Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  
TRANSCRIPT SPONSOR
Wall Street Breakfast

Linear Technology Corp. (NASDAQ:LLTC)

F4Q07 Earnings Call

July 25, 2007 11:30 am ET

Executives

Paul Coghlan - CFO

Bob Swanson - Executive Chairman

Lothar Maier - CEO

Analysts

Craig Hettenbach - Wachovia Securities

Doug Freedman - American Technical Research

Ross Seymore - Deutsche Bank

Craig Ellis - Citi

Michael Masdea - Credit Suisse

Jeff Rosenberg - William Blair

Simona Jankowski - Goldman Sachs

Evan Wong - Piper Jaffray

Sumit Dhanda - Banc of America

Uche Orji - UBS

Steve Smigie - Raymond James

Romit Shah - Lehman Brothers

Chris Stanley - JP Morgan

David Wu - Global Crown Capital

Satish Agrawal - KFA

Gus Richard - First Albany Capital

Louis Gerhardy - Morgan Stanley

Presentation

Operator

Good day, everyone. And welcome to the Linear Technology Corporation Fiscal 2007 First Quarter Earnings Release Conference Call. Today's conference is being recorded.

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

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 fourth quarter and fiscal year 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 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 April 1st, 2007, particularly management's discussion and analysis of financial conditions and results of operations.

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 sole forum to respond to questions regarding our estimated financial performance going forward. Consequently should you have any questions regarding our estimates or sales and profits, or other financial matters for the upcoming quarter, as well as how they might impact our income statement model and our balance sheet, this is the time we’re free to respond to those questions.

In April 2007, the company entered into a $3 billion accelerated share repurchase (NYSE:ASR) transaction, funded by $1.3 billion of the company's own cash and $1.7 billion of convertible debt. As a result the company had a decrease in interest income and an increase in interest expense, together totaling $19.5 million.

Concurrently the company retired 72.2 million shares of its common stock and expects to retire an additional 7.7 million shares during the first quarter of fiscal year 2008. Consequently, the transaction has been accretive to earnings per share as the impact of the reduced shares was greater than the increased interest expense and lost interest income.

This unique and non-recurring transaction was beneficial to the company and will impact the comparability between annual and quarterly periods as I discuss these results going forward.

Starting with the just completed fourth quarter, sales increased from the previous quarter within the range of 3% to 6%, which we had forecasted in our last conference call.

Revenue was $268.1 million, up 5% from revenue of $255 million for the previous quarter. Earnings per share was $0.36, up from $0.32 last quarter. However, net income for the fourth quarter was $95.7 million, compared with $98.6 million in the prior quarter; this anomaly of increased earnings per share on lower net income was due to the ASR mentioned above, whereby the increase in net interest expense affecting net income was offset by the reduced shares outstanding in the earnings per share calculation.

On a pro-forma basis, without the impact of stock-based compensation, earnings per share would have been $0.42 versus $0.37. And net income would have been $109.9 million versus $111.8 million in the March quarter, so the impact of stock-based compensation was 15% of net income or $0.06 at the earnings per share level. For the quarter just ended, our GAAP return on sales was 36% and our pro-forma return on sales was 41%.

Another major impact on the result of the June quarter was a significant reduction in our effective tax rate, due to certain discreet items that occurred within this quarter. The company finalized certain tax issues that were under audit, and revised its tax reserves accordingly. This resulted in a reduction in the June quarter's effective tax rate to 23%, from the 28% recorded in the previous quarter.

Other line items within the income statement were more in line with previous quarters. Gross margin percent was 77.1% versus 77.8% in the prior quarter. Operating expenses, as a percent of sales decreased from 30.7% to 29.7%.

The resulting operating margin -- as a percent of sales improved to 47.4% from 47.2% the prior quarter. During the quarter the company's cash and short-term investments decreased by $1.175 billion. Our net increase of $125 million from the business was more than offset by the $1.3 billion of Linear cash, coupled with the $1.7 billion of convertible debt, use to finance the aforementioned ASR. For the 85th consecutive quarter, the company had positive cash flow from operation. The Board of Directors authorized the company to pay a cash dividend of $0.18 per share, but that dividend will be paid on August 22nd -- the shareholders have record on August 10th.

Demand created bookings, increased internationally and domestically and we again had a positive book-to-bill ratio.

On an end-market basis, we saw improvements in cell phones, networking, high-end consumer and space level products only partially offset by a reduction in industrial and computer. Our ending on-hand inventory at distributors is within historical churns levels. Cancellations are still minor, and lead times have remained unchanged at four to six weeks.

June was also the end of our fiscal year. Generally, it was a flat year. Revenues of $1.0831 billion were within 1% of last year's $1.093 billion. Diluted earnings per share were $0.02 higher at $1.39, compared with $1.37 for the prior fiscal year. GAAP net income of $411.7 million decreased $17 million or 4% from the previous fiscal year, while shares outstanding decreased by 16.7 million or 5%.

On a pro-forma basis, without the impact of stock-based compensation, earnings per share would have been $1.57 versus $1.50 in the prior year.

In summary, we continue to have an excellent business model and are therefore able to remain both highly profitable and cash flow positive. Our return on sales was 38% for fiscal 2007. The ASR and associated debt has improved our returns on equity, invested capital and assets. Our debt is modest and our current ratio is 5:1.

Looking forward, although this summer or September quarter is typically a slow quarter for industrial and communication infrastructure businesses, this should be offset by growing seasonal strength in consumer-oriented businesses.

In addition, our earnings per share will have a full quarter's positive impact from the accelerated share repurchase because the increase in interest expense and lost interest income will be more than offset by the decrease in outstanding shares. The reduction in inventory in the market place that took place in previous quarters appears to be behind us. However, customers remain cautious in their forecasting and inventory management. Currently we expect revenues in the September quarter to increase 4% to 6% from the June quarter, and to have earnings per share increase more in the high end of this range.

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, we had a positive book-to-bill ratio. Demand-created bookings were up in all major geographical areas, more so internationally than in the USA. Within international, Asia improved, whereas Europe was down modestly.

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 or essentially flat in all end-markets except industrial and computer, which were down modestly.

Industrial and communications both continue to be our largest areas. Industrial at 32% was down from 34%. This modest decline was primarily due to reduction in bookings through domestic and European distributors, as they adjusted their inventory levels to a higher turns level.

Communications on the other hand increased 32%-33% from 31% last quarter. For us, the three significant areas within communications are cell phone and telecom infrastructure, networking, and cell phone handsets.

Cell phone and telecom infrastructure increased from 10% to 11%. Networking at 14% remained at a 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 grew to 8% of our business versus 7% last quarter. New entrance in the high-end cell phone market dominated our improvement.

Computer, at 12% of our business, was down from 13% last quarter. High-end consumer at 10% increased from 9% last quarter. Automotive at 9% was similar to last quarter. This automotive area has grown steadily over the last two years and we believe will soon grow into double-digit percentages of our business.

Finally the military and space level products at 4% of our business were unchanged as the percentage from the prior period.

On an annual basis these percentages are as follows: industrial and communications were both 33% of our business; within communications the 33% was divided into cell phone and telecom infrastructure at 10%, networking at 15%, and cell phones at 8%. Annually, again computer was 13%, auto was 8%, high-end consumer 9%, and space level and military products 4%.

In summary, we believe we have very good diversity in markets, which contributes to our leadership positioning in high-performance analog. Note that 50% of our bookings were created in the USA, compared with 51% last quarter.

Moving from bookings to sales. As I said earlier, products sales grew 5% from the prior quarter, but were down 8% from the similar quarter in the prior year. Sales grew primarily in Asia, were generally flat in the USA and down in Europe. USA distribution was flat with the prior quarter.

In summary, USA at 32% was down two percentage points from last quarter. Europe at 17% was down three percentage points coming off a very strong March quarter. Japan at 12% was unchanged. Rest of world, primarily Asia Pacific at 39% improved significantly from 34% last quarter, since manufacturing for our cell phone and high in consumer OEMs is largely done in Asia.

On an annual basis again USA was 32%, Europe 18%, Japan 13% and rest of world 37%. Gross margin, gross margin was 77.1%. This impressive number validates our strategy of selling unique, high-performing analog semiconductors into a broad customer base. This gross margin percentage decreased slightly by seven tens of point from last quarter.

Gross margin was adversely affected primarily by a one-week shut down at the start of our quarter in our domestic fabrications plants. And also by a modest mix change to consumer base products from industrial products as discussed above, which contributed to ASP's decrease into a $1.57 from a $1.67 last quarter. The prior quarter to that they were at $1.57, which is similar to this quarter.

R&D: R&D increased in absolute dollars by 1,349,000, well decreasing at percent of sales to 17.4% from 17.8% last quarter. The increases in the dollars were predominately in the labor area for profit sharing and headcount related cost.

Selling: General and Administrative cost were essentially flat in absolute dollars, compared with the prior quarter, while decreasing as a percentage of sales from 12.9% to 12.3%. Increases in compensation and profit sharing were offset by decreases in communication expenses.

As a result of the above, operating income increased by $6.9 million or 6%. Operating income as a percent of sales was 47.4% versus 47.2% last quarter which continues to be industry leading performance.

Interest income and interest expense combined, is the area where there was the widest range in sell-side analyst models. The quarter-to-quarter change was a $19.5 million in additional expense. Many analysts had substantially smaller amounts which lead them to higher EPS estimates. Interest income decreased by $9,104,000, this was substantially due to reducing our cash in late April by $1.3 billion to finance the ASR.

In addition, the company issued convertible debt of $1.7 billion at 3%, and 3.25% interest. The company also had the amortization of debt related to fees. Together these total roughly $10.8 million in interest expense.

Looking forward we estimate net interest expense of roughly $9.3 million for next quarter versus $2.9 million this past quarter.

Our tax rate was 23%. This was the result of an ongoing effective tax rate of 29%, with six percentage points of discrete items unique to the fourth quarter. The six percentage points derived from finalizing certain tax issues that were under IRS audit and revising our tax reserves accordingly. Going forward we expect our effective tax rate to be approximately 29.5%. 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 $95.7 million is a decrease of $2.8 million from the previous quarter. On a pro-forma basis, before stock-based compensation, net income would have been $109.9 million versus $111.8 million last quarter. The average shares outstanding used in the calculation of earnings per share have changed significantly due to the accelerated share repurchases referred early.

During the quarter, shares retired by the company were 40.8 million. This was partially offset by additional shares issued for stock option exercises. So, the net impact was a reduction in diluted shares outstanding from 304,640,000 shares last quarter to 266,000,474 shares at the end of June.

Next quarter, as the company has the full impact of retired shares over the whole quarter, we expect diluted shares outstanding to be further reduced to roughly 235 million shares outstanding. Consequently, although net income was reduced by $2.8 million, diluted shares outstanding were reduced by 38,166,000, thereby contributing to the increase in diluted earnings per share from $0.32 last quarter to $0.36 this quarter.

Finally, on a GAAP basis, our return on sales was 35.7% versus 38.6% last quarter. The reduction was due to the increase in net interest expense, which was significantly offset on the earnings per share line by the decrease in shares.

Moving to the balance sheet, cash and short-term investments decreased significantly by $1 billion, $175 million. Cash of $1.3 billion was used in the ASR. $46.3 million was paid in cash dividends, $12.9 million was used to purchase fixed assets, $147.9 million in cash was provided by operations and $41.8 million was provided by the issuance of stock-for-stock options.

Our cash in short-term investment balance is now $633.3 million and represents 52% of total assets. Accounts receivable of a $130.5 million is down $11.7 million from last quarter's $142.2 million, even though sales increased in this quarter by $13.1 million. This anomaly results from four factors, shipments not sales were lower to US distribution by roughly $3 million, sales were higher to Asia, which has shorter payment terms, and lower to Europe which has longer payment terms. And finally shipments in total were modestly more evenly distributed in the June quarter than the March quarter, which seasonally gets off to a slow start in January. In summary, our day sales and accounts receivable were 44 days versus 51 days last quarter.

Inventory: Inventory at $51.1 million was largely unchanged from $50.7 million reported last quarter. Our inventory churns was 4.8 times, which is up from last quarter’s 4.7 times. During the quarter we had a one-week shutdown in our wafer fabrication plants to help slow the growth in inventory. Deferred taxes and other current assets decreased significantly by $21.8 million from the March quarter. We had lower interest receivable earned on our investments that had been reduced by $1.3 billion. And we had lower current deferred taxes primarily on our unique cap charge, which captures the difference between book and tax inventory valuation.

Our property, plants and equipments increased by 2,303,000. We had additions of 12,902,000 and depreciation of 10,599,000. Most of the additions were for wafer fabrication and test production equipment and for our building expansion project in Penang. For fiscal 2007, capital additions were $62 million and depreciation was $40 million. We plan to spend roughly $60 million in fiscal 2008 on capital additions.

Other non-current assets totaling $87 million increased by $21.2 million, primarily due to the debt fees incurred on a newly issued convertible debt. These fees will be amortized over the debt periods of 3.5 years and seven years.

Moving to the liability side of the balance sheet, accounts payable hardly changed down 921,000. Accrued income taxes, payroll and other accrued liabilities increased by $7.3 million. The largest items here are our profit-sharing accrual, income taxes payable and accrued interest payable on our convertible debt.

We pay out profit sharing twice a year, so accrual usually increases in the second and fourth quarters, such as this quarter, and decreases in the first and third quarters when payments are made. Our income taxes payable decreased as we had one last tax payment this quarter.

Finally, this accrual account for the first time includes accrued interest payable on our newly incurred convertible debt.

Deferred income on shipments to distribution decreased this quarter by 2,356,000 as we shipped 3 million less into US distributors than they shipped out to their end customers. Our accounting on shipments to US distribution is conservative. We do not record a sale nor income in our results of operations until the distributor ships the product out to its end customer. We continue to closely control our inventory distribution to properly position the inventory without any unneeded buildup.

Deferred tax and long-term liabilities decreased by $3.8 million. Stockholder equity accounts changed significantly due to the $3 billion ASR which caused the reduction in both common stock and retained earnings. As a result, for good reasons this extraordinarily profitable company now has negative stockholder equity.

The usual quarterly transactions for net income, dividends paid and employee stock activity also impacted the stockholder's equity accounts. This quarter the company again announced the cash dividend of $0.18 per share which will be paid on August 22nd -- the stockholders have record on August 10th.

Looking forward, as you can tell from my previous comments, June was a better quarter for us. Business improved as sales and operating income increased. We also significantly improved our capital structure through the issuance of the $3 billion ASR. The bookings for the company grew in the quarter and the company is going into the June quarter with a slightly 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 September quarter, we believe most of the major inventory corrections are behind us and that orders on us and our responding shipments should reflect improving market demand. Most of our customers continue to be cautious but not necessarily guarded in their outlook.

The general macro-economic trends are reasonable. The US continues to grow, but at a slower rate. Europe is doing reasonably well, and Japan is okay, but not strong. The overall semiconductor market isn't strong in its growth outlook, but is certainly reporting better numbers than last quarter.

When putting these factors together, we currently expect revenue to grow roughly 4% to 6% in the September quarter, with earnings per share increasing more in the high-end of the range, as the September quarter will have the full impact of our $3 billion accelerated share repurchase.

As I stated earlier, we expect net interest expense to be roughly $9.3 million, the effective income tax rate before discrete items to be 29.5%, and diluted shares outstanding to be roughly $235 million.

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 return to growth from the inventory correction period that it had been in for several quarters.

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

We have sensed for a while that investors have had three principal concerns about Linear. One, given our focus on the high-end analog market we may compromise our growth rate opportunities. Two, as we grow we might need to sacrifice our margins. And three, we could put our cash to better use to improve our capital structure. We addressed the capital structure concern with our $3 billion ASR. During this past year of flat sales growth industry-wide, we have essentially maintained our margins.

Finally, we grew 5% sequentially last quarter and are currently forecasting 4% to 6% sales growth for the September quarter. Surely we need to continue this growth trend to alleviate investor concerns. But we are certainly focused on profitable growth.

I would now like to open up the conference call to questions to be addressed to Bob, Lothar or myself.

Question-and-Answer Session

Operator

(Operator Instruction) We will take our first question from Craig Hettenbach with Wachovia Securities.

Craig Hettenbach - Wachovia Securities

Yes, thank you. Lothar, this high profile consumer electronics products into the back half is getting a lot of investor attention, but I was hoping you could talk about the diversity of your design win pipeline and revenue by your end markets?

Lothar Maier

Yeah, obviously there are some high visibility products that were designed into, but really the pipeline for our new product efforts which ultimately end up being the pipeline into our design wins, they are really not targeted to, I would say, specific end markets. We really target our design efforts and our sales efforts into markets that value the products that we have and allow us to get the margins that we typically expect from our products. So our pipeline generally from a design standpoint and from a design win stand point is really loaded more into that direction then any specific end market. We've talked in the past about automotive, we have had some, I would say a little more focus deferred into the automotive market. But that's more of sedulity than change in directions, so our real target is to the general market and not any specific end-market.

Craig Hettenbach - Wachovia Securities

Great and if I could follow-up, any update on the micro-module affords and anything that needs to be done in terms of the fact -- to get those products ramping up into 2008?

Lothar Maier

Yeah, the modules we've introduced about year and half year ago, two years ago we have our first product, now we got family of products, the design wins is been excellent so we have lot of design win. The sale growth has -- you know -- we've always liked to have it pro faster but it’s been fairly growing and in general waving well-received in the market. We -- from our wafer fabrications standpoint there are no issues. But we are so enthusiastic about the modules that we even decided to tool-up manufacturing of the modules in our own assembly facilities.

Craig Hettenbach - Wachovia Securities

Alright. Last one, if I would Paul on the gross margin front, is it fair to say that the one week shut down had a little bit of an impact on gross margins in the June quarters that that will ease in the September quarter ?

Paul Coghlan

Yes, that’s fair to say, we don't expect to have another shot down.

Craig Hettenbach - Wachovia Securities

Great, thank you.

Operator

Posing our next question -- Doug Freedman with American Technical Research.

Doug Freedman - American Technical Research

Thanks for taking my question guys. Could you talk a little bit about what's going on in the marketplace as far as pricing, I mean we've seen a little bit less margin leverage from few of your competitors and I think people are looking for anything you could offer as far as places where you're seeing more aggressiveness in the market -- of other would be helpful.

Lothar Maier

Hi Doug, this is Lothar. We always see pricing pressures, that's nothing particularly new to Linear Technology, and we've got the discipline as a company to, when the pricing pressure becomes such that the business isn't attractive to Linear, we've got enough other opportunities to move on. So, I don't sense that there is a particular sea-change in terms of what's happening from a pricing standpoint.

Doug Freedman - American Technical Research

How about if we look at distribution, we see that your sales into distribution slowed, over shipments I should say, not sales. What are you seeing there from the standpoint of just your relationship with distribution locally in the US and internationally? And what they are trying to do with their inventories in their business? I mean, Arrow just came out with a little bit of a disappointment on the revenue growth. Are you taking more business from distribution to OEM as the mix shifts towards slightly larger OEM business? Can you help us, what was the ratio of distribution to OEM sales?

Paul Coghlan

First of all, our sales in the distribution channel in the USA were flat quarter-to-quarter. So that and a lot of the increase in our sales overall, as I mentioned in my introductory comment was in, in the international area. So for the June quarter, I don't think there has been a change in the relative percentages of our U.S. sales through OEM and through distribution.

We still very much value our relationship with distribution. We have a strong relationship with our distributors, our two main distributors, and all of our distributors here in the US. And that sometimes what they do is, they go through their own periods of managing their assets and we tend to focus most on the sell-through and the ability to be sure that as they manage their assets, maybe have temporary changes in that, it doesn't impact our ability to get product through the channel out to the end customer.

So I think that's some of the reduction this period that we noted and you are certainly correct to note that we ship into them roughly 3 million less out of 47 million, I think we may shipped out, we don’t think that’s going to disturb our distribution business at all.

Bob Swanson

Yes, Doug the U.S. distribution camp continues to have pressure on it, because more and more customers are actually taking their deliveries overseas. So, that’s an ongoing problem at U.S. distribution, is less than away.

Doug Freedman - American Technical Research

Is it fair to say that you believe that U.S. distribution is or -- even would you say that distribution globally is trying to work down the amount of inventory and increase the turns that they are carrying? Are we still correct to sort of monitor what's happening, as distribution should sort of get a read on end market demands or is that becoming less helpful because of their unwillingness to carry inventory?

Paul Coghlan

I think that changes Doug, depending on the environment. So we have had -- if you back a year and half to one of these conference calls, we were probably telling you we were wrestling with the distributors who wanted more inventory from us, in anticipation of the markets growing and we didn’t to give it to them, we want to be the focal point in distributing it. So it didn’t get blocked or stuck in one area. So I think what you have is their overall business objective is to sell the product and make a return on that. When they think that climate which it has been in the last nine months or so has been a little tight, they try to lower inventories as much as they can, and they try to get very high throughput from the suppliers. When they see any breath of optimism that things might pick up, then they try to get some inventory. So it wouldn’t surprise me if a couple of quarters from now the return of the question like this would be the exact opposite. So I don’t think they always want to have as little inventories as they can, but they always want to optimize their sales, and it’s that balance that sometimes lead to these quarter-to-quarter changes.

Doug Freedman - American Technical Research

Alright, that’s helpful and my last question, if I could, focused on EMS and also a little bit of another one of the inventory question. EMS really supports a lot of industrial base, what do you guys see there from a standpoint of their inventory and demand coming out of that investor base? When do you think it is possible that we might see a pickup in the industrial market, sometime in the back half of the year, what are your thoughts there?

Paul Coghlan

Well I think EMS, first of all I am always intrigued that you ask us, because generally we’ve been inaccurate in our forecast to EMS and as I may have shared with some of you, it sort of seems like in the front half of the calendar year EMS tightens its inventories and in the back half when they want to have enough products on hand to meet demand around the holiday seasons, they may loosen that tightness a bit. So, I think looking forward we are telling you we think we will grow in the summer quarter. Historically in summer quarters we have grown less than we are forecasting for this one, now it’s coming off, not a great pace. But I think overall we here are a kind of optimistic -- maybe optimistic is too strong a word, but we think the industrial businesses can pick up and so we think actually the markets might pickup a bit, overall not just industry.

Doug Freedman - American Technical Research

Alright great, thanks guys.

Operator

We’ll take our question from Ross Seymore with Deutsche Bank.

Ross Seymore - Deutsche Bank

Thanks guys and congrats on the solid guidance. Paul on the margins side of things, when you are not going to have the one week shutdown, can you talk about the interaction between operating more fully throughout the quarter versus the mix of consumer being the stronger portion in your guidance and what that might mean to gross margin?

Paul Coghlan

Let me make sure I understand the question, if we don’t have so much, we don’t plan to have the shutdown. It is probable you never predict the future but the margin could improve a bit next quarter, if that’s your question. The gross margin, because if your question really is, is there something inherent in gross margin relative to pricing or in markets distribution that will cause our margins to start to go down the answer to that is no. We've constantly told we think, overall what we do is, so sale unique product and into a customer base that helps them, feature distinguish their end products and that's our strategy and we've continued to be able to do that and remain highly profitable and we expect to continue to do that.

Ross Seymore - Deutsche Bank

And switching gears over to the ASR side of things, you help that a lot with the share count projection for the third quarter and that blends in for the calendar third quarter and then into the fourth quarter. How should we think about the share account kind of flattening out, should it drop again in the December quarter? Any guidance you could give on that would be helpful to avoid confusion on our side and modeling.

Paul Coghlan

No, I think the third quarter is going to be pretty close to representative, not totally there for what the ongoing bases will be, but it might be 95% of the way they are. So that's, if you look, I think, I mentioned we had 72.2 million shares, came in the summer quarter and not but some of the June quarter. So they would be all present in the September quarter. Then we got another roughly 8 million shares couple of weeks into the quarter. So that will be about 10-13 if you will, and then there will be a little through up that takes place in January depending on what we can get the remaining ASR, what the price of the stock is between now and January.

So, I think that number I gave you for the September quarter, there can be a slight reduction, slowly relative to the ASR in December, but really not very much. But then you will have stock options which will impact the shares a little bit and of the stock and then the movements in the stock price, if stock price goes up that impact to shares account little bit it goes down, it doesn't impact. I mean it impacts with the other way.

Ross Seymore - Deutsche Bank

Okay, and then the last question from me. Usually at the end of your fiscal year, you give what the backlog is, could you give us that number and give us kind of a range on what turns requirements are? I know you said they need to come down for your guidance but could you put a number on that please?

Paul Coghlan

Yeah, just give me a second. I should have had that number at my fingertips, but I didn't. Backlog is roughly a 112 million. And then our turns is -- we've been running somewhere in that recent quarters, somewhere in that 60% to 70% range with the low-end of that particular range now going into the September quarter.

Ross Seymore - Deutsche Bank

Great, thank you.

Paul Coghlan

You're welcome.

Operator

We'll take our next question from Craig Ellis with Citi.

Craig Ellis - Citi

Thanks for taking the question. First half in the prepared release last night and then in your comments Paul, there was a remark on consumer driven second half strength. Can you speak to some of the specific applications that are driving the strength you're seeing in the back half of the year?

Paul Coghlan

Well, some of the strength in the back half of the year obviously is seasonal, in that you have consumer build up getting ready for the holiday season. So products that would go towards sales in that season like, some particular cell phones that we've eluted to GPS type products, other type of consumer products where they'll be some strength for us. But again, consumer is only about 10% of our business. So that although we'll see strength and certainly we think we're well positioned in some areas within that, those areas that value the features we bring, we still have 90% of the rest of our business which is very strong in communications, autos picking up, networking we talked about, industrial we talked about.

Craig Ellis - Citi

So it's pretty broad strength into the third quarter, not just consumer as the key takeaway down?

Paul Coghlan

Yes.

Craig Ellis - Citi

Okay. And then secondly, in the past in some of your prepared comments you've remarked on the handset business as one where high-end 3G phones hadn't really had a material impact on the business. It looks like we are starting to get more feature rich handsets out there. What are you seeing from a design standpoint, are you seeing the degree of interest from OEMs that could take handset bookings back up into the double digit level for the company and maybe even into low teens?

Lothar Maier

In terms of feature rich cell phones, right now there is obviously one conspicuous provider of that and that we participate in, but I don’t think we have seen much yet beyond that, obviously I am going to assume all of the other handset providers are scrambling really hard to find competitive and maybe more than competitive alternatives. But from our standpoint we haven't really seen a lot of that yet, but it's possible in the next quarter or two that those opportunities may come towards us.

Craig Ellis - Citi

Alright, thanks, and then lastly, Paul I think you mentioned that inventory correction was mostly behind, what are the specific areas where there still might be an inventory issue out there is it just EMS?

Paul Coghlan

Yeah, I think it's just EMS, but again we have not been good prognosticators, like the changes at EMS. So we are not saying there is going to more inventory changes, but in the past when we didn’t think there would be once they intended to drag on. So you are getting sort of a kind of negative confirmation I guess in this response, but we don’t see any problem there, but they run their business, we don’t.

Craig Ellis - Citi

Alright, thank you and nice job on the revenue outlook.

Operator

We will take our next question from Michael Masdea with Credit Suisse.

Michael Masdea - Credit Suisse

Yes, thanks a lot. Paul, as you pointed out you had good growth this past quarter and you have great guidance in terms of revenue growth for next quarter. And somebody had pointed out that some of that's relative to inventory work off and easier comparable, is that all it is or is there any more going on the demand side and in your penetration of OEMs or product opportunities or is it just that the easier compare?

Paul Coghlan

Oh well, I mean, we certainly feel we are in good position in several markets. We have talked to you in the past about the automotive market, we talked about new generations of high speed A2D converters that we think are making inroads in communication infrastructure markets. The industrial market, we have a lot of products, micro-modules is an example of something that could penetrate that very strongly, the consumer market that we talked about. People always doubt our abilities in that area, yet when they see something really kind of unique and clever in that consumer market and they open it they often find Linear part inside in that. So we are coming off easier comparables, as is everybody else in the industry, but you still ask that you are coming off easier comparables, you still have that really good products and you still have to outperform the other folks. So we are pretty optimistic from where we positioned in the product side as it relates to our strategy of being a profitable, significant grower in the analog space. So I mean, I can take an hour to answer this question, you just asked my favorite question of the day, but I should curtail it this time.

Michael Masdea - Credit Suisse

I guess following on to that to some degree, we thought couple of lower-end competitors -- that there is a lead time stretching going on, is there any sort of risk that some of your order numbers may be a little inflated because of some other (inaudible) material parts spending it from the lead time or do you feel okay with that?

Paul Coghlan

Most of our customers know we are so consistent with lead times of 4 to 6, that if they have a problem with another part they don’t generally panic and then order out on us. And you know the company is pretty control-driven and the PC department here -- when they see orders stretching out beyond what they think the obvious lead time is, they quickly ring the bell and say what's going on at this account. And I don’t think we’ve seen much of that, at least none of it’s surfaced up to my desk to look out or so and Bob and Lothar are shaking their heads, so I don’t think we see much of the problem in that area.

Michael Masdea - Credit Suisse

That's helpful. Last one real quick on the gross margin side and sorry if I missed this -- it is worth getting out but did you saw the way out the like a shut down, and then the higher mix consumer then that are you expecting gross margin to sort of the trend included earlier all margin I think would get better but will the gross margin turn down little bit or up little bit or what's your best guess at this point?

Paul Coghlan

Of the guess, but my best guess at this point is quarter-to-quarter it may trend up a little bit. But again guys we can't do that note on your wall and wait 90 days, but the quarter has to play out etcetera, we certainly -- we do have much, we think we give guidance on what we thought the sales will be. We give guidance on what we thought earning per share will be so obviously we think we'll continue to be very profitable. But you wanted to micro manage me down in that one line with the caveat quarter have to play out and it’s one line in income statement. I tell you I think it will probably drift up a little bit.

Michael Masdea - Credit Suisse

That's helpful. About the profit growth guidance is most helpful. Thank you very much.

Paul Coghlan

Yes, gross margin would drift up because I won't have the shut down.

Bob Swanson

So, any up tick in the consumer business is not going to negatively impact. It went positive.

Michael Masdea - Credit Suisse

Thanks a lot guys.

Paul Coghlan

You are welcome.

Operator

And we'll hear next from Jeff Rosenberg with William Blair.

Jeff Rosenberg - William Blair

Good morning. I want to ask another question about the consumer business just related to the comments you've made of the interest three months ago, that in order for you to reach your growth goals you didn't need to have conical board participations in the consumer market. So can you talk a little bit about what the opportunities are there, I guess I think you are getting a little bit more of that seasonal lift this year than you were able to enjoy a year ago even, before the inventory correction started to effect things. So any comment to a year-over-year, where you've been more successful then you were last year?

Paul Coghlan

We don't really like to go into too many customer-by-customer comparisons but consumers varied from mid single-digits, teens in single-digits, this quarter which is normally a period when it picks up a bit at 10%. So, we do have some good situations there but we'd rather than talk specifically about those, every year that kind of different good particular situations. What you don't find from Linear too much is in a consumer place where we're in the same application for 3 or 4 or 5 years. So where we are is as something new comes up which needs probably in the power area some particular battery assistance, we do well in those. We have some of those, I don't know if we want to really get into the specifics of which ones they are.

Bob Swanson

I guess, I’d just like to add one comment that, I think you probably shouldn't read too much in the fact that high-end consumer for us went from 9% to 10%. That really doesn't flag any change in our strategy. We've got some decent orders on some business but again we've always remained opportunistic in those markets and the 1% change is really not reflective of changing any strategy.

Jeff Rosenberg - William Blair

Okay. And then, just real quick Paul, I just wanted to make sure that I'm getting this right from a modeling perspective. There is no point in the foreseeable future in which we need to be concerned about the effective conversion and the convert, as it relates to the EPS calculation? It's accretive, it's rate debt for right now?

Paul Coghlan

Yeah where are you referring to what FAS we might do in the future?

Jeff Rosenberg - William Blair

No, no, no. Just in terms of how the fact that the convert could potentially dilute EPS and after adjust for the FAS that should add back to interest, that sort of thing, is that just not until the share price reaches the conversion price or…?

Paul Coghlan

Yes, yeah. Once the share price reaches the conversion price, then I have to bring those shares in for the calculation.

Jeff Rosenberg - William Blair

Okay. Thanks.

Paul Coghlan

But the conversion price is now roughly $50.

Jeff Rosenberg - William Blair

Right, okay.

Operator

Mr. Rosenberg anything further?

Jeff Rosenberg - William Blair

No I am good, thanks.

Operator

Our next question will come from Simona Jankowski with Goldman Sachs.

Simona Jankowski - Goldman Sachs

Hi, thank you so much. Just a couple of questions Paul on the end markets and you have talked about on the consumer and handset strength this quarter, you mentioned seasonality and also there seems to be some high profile designs there. Is there also any kind of benefit we are seeing from some of the increased technical hiring in some of the new design centers you guys had done in the last couple of years, or is the mix of those newer products kind of similar to your overall mix and there is not more of the consumer handsets plant?

Lothar Maier

Yet clearly there -- there is no connection between our hiring and developing new design centers and the little bit of growth we are seeing in handsets. The design centers that we have opened and the staffing of design engineers in those design centers, those design efforts are directed to our broad markets not specifically to consumer. So as I said earlier I think you are probably reading too much into the slight change in our high-end consumer bookings. So there is maybe a little seasonality to it. Our customers don’t book their products on us particularly linearly over a quarter. So, again that 1% change doesn't represent any change in how we approach in the market from a sales standpoint, nor does it show any change for approach to the market from a design and product development standpoint, we just got some orders.

Simona Jankowski - Goldman Sachs

Got it, thanks for that Lothar and some of these very high-end feature cell phones that have been launched recently, would you categorize something like that in handset or on in high-end consumer?

Lothar Maier

Those would be classified as handsets.

Simona Jankowski - Goldman Sachs

As handsets, okay. And then you also had commented on your computing bookings being down a little bit. I think in the quarter that was generally pretty unseasonably strong for the computing-end market, I know that's not an area you have been aggressively chasing or emphasizing but can you give us a little more color on what went on there?

Lothar Maier

It's almost the same answer as high-end consumer I think you are trying to read too much into a 1% change.

Simona Jankowski - Goldman Sachs

Got it, thanks very much.

Operator

And the next question will comes from Tore Svanberg with Piper Jaffray.

Evan Wong - Piper Jaffray

Hi, thanks for taking my call, this is Evan Wang calling in for Tore Svanberg. I have a few questions, one is about your CapEx for fiscal '08, it’s up about $10 million from your earlier projection, I was wondering if there is anything that we should read into this?

Paul Coghlan

No we are looking in one particular of our fabs and in one area we are looking at maybe doing some expansion relative to a process and we’ve added a little money for that.

Evan Wong - Piper Jaffray

Okay. And I was also wondering if you could add a bit of color to your new product introductions? If you could talk a little bit about the distribution of the new products introduced by end-markets as well as relative levels of introduction compared to past periods?

Paul Coghlan

I can comment on that. In terms of end-markets, again we don’t try to design products specifically to any end-markets, so that we try to make products that we’ll sell really to the broad markets. So, I would say that probably the design efforts are roughly in proportions to our various end-markets, but that's not really how we allocate the designing resources. In terms of the number of new products that we introduced last year, fiscal year '07 was a good year for us and we were able to introduce more new products in fiscal year '07 than we did in '06. And I think that’s just reflective of the investments we have in the last couple of years in terms of adding to our design talent and adding to our design centers around the world.

Evan Wong - Piper Jaffray

Thank you. One last question, the demand strengthen you've spoken of, have you seen a steady increase in the demand? And that -- now there you have seen the part of the September quarter, mainly if the early weeks of July, is that continuing?

Paul Coghlan

Well, the demand was pretty steady for us. If your question is did it come in, in the last minute, the answer is no, it was pretty evenly distributed and we gave you our guidance going in to September. So, we would have considered the first couple of weeks in July and given you that guidance.

Evan Wong - Piper Jaffray

Okay. Thank you, very much.

Paul Coghlan

You are welcome.

Operator

Our next question will come from Sumit Dhanda with Banc of America.

Sumit Dhanda - Banc of America

My question has been asked and answered, thank you.

Operator

And our next question is from Uche Orji with UBS.

Uche Orji - UBS

Thank you, very much. Can I just be sure I understand, did you quantify how much of the gross margin was for the one-week half shut down and how much was from mix? If I'm talking about the gross margin decline that we saw sequentially?

Paul Coghlan

No, I didn't break it down -- that finally the lion’s share, it was the shut down.

Uche Orji - UBS

Okay.

Paul Coghlan

I don't have the exact mathematical percentage therein with.

Uche Orji - UBS

That's fine. If I look at the industrial, I mean it's been a very -- I understand it is nearly a fact of shifting more towards consummated sign but industrial is your largest end-market, and is there something else going on within the market shares within that, do you think you are loosing share within industrialist or is it just that the overall market has been (inaudible) sluggish this year end and if you can give us some inside as to your confidence about this coming back, and when should we expect that in the seasonally favorable quarter like March, industrialist should come back in a big way?

Paul Coghlan

Well, I frankly don't see how you're concluding -- we are having based on this one quarter, or we having some kind of issue with industrial.

Uche Orji - UBS

I'm not, I am just asking if there was?

Paul Coghlan

No, I think it was not, if you look at -- I gave you the '07 percentages by end-markets and industrial was 33% of our business.

Uche Orji - UBS

Sure.

Paul Coghlan

In '06, it was also 33% of our business. '07 wasn't a bad year for us, it was relatively flat in revenue. Our major competitors, I think you'll find the numbers are pretty similar. Certainly if you look over a couple of year basis, we're all pretty similar in growth. So that, and industrial has got a lot of good attributes and that's why it's a significant portion for us. You are correct that usually every year, like one quarter, it's the strongest, it's the March quarter, and that has its own kind of unique instances. Three things which we think impact that are, in the March quarter, our US distribution which has a large portion of its sales, industrial has more sales days in the March quarter, shipment days if you will. Europe has the fewest number of vacation days in the March quarter. And then a lot of industrial companies are smaller companies, and what they typically do is, towards the end of the year they get their balance sheets in order to submit through their bankers annually. They have an annual budget and then they start spending in the March quarter. So, now a lot of that is subjective analysis rather than quantitative that I know you guys liked, but that generally is why we believe March is a stronger quarter for industrial but I've tried to emphasize, both during these responses has tried to emphasize, we don't think you folks should try to read anything into industrial, if we thought there was something there we would tell you, we don't think there is anything unusual going on.

Uche Orji - UBS

That's helpful. And just on the operating expenses I think, with the gross margin slightly weakened at this stage, was expected? OP margins was in line sort of -- is there like a specific effort to -- I know you always have an effort to keep OpEx as low as you can. Is it possible that we extrapolate to see more OP margin leverage as gross margin expands according to the guidance you just gave in terms of sequential improvement going forward? Is there a situation where this was just one quarter type improvement and then things kind of go back again on operating expense over the next phase over the next couple of quarters?

Paul Coghlan

Let me first start with the beginning of your question, if you look back and you look at the transcript of last quarter's conference call, we mentioned in there that we are going to have a plant shut down. One of the people in the question and answer session said well if you have a shutdown that would probably impact your gross margins won't it? We said yes it would. So when you say that Street was kind of surprised by that event I am surprised that Street was surprised. Now, and the last thing, I am just picking an argument with the Street, but there are couple of line items in here, we thought we gave some reasonable guidance and you guys estimated it little differently. So relatively to gross margin, I think you are kind of saying this is the big surprise, again I iterate we have mentioned in the last quarterly call about that.

Relative to operating expenses, it's certainly safe to say that we thought over the past year and a half we haven't grown as much as we have grown before and haven't grown as much as we think how historically we will prove to grow. We did invest in R&D in particular by opening new design centers etcetera. So we had to absorb those costs over a lower growing sales base. So we will probably have some leverage if we grow substantially in the R&D area and little bit in the SG&A area. But we already have an operating margin of 47%, and gross margins in the 77% to 78%. So we are not a guy that’s done poorly, that’s a turnaround, our guidance has done really well, is there a chance for some more improving? There is. Would it be dramatic? I doubt it.

Uche Orji - UBS

Perfect. Thank you very much. That’s helpful.

Paul Coghlan

Okay.

Operator

Our next comes from Steve Smigie with Raymond James.

Steve Smigie - Raymond James

Great, thank you, my friends really addressed this, but could you just comment on what the option expense might be in the quarter and then what might it look in Q4 or the calendar fourth quarter?

Paul Coghlan

Option expense was in the press release, I think it was about $18,400,000.

Steve Smigie - Raymond James

For the coming quarter?

Paul Coghlan

For the coming quarter, it might be down a little bit than that, but I don't have the exact number right in front of me. But overall that's just one of the components of all of the income and expense that we have.

Steve Smigie - Raymond James

Okay, there’s no more question.

Paul Coghlan

And, okay fine.

Operator

Next question comes from Romit Shah with Lehman Brothers

Romit Shah - Lehman Brothers

Yeah thanks, Paul just back to that question on operating leverage you said you don't expect a dramatic improvement would you think going from the current levels of return, 48% back, I think you guys have been as high as 52% in the last couple of years, would you consider that to be a dramatic improvement or something that's achievable?

Paul Coghlan

Yeah, growth was strong and up to now we could certainly get operating profit into the 50% range, that's achievable but I don't consider that dramatic going from 48% to 50%.

Romit Shah - Lehman Brothers

Okay.

Paul Coghlan

But again, it s got to play out.

Romit Shah - Lehman Brothers

It's a function of revenue growth is that what you are saying?

Paul Coghlan

Yeah.

Romit Shah - Lehman Brothers

And then could you guys also elaborate on your optimism around the automotive businesses, you've said on multiple calls that you expect to continue to increase as a percentage of sales and is this attributable to a number of design wins that the companies have won in the last few years that are finally going into production, and are going to contribute more meaningfully as we get into the back half of 2007 and 2008?

Bob Swanson

Yes I was trying to guess all of those, it's the fact that we've been working in this market for quite a number of years and it takes a while from design, presenting the products, getting a design win and the product finally going into productions and so we starting to see the benefits of really those investments over the years. And so we've got lots of products, we've got a lot of design wins into the automotive market and on top of it, it's just sort of general need that the automotive market has for analog products as well that kind feels our optimism. So we are just seeing a fairly steady need in just about every part from in the under the earth to the lighting to in the passenger compartment, opportunities for Linear products inside of the automobile so it's kind of just the focus we've had the products that is been excepted by our customers in business binding and the fact that the -- just the overall need is going up is really what builds our confidence in this area.

Romit Shah - Lehman Brothers

Okay. And just last if I could ask Paul with this ASR largely completed have you guys -- in your thought about what's your plan for future priorities for the cash may present you guys are going to continue to generate 100 million - 150 million in free cash quarter. What you've planed to do you with that cash is it rebuilding that balances or may be paid down some of the convert?

Paul Coghlan

Well I think we've learned a few things in the past few years in the marketplace. We had accumulating cash then we level it off and slowly over a four-year period each quarter kind of brought back stock and that wasn't particularly well received by the investment community, they want something more dramatic than that and then what we did is in response to that we did the significantly ASR and we certainly got the message that that was preferred.

So we strongly committed to our dividend position we think we are a cash flow positive company. We were really the first ones to have advantage to declare a dividend, we did it in 1992. And in every year, obviously most of them were very good years but even in a couple of bad years we increased dividend. So from a cash management standpoint, I think at this stage what we'll do is certainly we're committed to the dividend posture.

We'll probably initially pay down some of this debt. We have to look and see what, how debt's treated, how expenses recorded etcetera. Some might be prudent to pay down debt depending on accounting regulations. And then what we'll do is we'll look at what's an advantageous time to again perhaps buyback some more of our stock. So that's really the current outlook of the company.

Romit Shah - Lehman Brothers

It sounds like having $500 million to $600 million on the balance sheet, is sufficient to run the operations?

Paul Coghlan

Yes. Well, yes, again, now it is but if there is some reason, I think businesses change all the time, you want to be able to be in a position to be responsive to those changes.

Romit Shah - Lehman Brothers

Sure.

Paul Coghlan

And now we're comfortable with the cash position.

Romit Shah - Lehman Brothers

Great. Thank you.

Operator

Our next question comes from Chris Stanley with JP Morgan.

Chris Stanley - JP Morgan

Hey thanks guys. Just a couple of quickies. Where do you expect depreciation to be in fiscal '08?

Paul Coghlan

$40 million roughly.

Chris Stanley - JP Morgan

And how should we look at inventories trending forward?

Lothar Maier

For us, our goal is to keep our inventory lean and so, our goal for this particular quarter obviously is to not have our inventory grow. And on a kind of a going forward basis, I think we'll be looking to actually decrease our inventory on a going forward basis.

Chris Stanley - JP Morgan

Okay, great. And then a last question. Paul you've talked about looking at sort of your expenses and margins on a yearly basis, so longer term should we expect gross margins to kind of remain in that sort of 78% range?

Paul Coghlan

Yeah, we don't see any reason why they would go down at the moment. So yeah we think that is pretty good range to keep us in.

Chris Stanley - JP Morgan

That's fine. And then on the OpEx side, sounds like for the next four to six quarters we should expect OpEx to trend up but less than sales so that so are you seeing?

Paul Coghlan

Yeah in the sale what we do is, well as we think we were in sales, yeah that’s probably true.

Chris Stanley - JP Morgan

Okay great, thanks.

Operator

You have anything further?

Chris Stanley - JP Morgan

I am done.

Operator

Thank you. Our next question comes from David Wu with Global Crown Capital.

David Wu - Global Crown Capital

Good morning. I want to ask a different question, if I look at the last five years since '01 rather, your revenue performance relative to your largest, any analog companies in the same size of the year, I’ve noticed that your growth rate actually was fairly comparable but there were periods that you were growing faster, you were the fastest growing analog company and there were periods that you weren't. And I was wondering what would have been conditions that would have allowed you to grow faster than your peers, whether it's because your lean inventory model or short lead times that in these modest cycles you actually can outperform? Or do we need a period where there are a lot of new electronic gadgets out there that require your high performance design capability that would allow you to out-perform your peers?

Paul Coghlan

I think you have bracketed the question well, you have actually given a response, we thought we would have given to some extent. There is some probably minor financial reasons is to how we run our business, etcetera. Why we did better than our competitors in certain periods. But a key thing is what we sell, we enable our customers to maximize their feature rich offerings, so when we are in a market that’s heavy with feature rich products, we typically do much better than other folks. When it's a market that's kind of consolidating where it is, feature wise expanding into third world, for example third world opportunities where the goal is to lower cost even if it means lowering functionality somewhat. We then tend to kind of have to grow in the range with the pack, so I think you kind of answered the question as well as we could.

David Wu - Global Crown Capital

Okay, thank you.

Paul Coghlan

You are welcome.

Operator

Our next question comes from [Satish Agrawal of KFA]

Satish Agrawal - KFA

Good morning gentlemen.

Paul Coghlan

Good morning.

Satish Agrawal - KFA

Paul my question is with respect to the convertible bond as I understand it does not mature for another 20 years, but during the commentary you said that the cost associated with this particular bond issuance will be amortized over three and a half to seven years period, which is considerably shorter than the maturity. So do I read into this as you planned to basically pay down this convert over that period of time, three to seven years or maybe you can clarify what exactly your plan is?

Paul Coghlan

Well, the bond although it matures in 20 years, technically its callable plus putable, one of them in three and half and one of them in seven, so senses both callable and putable in that time frame we amortized that expense over that timeframe.

Satish Agrawal - KFA

Okay, but then do you anticipate buying back or retiring significant portion of that convert over the next couple of years?

Paul Coghlan

At the moment we anticipate that whenever it’s callable and putable, we will exercise that opportunity.

Satish Agrawal - KFA

Excellent thank you.

Paul Coghlan

You are welcome.

Operator

And your next question comes from Gus Richard with First Albany Capital.

Gus Richard - First Albany Capital

Yes. Thanks for taking my question. In the strength you are starting to see, if you could sort of guess either get it, two things drive your business from my perspective. One is, your new innovation, new requirements from customers and the other is just general business conditions, inventory accumulation seasonally that's sort of thing. If you could give some color as to what’s driving sort of the better than seasonal results here that would be helpful. And then secondly if you could talk about your telecom business, it is very strong, what sorts of applications were driving that business and applications? Thanks.

Paul Coghlan

Okay, I'll take a stab at the first half of the question. I think Gus that we don't feel that the strength, if it's that, we are growing four to six or it’s not a, it's really good. I don't want to rain on my own parade. But we had two kind of not so great quarters in the December and March quarters. So we have improved in June and looks like we going to improve again in September. But I wouldn't consider it boom times yet. So we think there is a lot more updraft that we are hoping to see in the markets.

But I don't think any of this increase assumes to any, but I don't think much of the increase in the June and there what we are hoping to have in September is coming from people just re-stoking inventory. I don't think we feel a real pressure to build up a lot of inventory yet in the end markets. So I think what is happening is, people have been pretty conservative, pretty tight, there are some new opportunities -- we shared one of those that you aware of in, cell phones just as an example, but there are other opportunities we've talked to you about micro modules and stuff.

And so we are seeing kind of the beginnings of some growth potential in these markets that would be more relative to maybe future richness growing again in these markets and applications that require our type of products, then it is just an existing status growth of getting more inventory. Then the second half of our question was, in the area, in that we think we're going to grow a bit in September, but where do we think we will grow?

Gus Richard - First Albany Capital

No, no, no. In -- when I go and I look at the product line, your in communications, the telecom infrastructure was quite strong sequentially up about 16%. I know it’s hotspot and power, that sort of product and I was just wondering what sort of end boxes if you will, what sort of applications you are being drive, that would seem driven by side?

Paul Coghlan

In communications, we saw telecom improve a little bit, just by 1%. And maybe I can add a little bit of color, I mean it's just 1%. But telecom for us is, we're seeing a little bit of strength there from the introduction of some of our new products. We've had an effort for quite a time now in particular in the area of high-speed data converters. So we're seeing some market acceptance of those parts and those parts are really directed to a very, very high performance base station type of application.

So, if I had to say anything to that, it is the strength that we're seeing now is really directed more to the acceptance of some of our new products, but again it's just 1%.

Gus Richard - First Albany Capital

Okay, thanks so much.

Operator

Our next question comes from Louis Gerhardy with Morgan Stanley.

Louis Gerhardy - Morgan Stanley

Yeah, good morning, couple of questions if I could. First, just on the convertible, I understand there is some accounting activity or discussion on how to account for convertible debt that can be settled in cash? And Paul just interested in your view and the timing for such a move, and then what would this mean for linear and annual reporting?

Paul Coghlan

First of all, this is the third time in about a year, six months we have talked about some change in the accounting that might take place relative to what we call cash settlement converts. There was a significant meeting of a task force, an accounting task force in March, at which point they ultimately said leave the accounting the way it is. There was another meeting in June, and in June a few weeks ago this task force again kind of was divided in said look you have to leave the accounting the way it is. Some advocated to change, some advocated no change, some thought if you do make a change it's a non cash item and theoretic may have made some sense although not a lot of sense theoretically, but certainly it doesn't make any practical sense and that's why they didn't push it.

And then just last week I heard that FASB said it might take a look at it and it would issue something. It's sort of hit the tent a little bit that it was leaning towards maybe making companies estimate what a bank debt would be, even though we had convert debt and allocate some interest to that but that was again going to be put forward for discussion. So if that happens that would mean our the interest rate that we have that presently 3 to 3.8 would go up to whatever performing all they have ascertain, what the market rate is. But I would caution you before you jump to a conclusion on that -- that this is the third time in nine months, that they have address to this the first two they have had brave people on both side to that issue choose to disagree quite exemptly with one another. So I think the jury is still out on that and it probably won't affect the shares outstanding the present FASB thing I think, but again they are going to get some more commentary on it.

Louis Gerhardy - Morgan Stanley

Okay. And thanks for that explanation, I just wanted to ask you about the R&D investment here, up little more than 1% year over year and I understand probably a fair amount of the reason its only up 1% is that the profit sharing and some of your discretionary variable comp is down, but is there a way you can help us understand the R&D productivity maybe in terms of new maths/stats you expect to tape out in Fiscal '08 and '09 versus '07 or some other way that you can quantify the type of productivity that's happening behind these numbers?

Bob Swanson

Probably the most obvious way to measure the productivity is the number of new products, so that's really the end goal for R&D investments and as I mentioned earlier in fiscal year 2007 we introduced more new products than we did in the prior year. So I think that would be one of the metrics.

Louis Gerhardy - Morgan Stanley

Okay.

Paul Coghlan

This whole area of R&D -- you folks have to realize that, that's an area where we distinguish ourselves from our competitors. The goal to try and quantify that mathematically is less important to us than to quantify it from a technical standpoint. We continue to have technical differences in the market place, so if you are looking for some magical mathematical formula we have here, which tells us whether the products are going to be successful mathematically and how much sales they will drive, we don’t get down that road far because if we do, we could adversely impact behavior in getting cutting edge products, while that behavior will be oriented towards meeting some financial goal.

Louis Gerhardy - Morgan Stanley

Yeah I guess another part of the argument could be, you might get more revenue for each new product introduced for example like the modules, how important is that?

Paul Coghlan

What do you mean, you mean like I am trying not to get more revenues?

Louis Gerhardy - Morgan Stanley

No, you will get more revenue per your average new product, for example the ASP at some the modules is much higher than you traditional ASP.

Paul Coghlan

I know, but I am a broad-based diversified supplier of analog skill in a market where there is not even folks. So we think we are better of things, diversify than just going in one particular area, even though that area may have more sales for products than another.

Louis Gerhardy - Morgan Stanley

Yeah okay. Let me just go over to bookings, year-over-year is that number turned positive, or is it about it?

Paul Coghlan

I don't understand the question.

Louis Gerhardy - Morgan Stanley

You are bookings dollars. On a year-over-year basis, is it starting to increase or is it still down a little bit year-over-year?

Paul Coghlan

I don't have the June bookings in front of me, but I mean sales were down 8% so my guess is on a Euro if you are saying -- is your question were Q4 bookings this year greater than Q 4 bookings last year?

Louis Gerhardy - Morgan Stanley

Exactly.

Paul Coghlan

Okay that was your question, since I don't have that number front of me, but since sale was down 8% my guess is bookings would have been down a bit as well.

Louis Gerhardy - Morgan Stanley

Okay great. Thank you

Operator

At this time I like to give every one a chance to queue up for a question. (Operator Instructions). And gentlemen there are no further question at this time, may turn the call back over to you for any closing remarks.

Paul Coghlan

Thank you for your attention this morning as we said during the call. Things have picked up, we had a better June than March, and our forecast for September is for continued improvement. And wish you all a good day. Thanks again for your attention. Bye, bye.

Operator

That does conclude the conference for today. We thank you for your participation, have wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Linear Technology F4Q07 (Qtr End 7/01/07) Earnings Call Transcript
This Transcript
All Transcripts