think we burned through that. And we are shipping to actual end customer demand more or less. We think any type of major inventory correction is behind us.

Chris Caso-Susquehanna Financial Group

But the customers' targets for inventory haven't changed. At this point, they are getting back to normal inventory levels, not raising those targets at this point.

Don Zerio

Yes. I think – I mean I don’t think what we are seeing now is they’ve taken inventory down and now they are having it back, I mean, they have taken it down and now, they are ordering to meet the actual demand. And so, I would expect if demand picks up as that we see from the beginning part of the quarter, if that was to continue, eventually, some of that inventory has to be built back up and I don’t think that’s going on right now.

Lothar Maier

I think inventory situation at the customers are still pretty lean and we kind of normally think of the December month of being a pretty quiet month and we actually saw some significant expedite activities from our customers where they don’t expedite unless either one, they get surprised with an order or two, that they’ve run their inventory so low that they need some extra help from us. So, that was kind of a positive feel is that customers are having to expedite us for product.

Bob Swanson

I think in general our customers are – confuses a lot of suppliers. They are trying to figure out which way business is moving.

Operator

And we will now take a question from Ross Seymore from Deutsche Bank.

Ross Seymore - Deutsche Bank

Hi, guys. Thanks again for doing the call especially the hour it is over there. I guess one area that hasn't been asked about thus far is the communications infrastructure side. You just mentioned it's one of your three focus areas. I realize it stayed unchanged as a percentage of bookings. But can you talk a little bit about what you are seeing there from the wireline versus wireless side and maybe any geographic color as well?

Lothar Maier

Yes, it’s – this market is kind of sits and starts, it stays the same as a percentage, but it did obviously grow in absolute dollars. And for us, the part of the communications market, particularly when you look towards the wireless portion isn’t in the base station type of area. Really, the sort of non-wired or non-wireless portion is really where the growth that we are seeing, sort of the networking. Optical is coming back to life. We were seeing as these optical applications go from 40G to 100G to 200G to 400G, there is really some tough problems that our customers need to solve. And that particular part of the market looks pretty good. There is some performance issues, there is some very tight space constraints that they have to deal with. And so, that – for the optical part of the business looks pretty decent.

Ross Seymore - Deutsche Bank

I guess as my follow-up just getting to the nearer-term in the March quarter, can you give us a rough idea that the turns assumption that you guys have for the March quarter this year and how that compares to maybe the December quarter and if it's a more meaningful comparison to the March quarter of last year and what the actual turns were?

Don Zerio

Well, to be honest, I would only remember what the turns was last year, but I know that the turns that we expect this quarter is probably in the 60% range which is sort of normal, we shouldn’t really – with the kind of bookings that we expect on this strength we are covering on, it shouldn’t be a problem, but again, we have to see what happens with bookings ultimately.

Operator

And we will now take a question from C.J. Muse from ISI Group.

C.J. Muse - Evercore ISI

Yes. Good evening. Thank you for taking my question. I guess getting back to the seasonal guide in this macro uncertainty, just curious if you can talk a little bit about whether you think this is leveraged to the right sub-segments in terms of end markets, whether rising content ala – and/or ala higher ASPs as you alluded to? We would love to hear just color on that front.

Don Zerio

Honestly, I don’t understand what you are asking for. I mean, can you please repeat that, so I would maybe take it another time?

C.J. Muse - Evercore ISI

Yes, sure. Trying to balance seasonal guide with macro uncertainty and there just wondering are you just leveraged simply to the right sub end markets that you’ve been attacking over the last couple of years? Is it a rising content story for you? Is it a rising ASP? Really try to better understand the drivers there.

Lothar Maier

Yes, I think you hit on the head is that it’s – there are headwinds obviously that are out there, but I think we either through good fortune, luck or brilliance had picked the right markets to go after and even though there are some economic headwinds, the content in the automotive market which has been our fastest growing end market just has accelerated and will probably continue to accelerate for quite a while. So, I think we are seeing some growth here partially because of seasonality, but I think at least it is important is the fact that our products and our sales efforts and our design efforts are in the markets that seems to be doing relatively well. I say this all the time and it surprises people, it is the – if you look at the total analog market, the industrial and the automotive make up 50% of the total analog market, not us, but the total analog market and we – that’s where the majority of our business is directed towards. So, we are kind of focused really in the growth areas of the analog market and we seem to be doing pretty well right now.

C.J. Muse - Evercore ISI

That's helpful. And I guess as a quick follow-up, can you walk through the moving parts again in terms of what we should be expecting for gross margin in terms of mix, ASP, FX? Thank you.

Don Zerio

As I stated in the opening commentary, quite honestly to get a 60 base improvement on a little over $5 million increase in sales is unusual. So, there is a lot of moving parts in there. So, it is difficult to say going forward which one of those parts will continue. I do know for sure that there is a (Inaudible) you call at that, just that we know we are closing down our backend factory and so, less production days means, some inefficiencies, but absorptions and that affects us.

Lothar Maier

We will close the factory for Chinese New Year.

Don Zerio

Yes, for Chinese New Year on Singapore and Malaysia, but the ASP certainly helps, and that’s next, but I can’t say what just yet what mix is going to be in the current quarter. I will say that in fairness to our factories, it wasn’t just number of production days, I mean, there is some real P&L improvement and some cost saving efforts that they’ve achieved. But in terms of color going forward, I do expect – I don’t expect another 60 base improvement in gross margin on the higher sales growth if we actually hit our target. So, I’m a little cautious about saying that. I wouldn’t expect even with the shutdown of our backend factory for Chinese New Year. So, I wouldn’t expect it to decline. Hopefully, we will get some improvement, but it is too early to know. Just like you said, there’s just a lot of moving pieces.

Operator

And we will now take a question from Craig Ellis from B. Riley & Co.

Craig Ellis - B. Riley & Co.

Thanks for taking the question. The first is just a follow-up on your comments, Lothar, around the automotive business. I just want to ensure I'm understanding how your business is evolving. Are you saying that content growth is accelerating because we are starting to see some of the more advanced systems in traditional automobiles or is content growth accelerating for Linear Tech because as the TAM expands to include things like buses and other mass transit type systems, you've just got a blended content growth rate that's better than what it has been recently?

Lothar Maier

I think it is a little bit of both. And clearly, you spend that time ten years ago, there wasn’t a lot of electronics, there is the NAV and the entertainment systems and that’s where really most of the electronics was concentrated in a car, now you’ve got whole sorts of drive-by wires, you got LED lighting, you’ve got BMS, you’ve got hybrid and electric cars, and that’s because we work with the car companies and we already know model year 2017, 2018, 2019, what sort of electronic content they are going to have and there is just a tremendous amount of new opportunities, things like 48-volt battery systems, they are coming. I think there is already model year 2016, 2017, there is a couple of car companies that’ll have 48-volt battery systems and then that just opens up a whole new area. And I think what probably helps us a lot as well is the fact that there’s been some geographies particularly China that’s pushing very hard alternatively fueled vehicles. And so, it’s just – we talked about is ADAS stuff that’s coming. And so, it’s really just a lot of new opportunities for electronics that’s really helping us in the automotive market.

Craig Ellis - B. Riley & Co.

Thanks for that.

Lothar Maier

And you asked me if it’s accelerate, I think to some extent probably yes, I mean, we just see opportunity upon opportunity in that market.

Craig Ellis - B. Riley & Co.

Thank you. The follow-up, Don, nice $0.02 dividend increase, the second consecutive multi-penny increase for the company. Where are we with respect to an optimal level as a percent of free cash flow for your dividend payment now?

Don Zerio

An optimal level for our cash flow, well, I think what we said is, to be honest, it’s we don’t have an optimal level of cash flow. I mean, we think that the increase in the dividend year in, year out is sort of our first commitment to our shareholders and the return of that capital, we’ve done that every year since we’ve commenced it. And then secondarily, at a minimum, we try to retire the shares that are issued to employees. The first and foremost is the dividend and absent something unforeseen, we expect to increase that every year as long as we can. It’s not based upon some optimal level of cash flow.

Operator

And we will now go to Harlan Sur from JPMorgan.

Harlan Sur - JPMorgan

Good morning, thank you for taking my questions. In your prepared remarks you mentioned seeing positive demand signs in certain geos and end markets this quarter. I know it is early days for the team, but can you give us a bit more color on what areas and geos you are seeing the positive demand pull this quarter? I know industrial and auto are typically stronger but, any color would be great.

Don Zerio

So, I mean I think certainly Asia-Pacific is showing strength. We talked about China, but Korea is doing pretty well, Europe is a little weak, but we see some signs there, Japan, we already talked about is somehow weak and being affected by China. Within Europe, I said Europe is sort of holding its own, if not strong, but it is not real weak either, but within Europe, there is different countries that are affected. I think Germany is being affected a little bit by China as well. So, Germany obviously a big pieced of Europe, but I think they are a little weak right now, but I wouldn’t say very weak. So, it’s – we are so broad-based, so it’s difficult to say which country, but I – it looks like we are showing a little bit of strength in general, we’ll just have to see if that continues.

Harlan Sur - JPMorgan

Great. And then were there any differences in bookings momentum between your disti and OEM customers in December? What are the trends that you are seeing OEM versus disti this quarter?

Don Zerio

Actually, I think between OEM and disti, OEM actually bounced back a little better than distribution. Distribution was somewhat flattish to maybe down a little bit, but nothing inornate. We would hope that just like the rest of our internal business (Inaudible) that distribution will grow along with us.

Harlan Sur - JPMorgan

Thank you.

Operator

And we will now take a question from Steve Smigie from Raymond James.

Steve Smigie - Raymond James

Great. Thanks a lot, guys. I just want to touch a little bit more on the China industrial. You mentioned some strength there. Obviously it is broad-based. Are there a couple of buckets of strength there that's doing a little bit better? Is it factory automation for example? And is that strength more around – their units are starting to do a little bit better again or is it you guys are just again getting a lot of dollar content on boxes?

Lothar Maier

Again, that’s an area that’s pretty hard to pin down, because it’s so broad, there is so many different customers, they buy such a diverse bill of materials. But from – we are here in the initial right now, and with discussions with sales team, you kind of hit it on head some of the interesting areas in industrial which maybe isn’t helping exactly right now, but maybe in the near future is the sort of automation area. There is a lot of talk about it here, we see customer interest in that area and so that maybe something that’s interesting going forward for LTC.

Steve Smigie - Raymond James

Okay, great. And just my follow-up question was around inventory. You talked about that getting cleaned up. Can you help us understand a little bit in terms of that cleanup, is it more cleanup on the channel side, the distributors, or is it OEM? And on the channel side, where did you see the biggest change? Is it the big Arrow, Avnets out there or is it local Chinese guys where you've seen the change?

Don Zerio

No, to be honest, I don’t think I have that information or recall the distribution inventory by region. But in terms of when the inventory had to come down because demand fell, I think it was inventory correction that affected OEM and distribution equally, it had to be done on both channels. But in terms of what part of the channel, we are (Inaudible) I honestly don’t know. I don’t have the information broken down like that.

Operator

And we will now take a question from Vivek Arya from Bank of America.

Vivek Arya - Bank of America

Thank you for taking my question. There's a lot of concern about just currency devaluation in China and just FX fluctuations. I realize semiconductor companies usually price in dollars but I'm wondering if it's having any direct or indirect impact on your business and does it even come up in discussions with your OEM or distributor customers?

Don Zerio

I think I answered this question before in the past. We are not going to say it has no effect, like you say we are a US dollar company, our competitors also price in US dollars. It certainly has some effect. You mentioned specifically China and I don’t ever remember coming up in an internal conversation about price – foreign currency issues resulting from China. That’s for sure. But in general, the movement of foreign currency to have some affect on our revenues, I am sure the answer to that is yes, but it’s never been great whether the dollar is strong or whether the dollar is weak, it is probably a little, but I wouldn’t say it’s significant in either direction.

Vivek Arya - Bank of America

I see. And as a quick follow-up, you have a very strong balance sheet, over $1.3 billion in cash. Does this current environment make you think more about either doing more buybacks or thinking about any other M&A in the industry or do you think just the caution in the environment makes you not think about those things more actively?

Don Zerio

You mentioned M&A, we are not a big player in that field. And so, when we – in the past, we did a large transaction in 2007 when we felt our strategy was not well understood and that’s when we are focusing more on automotive and industrial. We retired that debt a little over a year ago. We’ve been using our existing cash to retire shares and we’ve done that, we bought back at least those that we’ve issued that’s sort of our secondary cause, if you will, behind dividend. But in terms of something going forward, we’ll have to just wait and see.

Operator

And we will now take a question from Steven Chin from UBS.

Stephen Chin - UBS

Hi. Thanks for taking my questions. The first one I have is on your automotive business. I just wanted to see if you could help parse out a little bit more of some of the exposures in that business? When you look across the whole product line, can you break out the relative exposure between gasoline cars versus alternative energy cars like hybrids and electrics if that's possible? And also just with the long sort of design win visibility you have and where you are approximately going to, any sense for whether your products are still mainly concentrated in sort of high to mid-end vehicles or are you seeing your products migrate down towards a mid – end and then also mass market vehicles as well?

Lothar Maier

Initially, when we started to see a pickup in the automotive business, it was really dominated by conventional gasoline-powered cars, that is starting to evolve. And as more car OEMs field electric and hybrid an plug-in hybrid cars, even though today the quantity of those cars is still relatively small. The content of opportunities for Linear are significantly higher, multiple tier in those types of cars. So, the hybrid and electric vehicle market is a very interesting market for us because it has a much, much higher electronic content for us. So, that’s where we are seeing some pretty significant opportunities. But there is a sort of waves of new areas for electronics that are coming in the cars. I mentioned earlier the 48-volt battery system, that’s going to have a wave of opportunities, ADAS systems is going to have a wave of opportunities. And we are just seeing these waves of opportunities coming in and I think there is just a lot of good opportunities for vehicles right now and we’ve seen the benefit of it in the last several years where we see pretty steady growth in our automotive sales and also in the percentage of our sales going into the automotive market. So, I hope that answered part of your question.

Stephen Chin - UBS

Yes, that's helpful. And just as a quick follow-up, I'm not sure if I missed this detail or comment earlier but for your front-end fab utilization rates for the March quarter, is that going to be down or flat for the quarter? Thanks.

Don Zerio

In the March quarter? It should be I think in terms of the number of production days, it’s probably going to be about flat. I mentioned it’s the backend, our assembly and test operation overseas that’s going to celebrate Chinese New Year. So, they’ll have less production. The fab will about the same.

Stephen Chin - UBS

Thank you.

Operator

(Operator Instructions) And gentlemen, it appears, we have no more telephone questions at this time.

End of Q&A

Don Zerio

Okay, thank you for joining us on the quarterly conference call. We look forward to talking to you again next quarter. I think the three of us here are calling in the night.

Thank you and have a good day.

Operator

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

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