Linear Technology F1Q08 (Qtr End 9/30/07) Earnings Call Transcript

Oct.17.07 | About: Linear Technology (LLTC)

Linear Technology Corporation (NASDAQ:LLTC)

F1Q08 Earnings Call

October 17, 2007 11:30 am ET

Executives

Paul Coghlan - Chief Financial Officer, Vice President -Finance

Robert H. Swanson - Executive Chairman of the Board

Lothar Maier - Chief Executive Officer, Director

Analysts

Ross Seymore - Deutsche Bank

Doug Freeman - American Technology Research

JoAnne Feeney - FTN Midwest

Craig Ellis - Citigroup

Sumit Dhanda - Banc of America Securities

Tore Svanberg - Thomas Weisel Partners

Krishna Shankar - JMP Securities

Steve Smigie - Raymond James

Romit Shah - Lehman Brothers

Simona Jankowski - Goldman Sachs

Daniel A. Berenbaum - Caris & Company

John Pitzer - Credit Suisse

Chris Danely - J.P. Morgan

Gus Richard - Broadpoint Capital

David Wu - Global Crown Capital

Satish Atavel - KSA Capital

Operator

Good day, everyone and welcome to the Linear TechnologyCorporation fiscal year 2008 first quarter earnings conference call. Today’sconference is being recorded. At this time, I would like to turn the conferenceover to Paul Coghlan, Chief Financial Officer. Please go ahead, sir.

Paul Coghlan

Hello. Welcome to the Linear Technology conference call. Iam being joined today by Bob Swanson and Lothar Maier. We are actuallyconducting this conference call from Singapore. We often tell you theimportance of our manufacturing skills to the success of our financial modeland our reputation in the customer base. This week, our board of directors isvisiting our Singapore and Penang facilities, both of which contribute largelyto our corporate success.

The only drawback to this visit is we are conducting thisconference call at 11:30 p.m. local time, so please don’t ask us too many toughquestions.

I will give you a brief overview of our recently completedfirst quarter and then address the current business climate. And then we willopen up the conference call to questions.

I trust you have all seen copies of our press release, whichwas published last night. First, however, I would like to remind you thatexcept for historical information, that matters we will be describing thismorning will be forward-looking statements that are dependent on certain riskand uncertainties, including such factors, among others, as new orders receivedand shipped during the quarter, the timely introduction of new processes andproducts, and general conditions in the world economy and financial markets.

In addition to these risks, which we described in our pressrelease issued yesterday, we refer you to the risk factors listed in thecompany’s Form 10-K for the year ended July 1, 2007, particularly managementdiscussion and analysis of financial condition and results of operations.

Secondly, SEC regulation SD regarding selective disclosureinfluences our interaction with investors. We have opened up this conferencecall to enable all interested investors to listen in. The press release andthis conference call will be our sole form to respond to questions regardingour estimated financial performance going forward. Consequently, should youhave any questions regarding our estimates of sales and profits, or otherfinancial matters for the upcoming quarter, as well as how they might impact ourincome statement model on our balance sheet, this is the time we are free torespond to these questions.

As a reminder, in April 2007, the company entered into a $3billion accelerated share repurchase known as an ASR transaction, funded by$1.3 billion of the company’s own cash and $1.7 billion of convertible debt. Inaddition to the initial impact this had on the company’s Q4 2007 results, italso had an effect on the current Q1 2008 results.

This quarter has had an additional decrease in interest incomeof $1.5 million and an additional increase in interest expense of $3.8 millionsince the ASR impacted all of this quarter versus only two months of lastquarter. This reduction in net income was offset by $37.2 million fewer sharesoutstanding.

For the just completed first quarter, sales increased fromthe previous quarter within the range of 4% to 6% that we have forecasted inour previous conference call. Revenue was $281.5 million, up 5% from therevenue of $268.1 million for the previous quarter.

Earnings per share increased 11% to $0.40, up from $0.36last quarter. However, net income for the first quarter was $91.5 million,compared with $95.7 million in the prior quarter. This anomaly of increasedearnings 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 bythe reduced shares outstanding in the earnings per share calculations.

On a pro forma basis, without the impact of stock-basedcompensation, earnings per share would have been $0.45 versus $0.42 and netincome would have been $101.4 million versus $109.9 million in the Junequarter.

So the impact of stock-based compensation was 11% of netincome, or $0.05 at the EPS level. For the quarter just ended, our GAAP returnon sales was 33% and our pro forma return on sales was 36%.

Income tax expense also had an effect on the results of theSeptember quarter compared with the June quarter, as our quarterly tax rateincreased from 23% in June to 29% in September, largely due to certain discreteitems that occurred in the June quarter. The company had finalized certain taxissues that were under audit and revised its tax reserves accordingly. Thisresulted in a reduction in the June quarter’s effective tax rate to 23%.

Discrete items in the September quarter were minor bycomparison, only affecting the rate by 1%.

Other line items within the income statement were more inline with previous quarters. Gross margin percentage increased to 77.2% from77.1% in the prior quarter. Operating expenses as a percent of sales decreasedfrom 29.7% to 28.6%.

Employee compensation costs increased modestly in thequarter, as reductions in stock-based compensation were offset by increases inprofit sharing, new hire costs, and annual merit raises. The resultingoperating margin as a percent of sales improved to 48.6% from 47.8% in theprior quarter.

During the quarter, the company’s cash and short-terminvestments increased by $118.9 million. For the 86th consecutive quarter, thecompany had positive cash flow from operations. The board of directorsauthorized the company to pay a cash dividend of $0.18 per share. This dividendwill be paid on November 28th to shareholders of record on November 16th.

During the quarter, bookings increased and we again had apositive book-to-bill ratio. On an end market basis, we saw improvements inautomotive and computer, partially offset by a modest reduction in consumer.Communications, industrial, and the military area were largely unchanged.

Our ending on-hand inventory at distributors is withinhistorical turns levels, cancellations were minimal, and lead times have remainunchanged at four to six weeks.

In summary, we continue to have an excellent business modeland are therefore able to remain both highly profitable and cash flow positive.Our return on assets was 63%. The ASR and associated debt has improved ourreturns on equity and invested capital. Our debt is modest relative to our cashgeneration capabilities and our current ratio is five-to-one.

Looking ahead to the December quarter, growth will beimpacted by the usual seasonal slowdown in our businesses. Inventory appears tobe reasonably balanced in the marketplace. However, as we near the end of thecalendar year, in December many customers, particularly contract manufacturers,minimize inventory balances.

Consequently, given these factors, we expect revenues anddiluted earnings per share to increase in the 1% to 4% range from the Septemberquarter just completed.

Now I would like to address the quarter’s results on aline-by-line basis, starting with bookings. As I stated earlier, bookingsincreased over the previous quarter, cancellations were minor, and we had apositive book-to-bill ratio. Demand-created bookings were up in most majorinternational geographic areas and relatively unchanged in the U.S.A.

At this time every quarter, we give you a breakdown of ourbookings percentages by end markets to give you insight into those markets thatdrive our business.

Industrial and communications continues to be our largestareas. Industrial at 31% was down from 32%, largely due to rounding, asindustrial actually increased slightly in absolute dollars. Communicationsdecreased also from 33% to 32%, while being relatively flat in absolutedollars.

For us, the three significant areas within communicationsare cell phone and telecom infrastructure, networking, and cell phone handsets.Cell phone and telecom infrastructure decreased slightly from 11% to 10%. Networkingat 15% increased from 14% last quarter. Power over ethernet circuits and hotswap circuits, areas rich in technology, lead our presence in this area. Cellphone handsets at 7% were down modestly from 8% last quarter.

Computer at 13% of our business was up from 12% lastquarter.

High-end consumer remained at 10%, although it was downslightly in absolute dollars.

Automotive grew from 9% to 10% of our business. This areahas grown steadily over the last two years and we had forecasted that it wouldsoon grow into double-digit percentages of our business.

Finally, the military products at 4% of our business wereunchanged as a percent from the prior period.

In summary, we believe we have very good diversity by endmarkets, which contributes to our leadership positioning in high performanceanalog. Note that 50% of our bookings were created in the U.S.A., similar tolast quarter.

Moving from bookings to sales, as I said earlier, productsales grew 5% from the prior quarter, but were down 3.6% from the similarquarter in the prior year. Sales grew internationally. Asia was the strongestarea, although Europe and Japan also grew well. U.S. OEM was unchanged and U.S.distribution was down.

In summary, the U.S.A., 30% was down two percentage pointsfrom last quarter; Europe at 17% and Japan at 12% were unchanged; the rest ofthe world, which is the rest of Asia, aside from Japan, was 41%, which improvedfrom 39% last quarter, since manufacturing for our high-end consumer and otherOEMs are to be done in Asia.

Gross margin was 77.2%. This impressive number validates ourstrategy, selling unique, high performance analog semiconductors to a broadcustomer base. This gross margin percentage increased slightly by one-tenth ofa point from last quarter.

Fixed costs absorbed over a larger sales base more thanoffset a modest mix change, contributed to ASPs decreasing $1.55 to $1.57 lastquarter.

R&D increased in absolute dollars by $1,067,000, whiledecreasing as a percentage of sales to 17% from 17.4% last quarter. Theincreases were predominantly in the labor area for profit sharing and headcountincreases, largely offset by a decrease in the charge for stock-basedcompensation.

SG&A -- selling, general and administrative costs wereessentially flat in absolute dollars compared with the prior quarter, whiledecreasing as a percent of sales to 11.6% from 12.3%. Similar to R&D,increases in compensation and profit sharing were offset by decreases instock-based compensation.

As a result of the above, operating income increased by7.6%, or $9.7 million on a sales increase of $13.4 million. Operating income asa percent of sales was 48.6% versus 47.4% last quarter, which continues to beindustry-leading performance.

Interest expense increased by $3.7 million, as we had threemonths of interest and debt fee amortization costs this quarter versus twomonths last quarter on our $1.7 billion convertible debt offering.

Similarly, interest income was down $1.5 million since wehad $1.3 billion less cash and short-term investments for three months thisquarter versus two months last quarter.

Our tax rate was 29%. This was the result of an ongoingeffective tax rate of 20%, with one point of discrete items unique to thequarter. Our tax rate in the previous quarter was 23%. The 6% point differencederived from finalizing certain tax issues last quarter that were under IRSaudit and revising our tax reserves accordingly. Going forward, we expect oureffective tax rate to be approximately 29.5%.

The major tax savings items that currently support oureffective tax rate are the benefits from our tax holidays overseas, our taxexempt interest, the R&D credit, and our foreign sales tax benefit.

The resulting net income of $91.5 million is a decrease of$4.2 million from the previous quarter due to the increases in net interestexpense and taxes. On a pro forma basis, before stock-based compensation, netincome would have been $101.4 million versus $109.9 million last quarter.

The average shares outstanding used in the calculation ofearnings per share have changed significantly due to the accelerated sharerepurchase referred to earlier. During the quarter, the company received thefull three-month impact on the shares delivered last quarter. In the last twoquarters, impact of the ASR on the share count for earnings per share purposeshas been 78.4 million shares. Next quarter we expect the diluted sharesoutstanding to be roughly similar to this quarter.

Consequently, although net income was reduced by $4.2million, diluted shares outstanding were reduced by 37,244,000, therebycontributing to the increase in diluted earnings per share from $0.36 lastquarter to $0.40 this quarter.

Finally, on a GAAP basis, our return on sales was 32.5%versus 35.7% last quarter. The reduction was due to the increase in taxes andnet interest expense, which were significantly offset on the EPS line by thedecrease in shares.

Moving to the balance sheet, cash and short-term investmentsincreased by $118.9 million; $158.2 million was provided by operations; $40.7million was paid in cash dividends and $5.3 million was used to purchase fixedassets. Our cash and short-term investment balance is now $752.2 million andrepresents 56% of total assets.

Accounts receivable of $134 million is up $3.5 million fromlast quarter, roughly what you would expect from a $13.4 million increase insales. Our day sales in accounts receivable were 43 days versus 44 days lastquarter.

Inventory at $51.4 million was largely unchanged from the$50 million reported last quarter. Our inventory turns was 5 times, a slightimprovement from last quarter’s 4.8 times.

Deferred taxes and other current assets decreased by $4.1million from the June quarter, largely due to a reduction in deferred taxesresulting from a lower charge for stock-based compensation.

Property, plants and equipment decreased by $5.4 million. Wehad $5,323,000 of additions and depreciation of $10,752,000. Most of theadditions were for test production equipment and for our building expansionproject in Penang. We continue to spend roughly -- we continue to plan to spendroughly $60 million fiscal 2008 capital additions.

Other non-current assets, which totaled $93.6 million,increased by $2.5 million, again primarily due to an increase in deferredtaxes.

Moving to the liability side of the balance sheet, accountspayable hardly changed, down $163,000. Accrued income taxes, payroll, and otheraccrued liabilities decreased by $26.9 million. The largest items here are ourprofit sharing accrual, income taxes payable, and accrued interest payable onour convertible debt.

We pay out profit sharing twice a year, so our accrualusually increases in the second and fourth quarters and decreases in the firstand third quarters, such as this quarter when payments are made.

Our income taxes payable decreased as we had a re-class oflong-term liabilities for part of our tax payable account as required by thenew accounting pronouncement referred to as FIN-48.

Finally, these decreases were partially offset by thequarter’s accrued interest payable on our newly incurred convertible debt.

Deferred income on shipments to distribution decreased thisquarter by $760,000, as we shipped roughly 1 million less into distribution --that is U.S. distribution -- than they shipped out to their end customers. Ouraccounting on shipments to U.S. distribution is conservative. We do not recorda sale on our income and our results of operations until the distributor shipsthe product out to its end customer. We continue to closely control ourinventory at distribution to properly position the inventory without anyunneeded buildup.

Deferred tax and other long-term liabilities increased by$71.1 million, due largely to the re-class referred to above for theimplementation of FIN-48.

Changes in the stockholder equity accounts were primarilythe result of the usual quarterly transaction for net income, dividends paid,and for employee stock activity. This quarter, the company again announced acash dividend of $0.18 per share, to be paid on November 28th to stockholdersof record on November 16th.

Looking forward, as you can tell from my previous comments,September was a good quarter for us. Business improved as sales, operatingincome, and cash and short-term investments all increased. The company’sbookings grew in the quarter and our turns requirement for the December quarteris similar to last quarter. Turns are orders that must be booked and shipped inthe quarter. Our lead times of four to six weeks can support this level ofturns as we have often done in the past.

Looking ahead to the December quarter, this is seasonally aslower growth quarter for us, since our consumer related business tends to slowdown late in the quarter, as most of the holiday related business has shippedby mid-November. Also, our non-consumer businesses, such as industrial andcommunications infrastructure, tend to slow a bit as customers manage theirinventories going into year-end.

These trends can be exacerbated by an overall inventorytightening or correction. However, we don’t sense a general inventory imbalancesuch as prevailed this time last year. We believe our distributors are in goodinventory shape and although we have less visibility to subcontractors, wesense they are in a normal, seasonal mode.

The general macroeconomic trends are reasonable. The U.S.A.continues to grow but at a slow rate. There are concerns about consumer demand,the sub-prime mortgage issues. However, the weak dollar does help export.

When we put these factors together, when coupled with ourgood September quarter, our outlook is better than this time a year ago.Whereas then we guided down sequentially 5% to 7%, this year we are guiding fora slight growth, expecting revenues and profits to increase in the 1% to 4%range from the just completed September quarter.

In summary, we are in a strong segment of the electronicsmarketplace in the high performance analog, where we continue to be a marketleader. We are optimistic about the long-term and mid-term growth opportunitiesfor our markets and for Linear.

From an investment standpoint, we believe we arewell-positioned vis-à-vis investor concerns.

Stock option back-dating -- we received a closure letterfrom the SEC this quarter. We had filed our annual reports on time with nofinancial restatement.

Second, utilization of our cash balance -- in April, weentered into a $3 billion ASR, utilizing $1.3 billion of our own cash andissuing $1.7 billion in convertible debt. This enabled us to reduce our sharesoutstanding by approximately 25%.

Third, margin concerns -- our margins remain strong. Theyactually increased our operating margin this quarter and it is roughly twicethat of our nearest competitors.

Fourth, growth -- we are growing. We just completed oursecond sequential 5% growth quarter. We are guiding for growth this Decemberquarter. Looking ahead, usually March and June are our strongest quarters.

We like where we are. We are very diversified by end market.WSPS projects that automotive, industrial, and standard linear will be thefastest growing end markets within worldwide analog through 2010. Surely weneed to continue this growth trend to alleviate investor concerns, but we arecertainly focused on profitable growth.

Finally, for all of you that are stockholders, please readthe annual report which emphasizes analog excellence and vote your proxiesprior to our November 7th annual meeting.

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

Question-and-AnswerSession

Operator

(Operator Instructions) We’ll first hear from Ross Seymore of DeutscheBank.

RossSeymore - Deutsche Bank

Thanks, guys. I just had a question on what you are seeing froma bookings linearity point of view. Is there anything better or worse than thenormal seasonality that you talk about that occurs in a typical Decemberquarter?

Paul Coghlan

No, it should be typical, which means October would be thebest -- not -- October is a four-week month and October on a four-week basiswould be probably the strongest, and then November would start off pretty well.And then as you get later in November and early December, bookings seasonallytend to drop off a bit.

Ross Seymore -Deutsche Bank

You mentioned about the distis in the U.S., you shipped lessin than they shipped out. As I look at their numbers, it looks like they arerunning pretty lean in inventory. Do you get the sense that they are stilltrying to adjust it down even further or is that even a normal seasonal patternfrom those guys?

Paul Coghlan

What we said is the U.S., the numbers in U.S. distributionwere down this quarter, not significantly but down a bit from the priorquarter, so it would make sense that they would adjust their inventoryslightly. I told you we had a $1 million adjustment, so I think distis areseasonally responding to what they expect in the December quarter.

I would remind you that the March quarter normally for U.S.distribution is by far their strongest quarter and we don’t have any reason tobelieve that won’t occur this year.

Ross Seymore -Deutsche Bank

And then the last question for me, Paul, the ASR that youput into place, you guys have spent at least the first half, the ASR side ofit, but I believe there was a second half of it that was a repo approved thatyou guys could use kind of at your discretion. Could you just let me know howmuch is outstanding in that approved buy-back today?

Paul Coghlan

The second half actually, what we did is we entered into anagreement with an investment bank for both the first and the second half. Thesecond half had a collar on it, as you know, or you may not know, had a collaron it, and the bank was required to buy a certain percentage of the dailytransactions every day for a six-month period, so that the purchaser would beevenly distributed over a six-month period, which ends I believe around January17th.

Ross Seymore -Deutsche Bank

Okay, so if they are still buying, is it just that there aremore options outstanding and your share count being flat in the Decemberquarter assumption?

Paul Coghlan

Well, what you had is -- the accounting around this ispretty complex in that when you enter into the ASR, the bank borrows a lot ofshares and they borrow what they believe will be the minimum number of sharesthey would need to deliver to you, so we actually got quite a large number,over $70 million worth of shares, in the June quarter. We got another $8million shares early in the September quarter. To go, we have roughly about $3million shares in the ASR, about half of which will probably come in in theDecember quarter and the other half in the March quarter, and then we will havethe exercise of some stock options. Does that help?

Ross Seymore -Deutsche Bank

Definitely. And then I guess the last little follow-up tothat, so over time, is your goal with your share repurchase plan to hold theshare count flat, basically? Or how should we think about that over the nextyear or so?

Paul Coghlan

I think over the next year or so, what we’d try to do iskeep it relatively flat, buy shares when we can buy them that approximate theshares that are being exercised. But you know, we are flexible and look at themarket and a lot depends on what the price of the stock is in the marketplace.

Ross Seymore -Deutsche Bank

Okay. Thank you very much.

Operator

(Operator Instructions) We will now hear from Doug Freemanfrom American Technology Research.

Doug Freeman -American Technology Research

Thanks for taking my question. Paul, in the past you’vegiven us some numbers on percentage of business in the power mixed signal,signal conditioning. Any chance we could get those?

Paul Coghlan

I don’t have them right in front of me but they are roughly60% was power and roughly maybe a little over 20% was mixed signal, and alittle under 20% was signal conditioning.

Doug Freeman -American Technology Research

All right. Can you guys help us understand the growth vectorand where you think growth is going to come from? Are we going to see any sortof pick-up in power management or are there any markets where you could betargeting to take some share that we could sort of put our arms around? I knowyou mentioned auto as one end market but if you were to look at it the otherway by product segment.

Lothar Maier

Let me take at least a first cut at it and as we’ve spokenin the past, for us we’ve seen significant growth quarter over quarter for thelast couple of years in automotive and as we predicted, it’s not reached 10% ofthe sales and so that’s really been the result of investments that we’ve donein R&D now for a number of years, and our expectation is that thatparticular end market for us is going to continue to be a strong growth marketfor us.

If you look at what end markets are forecasted to grow,clearly automotive is forecasted to grow. In fact, it is going to grow fasterthan virtually any other end market. If you look at the WFTF numbers,industrial is going to continue to grow and surprisingly enough, it’s standardlinear is going to continue to grow as well.

Our sense is we are pretty well-positioned relatively to ourproduct development efforts to really support those particular markets. I guessa bit surprising is the end market that is going to grow the least is theconsumer market and we’ve always said we’ve been more or less opportunistic inthat market and probably now for good reason.

Robert H. Swanson

It’s not going to grow at all. It’s going to be negativegrowth.

Lothar Maier

In the short-term, yes.

Robert H. Swanson

No, between now and 2010.

Paul Coghlan

From a product side, one of the products we’ve mentioned toyou often in the past is the module family and we have many -- we’ve introduceda few of those and we have many more --actually, in the December quarter, wehave several more coming out.

Lothar Maier

And we’ve got over 20 in development.

Doug Freeman -American Technology Research

Okay, so that business is growing nicely.

Paul Coghlan

Relative to specific products and specific power areas, we’djust as soon release them before we talk about them, I think.

Robert H. Swanson

Doug, let me just do a little color commentary. Obviouslyautomotive is a big piece of the market by 2010 and it’s the fastest growingsegment if the SAA data is correct. We hope it is correct. That is going to bea lot of power and if you look at the standard analog market, which is actuallygoing to become 40% of the market between now and 2010, what is going to be veryfast-growing in the standard product area are voltage regulators, so that’spower. But also interface and data converters has got very high growth also andI think you know that we are well-positioned in both of those.

So it is going to be, as Paul said in his monologue, thestandard product area where we are very strong is actually forecasted to havesome really good growth. Automotive is going to have some good growth andthat’s going to be a lot of power.

Doug Freeman -American Technology Research

What are you finding, Bob, the makeup of the automotivemarket from the standpoint of ASPs? Does it fall into the traditional ASPs thatLinear plays in or are you able to get really high dollar content into some ofthese automotive applications?

Robert H. Swanson

I think that the socket set we see, what you would call astraditional Linear Technology ASPs. They are very good ASPs.

Doug Freeman -American Technology Research

Terrific. One commentary, if you could; we’ve heard -- Ipicked up some recent data points. We had Ericsson just recently pre-announceand a miss on base stations. Converse to that, I am sort of picking up that thecommunications end market is actually doing a little bit better and has burnedthrough some of the inventory. Can you guys comment on what you are seeingspecific to the communications market?

Paul Coghlan

Which part of the communications market?

Doug Freeman -American Technology Research

Well, one on base stations, your exposure to the basestation market and the present softness we may be seeing there and then whatyou are seeing in sort of more general, broader term communication market --you know, the networking, the Cisco type of stuff.

Paul Coghlan

As I said in the introduction, the general base station businesswas down one percentage point. Not a lot in dollars but down one percentagepoint, and then networking was actually up, so networking at 15% is as high asit’s been in a while for us, so that’s doing pretty well.

Doug Freeman -American Technology Research

I guess my last question, if you could comment on thehigh-end handset market. I know in the past you had said you were very exposedto high-end, high feature phone handsets. We are starting to see smartphonesreally grow in the marketplace. What is your outlook for that market, if youcould? And I’ll leave it there. Thanks so much, guys.

Lothar Maier

In the high-end phones, whenever there is a high-end phonethat can take advantage of our products and is willing to pay us the value webring, we will be there. In the past, we’ve said that the cell phone market,again we’re opportunistic in it and if you look at the numbers that Paulpresented, cell phones were actually down from 8% to 7%, so again it’s -- asfar as the impact of these high feature rich cell phones on Linear Technology,I guess we probably haven’t seen a whole lot of it yet.

Doug Freeman -American Technology Research

All right, great. Thanks so much.

Operator

Next we’ll hear from JoAnne Feeney of FTN Midwest.

JoAnne Feeney - FTNMidwest

Thanks for taking my call. I was just also trying to get alittle bit more color on the communication infrastructure issues and wonderingif from your perspective, you are seeing -- given that you tend to lead themarket a little bit, you are seeing indications of a further stall ininfrastructure development, of if this you sort of think is more specific tothat one player in Ericsson?

Paul Coghlan

Infrastructure for us is a relatively small percentage ofour business at 10%, so that -- I don’t know as we’re a good model for you toextrapolate from how the overall base station market is doing. We’ve got goodtraction, particularly in the A to D area and in some power segments of thatmarket, so we don’t see a softening in it. But we really wouldn’t be abellwether for you to use to be another data point relative to the base stationmanufacturer that you discussed for an import into the overall market.

JoAnne Feeney - FTNMidwest

Okay, then on the computing side, could you elaborate a littlebit on the composition of what you are seeing there in terms of high-end versuslow-end power management solutions?

Paul Coghlan

It actually went up last quarter but it went up kind ofacross the board, so there wasn’t any one particular place in our business andthe overall computer business I think is a little healthier -- Microsoft Vista,some of the stuff Intel’s come out with, I think it’s a little better.

The high-end solutions for us in computer, we’re in bothdesktops and in notebooks and we tend to be in the more expensive, more featurerich models.

JoAnne Feeney - FTNMidwest

So there’s been a lot of --

Lothar Maier

-- towards the future a little bit, we’ve seen some gooddesign win opportunities in the computer market, probably not impacting thecurrent quarter but the quarter beyond, and so these new booking opportunitiesare in these high-end, notebook type PCs. So even though they are design wins,they are not hard orders yet. But we are a little bit optimistic that we areseeing some strength in the computer market.

JoAnne Feeney - FTNMidwest

Thanks a lot.

Operator

Next we’ll hear from Craig Ellis of Citigroup.

Craig Ellis -Citigroup

Thank you and good evening, gentlemen. Just on the consumerside of the business, I think going into the calendar third quarter, there wasan expectation for that part of the business to be strong. Is that the way itplayed out?

And Paul, thinking longer term, given some remarks aroundexpectations, or I guess typical seasonal strength in the first half, would weexpect computing and consumer to behave more seasonally from a bookingsstandpoint as we move through the next couple of quarters?

Paul Coghlan

The second half of your question first; I would expect theywould behave seasonally, in that I would expect the March quarter, for example,from a booking standpoint. Probably the weakest sector for us would beconsumer, the strongest sector would be industrial. So that I think we arelooking at it as being this stage kind of a classical start to the new calendaryear.

And then relative to computer, would you repeat yourquestion on that?

Craig Ellis -Citigroup

The question regarding the third quarter, my expectation atleast was that it would be a strong consumer quarter for you. Is that in factthe way it played out?

Paul Coghlan

Oh, you mean -- I’m getting confused. I’m on a fiscal basis.I’m sorry. The quarter that just ended, computer improved by a point. It wentfrom I think 12 to 13, so that’s not a -- and in consumer, it was down apercentage. It was flat, pardon me, at 10% but down a little bit in absolutedollars.

That’s sort of how we thought consumer would play out andthat’s just bookings. Now, billings will be opposite to that. Billings werestronger in the September quarter, which I think is the question you wereasking, by a good amount. They were stronger than the June quarter and probablywill be a little less in the December quarter than the September quarter.

Craig Ellis -Citigroup

Okay, that’s helpful. Thanks, guys.

Operator

Next we’ll hear from Sumit Dhanda of Banc of AmericaSecurities.

Sumit Dhanda - Bancof America Securities

I wanted to follow up on your commentary on the growthopportunities you provided earlier. On the auto market, you mentioned thatthere’s a potential growth for your power business. Are there specificapplications you could highlight for us within the auto market which wouldsupport that claim?

Lothar Maier

There are just broad application opportunities. Theopportunities in automotive started in the infotainment side. They’ve nowspread into many, many other areas, in areas of illumination, engineeringcontrol, safety -- all sorts of new safety equipment, lane departure sensing,radar systems, and then on top of it, there’s the emergence of hybrid vehicles,which also drive a lot of new opportunities for linear products.

Sumit Dhanda - Bancof America Securities

Okay, great. The other question I have is sort of moregeneric. You mentioned the fact that December is a seasonally weak quarter. Iguess my recollection has always been that September used to be the seasonallyweak quarter and December actually used to see a lift. Has something changed inyour business that would suggest that this is the new paradigm?

Paul Coghlan

Actually, your memory serves you well but the Septemberquarter used to be -- in a classical Linear Technology year, there would belittle or no growth in the September quarter, a little bit or none. TheDecember quarter would be low single digits, and then the March and Junequarter would be mid to high single digits.

So what’s changed a little bit is that the Septemberquarter, because we have a little more consumer business and consumer relatedbusiness now than we did in the period you are referring to, has gotten to be abit stronger than the December quarter, but the December quarter itself hasn’treally changed a whole lot. So if you will, there’s been a little come out ofmaybe March or June and gone into September and the December quarter -- this ison a classical, normal Linear year -- being 1% to 4% is fairly close to what wealways used to say.

Robert H. Swanson

On top of now a stronger September base.

Lothar Maier

Yes, that’s true.

Sumit Dhanda - Bancof America Securities

I guess the last question I had for you, you mentionedbook-to-bill above one, but your outlook doesn’t seem to suggest that samelevel of excitement, so to speak, when I think about book-to-bill above one.Anything -- I mean, are you baking in some conservatism with respect to whatmight happen with the business or are we just barely above one and that’swhat’s driving this low single-digit sequential revenue growth in December?

Paul Coghlan

I think what you have is the December quarter, you’ve gotgood bookings going into it. As I said earlier, it can tend to slow down as youreach the month of December. Historically, almost every year and probably thisyear, the U.S. distribution channel goes backwards a bit. Europe starts to slowdown as you get into the December vacation period, so you have a few factorsthat are pretty classical in December that tend to happen towards the end ofthe December quarter, whereas the bookings coming out of September impact thebeginning of the December quarter.

Sumit Dhanda - Banc ofAmerica Securities

Thank you very much for that.

Operator

Next we’ll hear from Tore Svanberg of Thomas WeiselPartners.

Tore Svanberg -Thomas Weisel Partners

I guess it’s morning by now, so I’ll say good morning. Acouple of questions; first of all --

Paul Coghlan

We’re a little punchy. Thanks.

Tore Svanberg -Thomas Weisel Partners

The tightening of the inventories in the disti channel thatyou are experiencing, is that really because of seasonality or are theyincreasingly getting nervous about the U.S.economy?

Paul Coghlan

I think there’s a couple of things there. I’m not sure theyare getting nervous about the U.S. economy. I think there’s some seasonality. Ithink also what you have in some U.S. distis are doing more business overseasbecause some U.S. distis, a lot of even medium-sized manufacturing companiesnow are -- whereas they manufactured in the U.S. in past years aremanufacturing overseas currently. So I don’t think disti would attribute itnecessarily to an unusual slowdown in the U.S.economy, but this is a period that every year where disti U.S.numbers typically go backwards a bit.

Lothar Maier

If I might add, Linear as a company does a very good job ofmanaging the inventory at the distribution channel, so I think we have prettygood insight as to what is happening in distribution and I would pretty muchlike to confirm what Paul says; we don’t think there’s a concern, that there’sany signal there.

Tore Svanberg -Thomas Weisel Partners

That’s very helpful. Also, looking at your automotivebusiness, is the mix by product pretty similar to the corporate average, or isit more heavy leaning towards power?

Lothar Maier

I would say it’s probably, from a product distributionstandpoint, is pretty similar to the overall company.

Tore Svanberg -Thomas Weisel Partners

And just finally, maybe just ask your opinion; is the highperformance analog market still big enough for everybody to grow or do you seeor think there should be some consolidation at some point?

Paul Coghlan

Well, first of all, we’re pretty sure it’s big enough for usto grow and that’s really what’s most important to us. I think Bob talked toyou about areas within the market that are projected to grow the best, and youknow from how we tell you our business is broken out by end-markets. Those aremarkets that we either presently do very well in or are growing in. Socertainly we think analog is going to grow. I think it is projected to be $45billion next year.

Lothar Maier

2010.

Paul Coghlan

2010, pardon me, and it’s in 36 or 37 now, so there’s a lotof good growth opportunity, especially if you are like us where you arepositioned in the areas that should growth the most. Did you want to saysomething about the rest of --

Robert H. Swanson

I think this $45 billion number for 2010, you know, just alittle over a year ago it was a $49 billion number in 2009. I think the factthat 2007, the market is going sideways to slightly back. I think the forecastis very conservative and it is likely these numbers are understated but still,$1.1 billion out of our $37 billion market today going to -- even if it goes tothis $45 billion a couple of years from now -- to put this thing inperspective, when we started the company, the whole market was $2 billion. Now,even in a “slow growth cycle”, it grows by $2 billion to $3 billion a year. Sonobody at Linear can find any reason to convince themselves that we can’t growin a market like that.

Tore Svanberg -Thomas Weisel Partners

That’s very helpful. Thank you very much and I hope you getsome sleep. Thanks.

Operator

Next we’ll hear from Krishna Shankar, JMP Securities.

Krishna Shankar - JMPSecurities

Thank you. Congratulations on the great gross margins andthat is very impressive. As you look at the networking market, can you talkabout was that one customer or a fairly broad range of customers which showedstrength in the networking market for you?

Paul Coghlan

We could probably split the uprights a little bit there.It’s certainly not a broad cross-section of customers because in that area,there’s certain customers that dominate. Among those that dominate, we did wellin those this past quarter.

Krishna Shankar - JMPSecurities

I see. And then, as you look at cell phones, it was down alittle bit again from 8% of revenues to 7% this quarter. Do you think thatcould kind of level off here, especially with the introduction of Sony’s newhigh-end cell phones, or are you continuing to be very selective in that areaand that trend could continue downward?

Paul Coghlan

We have to look -- it’s a little tough to project but Ithink from our opinion, it was 7, went to 8, went back to 7. I think this rangewe are in now is a range we’ll probably stay in, unless we get some moretraction in some of the high-end phones. We have some opportunities there butwe’ll probably stay in this area we are in, this percentage.

Lothar Maier

And we’ll continue to stay selective in this market.

Robert H. Swanson

Yeah and again, if the macro numbers are any guidance,between 2006 and 2010, the cell phone market, the handset market is going togrow a whopping 10% during the four-year period. And so it’s a big market butslow-growing market and Linear’s strategy will be the selective and findsockets where we can grow but grow profitably.

Krishna Shankar - JMPSecurities

Okay, and again, just to -- I wanted to clarify your commenton the industrial and distribution, where you attribute it solely toseasonality the -- you know, the preference on the part of distributors tocarry less inventory I guess in the year and you don’t see any macro issuesthat you can signal right now at all, either in the U.S. or globally?

Lothar Maier

I think that’s fair. I think as -- we told you some reasonswhy we think it went back a little bit. It’s becoming a little moreinternational in that business and I don’t -- we don’t sense any real warningsign from a macro standpoint.

Robert H. Swanson

I think to add to what Lothar said when he made a commentthat Linear has a lot of control over what inventory levels the distributorscarry and basically, we allow the distributors to carry a low inventory, allowthem to turn their inventory more times a year than is normal because we havesuch good response. And that’s just an attitude of Linear’s management thatthey have control over the inventory more than maybe some other suppliers.

Krishna Shankar - JMPSecurities

Thank you.

Operator

Next we’ll hear from Steve Smigie of Raymond James.

Steve Smigie -Raymond James

Thank you. I was hoping you could talk a little bit aboutthe opportunities you see in the power ethernet market, just in general. And Ihad a specific question -- it’s my understanding that the configuration of thepower ethernet is shifting to a 12 port configuration. I was just wondering howmuch you participate in that market or plan to?

Lothar Maier

We do participate in the power-over-ethernet market and weparticipate on both ends of the business, both on the PSC and the PV side, soon the source end and the device end. And the parts that we have, I’m not quitesure why on the 12-port, but we’ve got parts that can be 4-port, 8-port,12-port -- however a customer wants to configure their system, so we’ve got POEproducts on the PSC side that will support that, and we sell those productsreally to all of the suppliers of POE products.

Steve Smigie -Raymond James

Any sort of a growth rate, compounding growth rate you mightanticipate growing, or at least over the next year or so?

Lothar Maier

I don’t know. I would expect that the growth rate for us forthat market would be approximately the growth of the company, maybe a littlebit faster.

Steve Smigie -Raymond James

But do you still see it as a nascent market, or somethingthat has developed to the point where it should continue to evolve as asignificant standard?

Lothar Maier

I think it’s maybe just -- I would say very much in thebeginning of its product cycle. I think there are some early adopters of POE. Ithink there is a lot of applications beyond just the traditional use of atelephone. We see opportunities in security, type of systems as well. I thinkPOE as a family of products is really just in its infancy right now.

Steve Smigie -Raymond James

Thanks a lot.

Operator

Romit Shah of Lehman Brothers.

Romit Shah - LehmanBrothers

Thanks. Paul, you said your book-to-bill was positive thislast quarter. I know you don’t have perfect visibility, but would you expectyour backlog to grow again in the December period?

Paul Coghlan

We don’t know that yet. We would have to see. Earlierquestions, I said bookings would be stronger in the front end of the quarterthan the end, so I think it is early for us to project that.

Romit Shah - LehmanBrothers

Okay, but you did say earlier that you would expect yourdistribution business, which I’m guessing is tied mostly to industrial, itcould bounce back and see a classic pick-up in the March period. So I’m justtrying to get a better sense of why you guys think that will happen.

Paul Coghlan

First of all, on the bookings, remember our lead times arefour to six weeks, so people can tighten their inventory a bit at the end ofthe year and then book on us in the next quarter and get it shipped in the nextquarter.

Secondly, your question as to why I think distribution willimprove in March, again we’re not in March so I don’t know for sure, buthistorically, that’s been a good quarter for us for distribution, and not justgood, actually, a strong quarter and we would be coming off September, whichdidn’t live up to its expectations maybe and distribution was back a littlebit. December we think will be kind of historically where it is, so I thinkwe’d be pretty well-positioned for that business to pick up in March but wehave to see how it plays out. But right now, we believe it will.

Romit Shah - LehmanBrothers

Fair enough, and just on SG&A, it’s been flat the lastcouple of quarters at $33 million. Does that start to pick up here in fiscalQ2?

Paul Coghlan

I don’t know. I don’t think it’s going to be a dramaticchange in fiscal Q2. I think we won’t grow -- if we meet the projections wedid, we’ll grow 1% to 4% instead of 5%, so we did have some headcountadditions, as I told you, but I think overall the kind of operating margin willprobably be roughly about the same.

Romit Shah - LehmanBrothers

Okay, and if I could just lastly, you guys talked about atotal available market of around $40 billion but I guess I think of Linear asparticipating solely in the standard linear space. According to SIA, that’smore of a $15 billion market --

Robert H. Swanson

Well actually, between now and 2010, it is going to growfaster than the ASSP part of the market and so it’s actually -- it’s going tobe 40% of the market, so take 40% of $45 billion and that’s the standardproduct market.

But the other misconception is we are heavily involved inthe ASSP part as well, unless LED drivers and battery charges and PMCI chips,you don’t consider to be ASSP products. So we clearly are in ASSP products but weare very delighted that we are in the standard product are because that isgoing to grow very nicely in the next three to four years if the forecasts areanywhere near correct.

Romit Shah - LehmanBrothers

Bob, does ASSP product margins mean that they are -- are theASSP margins generally lower than your standard linear product margins, or isthat not the case?

Robert H. Swanson

Not at Linear. No, we are interested in ASSP products wherewe can make the kind of revenue that Linear expects from its allocation of itstechnical resources, the standard margins that we expect.

Romit Shah - LehmanBrothers

Okay. All right, thank you.

Operator

Next we’ll hear from Simona Jankowski of Goldman Sachs.

Simona Jankowski -Goldman Sachs

Just a longer term question on your op-ex as a percentage ofsales; when I look at that metric, op-ex as a percentage of sales, it hasactually been declining in the last couple of quarters, reversing the trendfrom the prior four quarters. I remember in the last couple of years, you didopen some design centers in Munichand Phoenix and I know that adds onsome op-ex earlier and then you see the revenue later. So should we in the nextcouple of years perhaps see your operating margin expanding as some of thosenew additions of headcount in those design centers get absorbed, or are thelast two quarters not something we should extrapolate on?

Paul Coghlan

First of all, the last two quarters, we grew 5% sequentiallyeach quarter. Quarters that you mentioned earlier to that, we didn’t have asgood a growth rate this time a year ago, so part of the reason thesepercentages look better is we have greater revenue to absorb the existing fixedcosts over.

Secondly, we did open some design centers, but going intothe future, we would expect to open more design centers as well, so we aregoing to continue to invest in good, talented technical people in the R&Darea, continue to invest in good skilled sales people and other people in theSG&A area as we grow our business and continue to grow our business whilewe can absorb those additions and probably not have the change and maybe havean improvement, a slight improvement in the operating margins. But a lot of itdepends again on how well we grow the top line.

Simona Jankowski - GoldmanSachs

Okay, that makes sense and just a second question, Paul, Idon’t know if I missed it but did you comment on the potential impact from theproposed new rule for FASB on accounting for [inaudible] converts?

Paul Coghlan

You didn’t miss it. I didn’t comment on it. Are you askingme about that?

Simona Jankowski -Goldman Sachs

Yes, I am.

Paul Coghlan

Well, first of all, there’s a proposal, there’s a lot ofpeople that have responded, including us, a lot of companies to FASB. I don’tknow how many of the folks in the audience are enlightened as to what it is butbasically we did what is called a net share settlement convert, which enabledus to have a low interest rate, roughly 3%, three-and-an-eighth percent, andthen there was a conversion element to it.

There was an emerging issues accounting task force thatlooked at the accounting for these instruments twice in the pastyear-and-a-half and in each time, suggested that the accounting shouldn’tchange.

FASB, however, right after the emerging issues task force,said it shouldn’t change in March. In July, FASB came out and said theyactually believe these instruments were a combination of equity and acombination of debt. So what they are proposing, for which they’ve askedcomments on and this is the comment period, but what they are proposing isthat, for example, if you look at Linear, their proposal would have no changewhatsoever on the cash flows of the company and no change whatsoever on thecash flows of the transaction, but they would take our $1.7 billion and divideit into two elements.

So even though I owe somebody $1.7 billion, under the newFASB pronouncement, I would show debt as roughly $1.45 billion, and I wouldshow an equity transaction, which they consider to be similar to a warrant, of$250 million and I would, on the $1.45 billion, I would extrapolate what thecost of bank debt would be to me, which would be higher obviously than the 3%,and charge that higher interest rate through the income statement. Once Isettle the transaction. Then of course, I would have not be making any cashpayments near what the accounting charge would be.

So that’s probably more accounting than most of the peopleon this call wanted to hear but to that -- have I answered your question, orhave I answered your question or have I not?

Simona Jankowski -Goldman Sachs

I was aware of the accounting. I was just wondering if youcould quantify for us the potential EPS impact per year if this were to beadopted.

Paul Coghlan

I can quantify that but I should caution you strongly thatthe impact would be on a GAAP basis. This would be another one of thesenon-cash items that probably on a pro forma basis, companies would be tellingyou that it’s had no impact on their cash flow, and the FASB itself kind ofacknowledges that it’s from a discounted cash flow standpoint in evaluating acompany. Nothing’s changed.

But given that, just if you want to know the GAAP impact, itprobably would have been roughly $0.03 per share last quarter.

Simona Jankowski -Goldman Sachs

Thank you so much, Paul. Appreciate it.

Robert H. Swanson

That’s a vicious $0.03.

Paul Coghlan

Yeah, but these things you sort of -- the way they presentit, it’s -- they tell you don’t worry about it, it’s a non-cash item and then alot of folks ask you about the GAAP number on it, so --

Simona Jankowski -Goldman Sachs

Understood. It’s a non-GAAP, non-cash number.

Paul Coghlan

Yeah, so if you are using -- if the investing public islooking at Linear on a discounted cash flow basis, this accountingpronouncement doesn’t exist.

Simona Jankowski -Goldman Sachs

That makes sense. Thanks a lot.

Operator

Next we’ll hear from Daniel Berenbaum of Caris &Company.

Daniel A. Berenbaum -Caris & Company

Thanks for taking my call. Just to go back to the Decemberquarter guidance real quick, if we could. Can you help me understand what thelevers are to hit the low end and the high end of the guidance range and maybewhat would have to happen for you to break above the high end of the guidancerange?

And then, following up on that and maybe following up onprevious op-ex questions, for the EPS guidance, is the earnings drivencompletely by revenue or are there other levers in there, things that couldchange that could also affect that separately from just a revenue? Thanks.

Paul Coghlan

Let me answer the second part of your question first. Theguidance we gave you was that we thought earnings per share and I can tell younet income would grow roughly the same as revenue in the December quarter, sowe are guiding 1% to 4%. We are guiding that both for revenue, profit, andearnings per share.

Relative to what can make it better or what can make itworse, first of all, we put a fair bit of effort into trying to give you ourbest estimate going in as to what it would be, and that is the 1% to 4% range.Obviously -- I mean, I don’t want to sound too basic, but if bookings turnedout to be better or stronger than we currently expect, we could beat thatnumber. But our prudent guidance at the moment we think is that’s the range itwill come it.

There’s no one or two things sitting out there like on the-- if your question is are there possible huge wins that could come in thequarter and ship in the quarter that we’re hoping to win but maybe not in thistimeframe, I don’t think there’s major things like that that could surprise youby the end of the quarter.

Daniel A. Berenbaum -Caris & Company

Okay, well, I guess maybe not actually just thinking aboutwins but also about certain product areas that you are more or less concernedabout and where do you have more certainty than other areas, maybe?

Paul Coghlan

Generally from a product area, and certainly any new productis not going to have an impact that short a timeframe. We are very, verydiversified, so we 7,500 products, roughly. So we don’t really have what youwould classically refer to as a homerun product or two. We’ve got a lot ofdoubles in a baseball analogy, so I don’t think there’s anything from a productstandpoint that would have a dramatic shift.

Daniel A. Berenbaum -Caris & Company

Okay, great. Thanks.

Operator

Next we’ll hear from John Pitzer of Credit Suisse.

John Pitzer - CreditSuisse

Thanks. This is Deepak for John Pitzer. Paul, just toclarify, is your guidance range for the December quarter anticipate distributorinventory to be flat or down during the quarter?

Paul Coghlan

Let me rephrase your question just a little bit and thenI’ll get back to it, and I’m not trying to be impolite, but my guidanceanticipates what I think they will ship, so that I’m looking at what theyshipped last quarter to their customers and estimating what I think they willship this quarter and incorporating that in my guidance of 1% to 4%.

Inventory -- I think inventory will track what they ship butgiven my short lead times, et cetera, that doesn’t have to be. I don’t thinkthat -- the more critical bellwether element of how business is is really howthey are shipping in the quarter and how they will ship in the quarter and Ihope I am wrong, but historically they have always been down and my guess isthey will be down a bit this quarter.

Robert H. Swanson

In their shipments out.

Paul Coghlan

In their shipments out.

Robert H. Swanson

Which is almost unrelated to the inventory.

Paul Coghlan

Did that help or is there something specific I’m notaddressing?

John Pitzer - CreditSuisse

No, that helps. And just a quick follow-up on that, Paul;did you say what your expectations were for your own inventories for December?

Paul Coghlan

We didn’t but we think it will be flat.

John Pitzer - CreditSuisse

Okay, that’s all I had. Thank you.

Operator

Next we’ll hear from Chris Danely of J.P. Morgan.

Chris Danely - J.P.Morgan

Thanks, guys. Can you talk about where you expect grossmargins and options expense to trend over the next few years?

Paul Coghlan

Yes, the next few years -- well, option expense droppedpretty significantly this quarter because what had happened is, if you go backthree and five years to the date, we had for us relatively large option grantsin those specific quarters that then came out of the calculation under FAS-123Rfor stock-based compensation.

Going forward, certainly in the near future, most of thegrants we had when you go back three and five years, primarily five years,quarter to quarter were more consistent, or the numbers were in a closer,tighter band than that one particular grant.

So what I think going forward is stock option basedaccounting expense will probably start to pick up again from what is now a bitof a low point, but not pick up very -- what you would consider to be verydramatically, certainly nowhere near the number that it dropped this quarter itwon’t increase next quarter on a quarterly basis.

But again, I should emphasize to you stock-basedcompensation is one element of compensation. We also have profit sharing and wehave other variable costs such as that.

Chris Danely - J.P.Morgan

And does your guidance take into a slight increase in optionsexpense?

Paul Coghlan

Yes, it did.

Chris Danely - J.P.Morgan

Okay, great, and then on the gross margins?

Paul Coghlan

You know, we’ve been telling you folks for years that we’vegot a really good business model that the way we kind of evaluate how good wedo things is our gross margin, and that’s remained very consistent, so we don’treally expect much of a change in that. That is really kind of cultural to thebusiness to invent unique things that are needed in the high performance marketfor which the customer is willing to pay us a fair price.

Chris Danely - J.P.Morgan

So right around the 77% to 77.5% range?

Paul Coghlan

Yes, it was 77.2% this quarter.

Chris Danely - J.P.Morgan

Yeah, great and then last question, on future uses of cash,now that you are through the ASR but starting to build up the cash quitenicely, as you guys tend to do, how do you look at putting future uses of cashto use and do you have some sort of payout ratio? Can you just compare andcontrast raising the dividend versus more buy-backs in the future?

Paul Coghlan

Well, we have been and continue to be committed to thedividend program, so we kind of view those as independent of one another. Whenyou have enough cash generation, we can view it that way.

We started the dividend in 1992 and we’ve increased it everyquarter since then -- every year since then, pardon me, and we would hope tocontinue that.

Relative to cash -- so that’s independent and something wethink is key for us to continue to do and for you as investors to understandthat we do pay a dividend, and that the yield is relative to bank debt -- notvery high, but it is actually pretty close to some of the converts out there.

Secondly, relative to buy-backs, we said earlier we think wewill be buying back the amount of shares we are going to be issuing, orsomething in that range. Relative to stronger buy-backs beyond that, we reallyneed to work our way through the ASR first, so we are kind of committed tofinish this ASR, which will take place through all of this quarter. And thenafter that, I think what we do is we will look at the conditions in the market,look at the price of the stock and then make the decisions at that time.

We had adopted for many years a policy whereby we boughtback a certain amount of shares, a relatively similar amount of shares everyyear and that didn’t seem to have much of an impact on the investmentcommunity, whereas when we bought a significant amount back, that had a bigimpact.

So we need to look at what’s gone on in the investmentcommunity. We need to look at the price of the stock. We need to look at thebusiness outlook and make the decisions at that time accordingly.

Chris Danely - J.P.Morgan

Thanks.

Operator

Next we’ll hear from Gus Richard of Broadpoint Capital.

Gus Richard -Broadpoint Capital

Thanks for taking my question. Just real briefly on thecompetitive landscape, there’s been quite a bit of chatter about increasingpricing pressure from TI. I know you guys have competed with them for quitesome time and was wondering, have you seen any change in their behavior overthe last several quarters and is that going to cause you to have to change yourbusiness model in any manner, shape or form?

Lothar Maier

The competitive landscape for us really hasn’t changedsignificantly. The competitors that we’ve had in the past are still thecompetitors that we have today, so I think there is really nothing you should readinto that, that there is some change in how we behave relative to our pricing.

We price our products on the performance and the value thatthey bring our customers and we don’t price it based on really what ourcompetitors are doing, so I wouldn’t read much into that.

Gus Richard -Broadpoint Capital

Have you seen any change, particularly in terms of TI andtheir aggressiveness in pricing?

Lothar Maier

I would have to say I am not aware of any changes that we’veseen.

Gus Richard -Broadpoint Capital

Thanks so much.

Operator

[Rod Finglass of Tribium Capital]. Your line is open.Hearing no response, we’ll move on to David Wu of Global Crown Capital.

David Wu - GlobalCrown Capital

Good morning. Can you --

Lothar Maier

It’s very early. It’s one in the morning here.

David Wu - GlobalCrown Capital

Well, you know, I’m on my second cup of coffee. I am surethat you folks are on your third, but --

Robert H. Swanson

And looking forward to a scotch.

David Wu - GlobalCrown Capital

You mentioned one word about the contract manufacturers,because if we look at the inventory levels in the distribution chain, the placewhere there does appear to inventory relatively -- you know, it’s really in thecontract manufacturers as opposed to distis. Those guys have always have verylean inventory but how does the contract manufacturer guys look to you folks?

And the second one, a follow-up, is on the question of TI. Ithink the TI story is that they got more salesmen than everybody else combinedand they now have a linear portfolio that the salesman is not afraid to go andpeddle. And in many cases, they lead with linear as opposed to lead with DSP.If you look at the numbers, they have done pretty well over the last couple ofyears. I was just wondering whether that is going to be a factor in themarketplace, i.e. they have more sales feet on the street than you do.

Lothar Maier

I don’t think that’s -- like I mentioned earlier, I don’tsee there’s really much change. I mean, they’ve always had more sales people.It’s not just sales people that sell products. You have to have the products tostart out with and number two, you have to have the sales people who areskilled to sell those products and quite frankly, Linear’s sales team is atechnical engineering sales team, not just a sales team.

You know, we’ve heard that TI has been more aggressive inthe marketplace but I think that’s a bigger issue with our competitors than itis with us.

David Wu - GlobalCrown Capital

Okay. What about the contract manufacturers inventorylevels? How does that look to you folks into Q4?

Lothar Maier

We don’t have a lot of insight into how much inventory thecontract manufacturers carry and how much they carry on hand for the holidayseason, so that’s not -- we’re probably not the best people to ask on thatquestion.

On the other hand, we don’t have any indications that thecontract manufacturers are in an inventory-rich position, other than just tosupport the normal build-up relative to the holiday demand.

I’m not sure I answered your question but that’s not an areawhere we’ve got a lot of insight.

Maybe to add a little bit, this time a year ago, thereseemed to be a lot more noise around contract manufacturer and contractmanufacturer inventory levels, external to us, so we don’t here as muchnegative comments as we did a year ago.

David Wu - GlobalCrown Capital

I was just wondering in terms of distribution channel, whatrough order of magnitude is contract manufacturer for you?

Lothar Maier

Vis-à-vis distribution?

David Wu - GlobalCrown Capital

Vis-à-vis the total. I mean, distributors are really key,go-to-market channel.

Lothar Maier

I could only maybe give you my best guess. I don’t think weactually calculate that number but I would say 40% of our business goes down inAsia and I would say probably a large percentage of that business is throughcontract manufacturers and then the rest of the world, maybe 50-50 but again, Idon’t have hard data on that.

Paul Coghlan

But it’s a significant number.

Robert H. Swanson

Maybe I don’t understand the question, the majority ofshipments that go to contract manufacturers are direct shipments from us, notserved via a distribution channel.

David Wu - GlobalCrown Capital

I see. Okay, got it.

Robert H. Swanson

So a small percentage of the sub hub of the contract manufacturersget their products through distribution. The vast majority come directly fromus.

David Wu - GlobalCrown Capital

Okay, so really if I take a look at your business and say if-- I guess if my memory serves me correctly, about half of your business, youship direct. The majority of that half is going to contract manufacturers.That’s the way to look at it?

Lothar Maier

I don’t know if we know that, per se. We know that 40% ofour business gets shipped into Asia and we know that a big portion of that isprobably going to contract manufacturers. I think that’s the data point that wehave.

Paul Coghlan

David, you are asking us a lot of questions on contractmanufacturers. Just let me make sure we are clear with you -- we spend adisproportionately greater amount of time with the OEM that is going to use thecontract manufacturer in designing in our parts than we do worrying about thequarterly inventory that the sub he picks will carry in this part, because thatover the course of the year tends to sort itself out.

Robert H. Swanson

Yeah, but again, the business from the large OEMs that isbeing manufactured by a sub-contractor, we get the order from the OEM, ship itdirectly to the sub-contractor. Very little of it gets shipped to a distributorand then goes to the sub-contractor.

David Wu - GlobalCrown Capital

Okay, great. Thank you.

Operator

Next we’ll hear from [Satish Atavel] of KSA Capital.

Satish Atavel - KSACapital

Good morning, gentlemen. Paul, you may have addressed this beforebut did you comment on ASP during the quarter?

Paul Coghlan

Yes, I said it went from $1.57 to $1.55.

Satish Atavel - KSACapital

Okay, great. And then the second question I have is I thinkin the past, you have said that you would consider at some point buying backthe convert. Is that something that you still think about or plan?

Paul Coghlan

Just so we are clear, what we said in the past was that whenthe convert matured, what we would do is we would have enough cash, webelieved, to settle the -- at least the principal part and hopefully, if it’sin the money, the money part of it. But we did not say we were going to buythem back early, if that’s your question.

Satish Atavel - KSACapital

Okay, great. Thank you.

Operator

(Operator Instructions) It appears there are no furtherquestions at this time. Mr. Coghlan, I’ll turn the conference back over to youfor any additional or closing comments.

Paul Coghlan

Thank you very much for your attention. Again, we had a goodSeptember quarter. We feel very good about our business. We think the issuesthat investors had relative to how we utilize our cash much less extend tostock option back-dating, our margins and our growth, we all feel prettyoptimistic that we are in good shape.

We wish you all a good day and thank you for your attention.Bye-bye.

Operator

That does conclude today’s teleconference. Thank you all foryour participation. You may now disconnect.

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