Linear Technology Corporation Q4 2008 Earnings Call Transcript

Linear Technology Corporation (LLTC)

Q4 2008 Earnings Call

July 23, 2008, 11:30 am ET

Executives

Paul Coghlan - Chief Financial Officer

Robert Swanson - Executive Chairman

Lothar Maier - Chief Executive Officer

Analysts

Craig Hettenbach - Goldman Sachs

Tore Svanberg - Thomas Weisel Partners

Doug Freedman - AmTech Research

Ross Seymore - Deutsche Bank

Sumit Dhanda - Bank of America Securities

Joanne Feeney - FTN Midwest

Chris Danely - JP Morgan

Uche Orji - UBS

John Pitzer - Credit Suisse

Craig Ellis - Citi

Michael Mcconnell - Pacific Crest Securities

David Wu - Global Crown Capital

Craig Berger - FBR Capital Markets

Steve Smigie - Raymond James

Phil Marriott - ASP Advisors

Gus Richard - Piper Jaffray

Presentation

Operator

Good day, everyone, and welcome to the Linear Technology Corporation Fiscal 2008 Fourth Quarter Earnings 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.

Paul Coghlan - Chief Financial Officer

Hello. Good morning. Welcome to the Linear Technology Conference Call. I will give you a brief overview of our recently completed fourth quarter and 2008 fiscal year-end and then address the current business climate. We will then open up the conference call for questions to be directed at Bob Swanson, our Executive Chairman; Lothar Maier, our CEO; or myself. I trust you’ve all seen copies of our press release which was published last night.

First, however, I’d 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 described in our press release issued yesterday, we refer you to the risk factors listed in the Company’s Form 10-Q for the quarter ended Marc 30, 2008, particularly management discussion and analysis of financial condition and results of operations. Secondly, SEC regulation FD regarding selected disclosure influences our interaction with investors.

We’ve opened up this conference call to enable all interested investors to listen in. The press release and this conference call will be our form to respond to questions regarding our estimated financial performance going forward. Consequently, should you have any questions regarding our estimates of sales and profits or other financial matters for the upcoming quarter as well as how they might impact our income statement model and our balance sheet, this is the time we are free to respond to these questions.

As a reminder, last year in April 2007, the Company entered into a $3 billion accelerated share repurchase for ASR transaction funded by 1.3 billion of the Company’s own cash and 1.7 billion of convertible debt. While this has had little impact on the comparability of Linear’s financials from Q3 to Q4 since the AR occurred in April last year. It has however had significant impact on the year-over-year comparability between Q4 of this year and Q4 of last year and particularly the comparability of fiscal 2008 when compared to fiscal 2007. Specifically interest income decreased, interest expense increased, and shares outstanding were reduced by 27%. The resulting impact on EPS has been positive.

Now, going into the quarter and the year. Starting with the just completed fiscal fourth quarter, sales increased from the previous quarter within the range of 1 to 5% that we had forecasted in our last conference call. Revenue was 307.1 million, up 3.1% from revenue of 297.9 million for the previous quarter and for the first time in our history quarterly revenues have exceed 300 million. Net income increased 4%; earnings per share 4.5% being $0.46 up from $0.44 last quarter.

On a pro forma basis, without the impact of stock-based compensation, earnings per share would have been $0.51 versus $0.49 and net income would have been 114.4 million versus 110 million in the March quarter. So the impact of stock-based compensation was 11% of net income or $0.05 at the earnings per share level. For the quarter just ended, our GAAP return on sales was 33.6% and our pro forma return on sales was 37.3%.

Net income for the quarter was positively impacted by both the lower tax rate and by a modest gain from the sale of a strategic investment in a private company. The lower tax rate resulted from a discrete tax benefit related to foreign source income. These gains which were reported below operating income were partially offset by an increase in legal expenses reflected in operating income.

These increased legal expenses pertained to trial involving intellectual property, the outcome of which was favorable to us and that the jury return to verdict that our underlying patent was valid and had been infringed. However the associated legal expenses were abnormally high on a quarterly run rate basis.

Other line items within the income statement were generally in line with previous quarters. Gross margin decreased to 77.3% from 77.5% in the quarter primarily due to higher currency and raw material costs.

Operating expenses as a percent of sales increased from 28.5% to 30.1%, primarily due to the previously mentioned legal cost and due to high year end sales commissions. The resulting operating income decreased from 49% to 47.1%. However, we currently expect this to improve next quarter as legal expenses returns to more historic levels.

During the quarter, the company’s cash and short-term investments increased by 58.8 million, net of spending 48.3 million to purchase approximately 1.3 million shares of its common stock. For the 89th consecutive quarter, the Company had positive cash flow from operations. The Board of Directors again authorized the Company to pay a cash dividend of $0.21 per share. The dividend will be paid on August 27, 2008 to stockholders of record on August 15, 2008.

During the quarter, bookings increased and we again had a positive book-to-bill ratio. On an end market booking basis, we saw bookings improvements in our major end markets of industrial and communications. These improvements were partially offset by a reduction in the automotive end market. Computer, military and high-end consumers were generally unchanged in the quarter as a percent of bookings.

Our ending on-hand inventory at distributors is within historical turns levels. Cancellations are still minor and lead times have remained unchanged at 4 to 6 weeks.

June was also the end of our fiscal year. Generally fiscal 2008 was a good year for us. In a difficult macroeconomic climate we grew revenues 8.5%, substantially more than the overall market growth. This sales growth aided by the previously discussed accelerated share repurchase that we did at the end of fiscal 2007 enabled us to grow earnings per share 23% over fiscal 2007. We maintained our successful margin structure by reporting 48.4% operating margin similar to last year.

However net income decreased due to lower interest rate income and higher interest expense on the funds used to finance the purchase of 83.3 million shares of approximately 27% of our outstanding shares.

In summary fiscal 2008 revenues were record 1,175,153,000 and net income was 357,613,000, a 33% return on sales and diluted earnings per share was a record $1.71. Our strategy of diversification by geography and end markets emphasizing more traditional Linear end markets contributed to the record annual revenues and earnings per share.

Looking ahead to the June quarter, given the concerns about the economic difficulties particularly in the United States, forecasting future results continues to be a challenge. Well we had a positive book-to-bill ratio for the June quarter, the summer or September quarter is typically a slow quarter for industrial and communication infrastructure business. However, we expect the September quarter to have some strength in certain high-end consumer. Consequently, we presently estimate that revenues and income before taxes will be flat to up 2% sequentially from the June quarter.

Now, I would like to address the quarter's results on a line by line basis. Starting with bookings. As I stated earlier, bookings increased over the previous quarter, cancelations were minor and we had a positive book-to-bill ratio. Demand created bookings were up both in the United States and international geographic areas. At this time, every quarter we give you a breakdown of our bookings percentages by end markets to give you insight into those markets that drive our business.

Industrial and communications continue to be our largest areas. Each grew well within the quarter. Industrial increased from 32% to 33% of our business. This increase was across a broad cross section of our customer base. Communications grew from 35 to 36% of our business.

For us, the three significant areas within communications are: cell phone and telecom infrastructure, networking and cell phone handsets. This quarter the strongest area was cell phone handsets, which grew from 9% to 11% of our business due to our success in the 3G smart phone area. Cell phone and telecom infrastructure remain unchanged at 10% of our business. Networking decreased 1 percentage point from 16% to 15% this quarter. Last quarter had been particularly strong and the return to 15% of bookings is more representative of our performance over the past two years.

Computer at 12% remains unchanged. Automotive decreased from 10% to 8% of our business due to a reduction in aftermarket navigation device systems. However, automotive projects to be an area of growth for us in many applications and we continue to believe it will evolve to double digit percentages of our business.

High end consumer decreased going from 6% to 5% as we continue our strategy of focusing only on those areas where we offer a sustainable technological advantage and migrating away from price driven commodity opportunities.

Finally, the military products at 6% increased 1% from last quarter and is an area of increasing opportunity for us. On an annual fiscal year basis, industrial was 32% of our business, communications was 34% with cell phone and telecom infrastructure being 10 of the 34 percentage points, cell phone handsets being 9 and networking being 15, computer was 12% of our business, automotive was 10%, high end consumer 7%, and the military/satellite area 5%.

In summary, we believe we have very good diversity by end markets, which contributes to our leadership positioning and high performance analog. Note that 53% of our bookings were created internationally, up slightly from last quarter.

Moving from bookings to sales. As I said earlier, product sales grew 3.1% from the prior quarter and 14.5% from the similar quarter in the prior year. Sales grew both domestically and internationally. Asia was our strongest area, improving from 37% to 38% of our sales. USA remains at 30% while growing steadily in absolute dollars. Japan decreased from 14 to 13% while remaining essentially unchanged in absolute dollars. Europe remained at 19% of our sales. On an annual fiscal year basis, USA was 30% of sales, Europe 18%, Japan 13% and the rest of world primarily Asia Pacific was 39%.

Gross margin: Gross margin was 77.3%. This impressive number validates our strategy of selling unique high performance analog semiconductors into a broad customer base. This gross margin percentage decreased by two-tenths of a point this quarter. This decrease was largely due to a weaker US dollar in the quarter and increased gold and other raw material costs, which added to our manufacturing expense base.

ASP increased to $1.61 from $1.57 last quarter.

R&D. Research and Development at 51.9 million increased $2.3 million and also increased slightly as a percentage of sale from 16.7% to 16.9%. Increases in engineering headcount, mask and legal costs were the largest contributors to the rise in R&D expense.

SG&A. Selling, general and administrative costs at 40.6 million increased significantly by 5.2 million and concurrently increased as a percentage of sales from 11.9 to 13.2%. As discussed earlier, legal expenses and to a lesser extent year-end sales commission costs dominated this increase. Next quarter, legal expenses are currently estimated to return to more historic level.

As a result of the above, operating income decreased by 1.1 million or less than 1%. Operating income as a percentage of sales at 47.1% although down from 49% last quarter continues to be industry leading performance.

Interest expense at 14.4 million was similar to last quarter. Interest income of 9.1 million increased 1.7 million due to a gain from the sale of a strategic investment in a private company. Interest income itself was partially affected by a decrease in the average rate from 3.4% to 2.96% in the quarter due to the reduction in Fed fund rates over the last six months.

Our tax rate was 26% versus 28.5% last quarter and an effective rate of 29. We had a non-recurring discreet item of 3.5 percentage points related to foreign source income. Going forward, we expect our effective rate for fiscal 2009 to be approximately 29.5% to 30%. However, just as happened in 2008, discreet quarterly items may impact that. As disclosed in our third quarter 10-Q, the IRS has disputed our export tax benefit for certain tax years. However, this issue is now being considered by IRS appeals. The major tax savings that currently support our effective tax rate are: the benefits from our tax holidays overseas, our tax exempt interest expense, and our domestic manufacturing tax benefits.

The resulting net income of 103.1 million is an increase of 3.9 million from the previous quarter due largely to the increase in sales and the lower tax rate, partially offset by higher legal expenses. On a pro forma basis before stock-based compensation, net income would have been 114.4 million versus 110 million last quarter.

The average shares outstanding used in the calculation of earnings per share increased by 525,000 shares during the quarter. The final benefit of the ASR and shares was approximately 1.1 million shares this quarter. In addition, the company bought back approximately 1.3 million shares in the open market. These reductions were partially offset by stock option exercises during the quarter. The impact of the ASR is now largely accounted for. We expect the diluted shares outstanding next quarter to be roughly similar to this quarter.

The resulting earnings per share was $0.46, an increase of 4.5% from the prior quarter and 28% from the $0.36 in the fourth quarter of last year. The increase over the prior year was due both to the increase in sales and the accretion benefits from the company’s 3 billion ASR last April. Earnings per share for the quarter was benefited by roughly $0.01 due to the items previously mentioned unique to the quarter. So modeling earnings per share going forward, this $0.01 benefit will probably not repeat.

Finally, on a GAAP basis, our return on sales was 33.6%, up from 33.3% last quarter.

Moving to the balance sheet: Cash and short-term investments increased by 58.8 million. During the quarter, the company bought back roughly 1.3 million shares of its common stock for $48.3 million. $134.7 million were provided by operations. 47.6 million was paid in cash dividends and 19.5 million was used to purchase fixed assets. Our cash and short-term investment balance is now 966.7 million and represents 61% of total assets. Accounts receivable of 161.5 million increased by 12.5 million from last quarter. This increase was mostly a function of the timing of collections as our fiscal month end ended prior to the calendar month end and some customers pay on the last day of the month. Our day sales and accounts receivable were 48 days versus 46 days last quarter.

Inventory at 56 million increased 1.6 million from the 54.4 million reported last quarter. Most of the increase was in finished goods as raw materials and [whip] were essentially unchanged. Our inventory turns was 5.1 times, essentially similar to last quarter’s 5 times.

Deferred taxes and current assets increased by 12.5 million from the March quarter, primarily due to an increase in prepaid taxes.

Property, plants, and equipment increased by 9.6 million. We had additions of 19,546,000 and depreciation of 9,949,000. Most of the additions were for test production, fab equipment and for building improvements for clean room expansion in our Milpitas, California fabrication plant. For fiscal 2008 capital additions were 35,267,000 and depreciation was 40,782,000. We plan to spend roughly 65 million in fiscal 2009 for capital additions and have depreciation of roughly 41 million.

Other non-current assets which totaled 77.3 million decreased by 13.5 million, primarily due to the sale of an equity investment in a private company.

Moving to the liability side of the balance sheet; accounts payable increased 4.2 million primarily due to the increased capital equipment purchases mentioned above. Accrued income taxes, payroll, and other accrued liabilities increased by 13.2 million. The largest items here are our profit sharing accrual, income taxes payable and accrued interest payable on our convertible debt.

Our profit sharing accrual increased as we accrued profit sharing quarterly, but make payments semiannually in the first and third fiscal quarters. This was partially offset by decreases in our interest payable accrual on our convertible debt, which we also accrue quarterly; however, make payments in the second and fourth fiscal quarters.

Finally, our income tax accrual was relatively unchanged from quarter-to-quarter. Deferred income on shipments to distribution hardly changed this quarter as our shipments to the US distributors were roughly the same as what they shipped out to their end customers. We continue to closely control our inventory distribution to properly position the inventory without any unneeded buildup.

Deferred taxes and other long-term liabilities increased by 9 million due to several tax-related items, the largest of which relates to deferred tax arising from our convertible debt.

Changes in the stockholder equity accounts were primarily the result of the usual quarterly transactions for net income, for dividends paid, and employee stock option activity. The Company announced it will again pay a $0.21 per share quarterly dividend having raised it in January from $0.18 to $0.21 per share. The Company began paying a dividend in 1992 and has increased it every year since.

Looking forward, as you can tell from my previous comments, June was a reasonable quarter for us, especially given current economic conditions. Business improved as sales, net income, cash and short-term investments all increased. The Company’s bookings grew in the quarter and our turns requirement for the September quarter is similar to last quarter. Turns or orders that must be both booked and shipped in the quarter. Our lead times are 4 to 6 weeks, which can support this level of turns as we have often done in the past.

Looking ahead to the September quarter, inventory levels in the marketplace appeared to be generally imbalanced. So our concerns are less about inventory levels in the channel than about general macroeconomic conditions particularly in the USA. However, from a Linear-specific point-of-view, September should be a reasonable quarter for us. We had positive book-to-bill ratio in the June quarter, and we have gotten off to a good start so far in July.

However, the September quarter is typically a slow quarter for industrial and communications businesses particularly in Europe. Offsetting this we expect the September quarter to have some strength in certain high end 3G handsets. Consequentially, weighing all these inputs with some caution about the macroeconomic environment we presently estimate that revenues and income before taxes will be flat to up 2% sequentially from the June quarter.

In summary we are in a strong segment of the electronic marketplace, namely high performance analog where we continue to be a market leader. We’re optimistic about the long-term and mid-term growth opportunities for our markets and for Linear.

From an investment standpoint, we believe we are well positioned vis-à-vis investor concerns. We have reduced our share count within this past year by roughly 27%. We have significantly grown our dividends for the 16th year in a row. Despite investor concerns to the contrary, our margins have remained strong our operating margins are roughly twice that of our competitors.

We just completed our fifth consecutive quarter of sequential quarterly growth. We are growing probably at a rate that will be judged to be faster than the overall market and faster than most of our competitors.

We have gradually over the last several quarters diminished our exposure to the commodity consumer end market while increasing our presence in more technology rich end markets such as industrial, communications, and automotive on our annual basis. In addition to the 92 million of sales growth we achieved in 2008, we replaced roughly a similar amount of business in the same year.

We believe the trends are positive for primary end markets that constitute a significant portion of our business. There appears to be a worldwide trend for large scale infrastructure build up both in upgrading developed nations as well as in developing emerging countries. Higher oil prices are both driving the automobile industry for more hybrid and electric vehicles sooner and driving more efficient oil exploration.

Finally, environment sensitivity is creating demand from lower power consumption, alternate power sources and pollution reduction. These opportunities are worldwide with Japan, China, and Europe leading the way in opportunities for Linear Technology.

We feel confident in our strategy and its ability to lead to steady growth. We represent approximately 1.2 billion in sales out of a $37 billion market, which is expected and projected to grow roughly 1 billion in 2008; therefore, we have plenty of headroom to execute our strategy.

I’d now like to open up the conference call to questions to be addressed by either, Bob, Lothar, and myself. Hell we would now like to take questions from either, Bob, Lothar, or myself.

Question-and-Answer Session

Operator

Thank you. (Operator Instruction). We will go first to Craig Hettenbach with Goldman Sachs.

Craig Hettenbach

Yes, thank you. Lothar, the last couple of course you have talked about weakness in the US that you posted respectable growth. Can you just discuss the influence of demand overseas and it looks like one of the main distributors this morning talked about growth in the A-Pac region. So I just want to get your color on the growth you are seeing kind of maybe domestically for us internationally?

Lothar Marier

Yeah, we grew both in the fourth quarter both international and domestically. So we have seen really kind of strength on a broad base, so it doesn’t seem to be concentrated in anyone particular end market. It doesn’t seem to be concentrated in anyone geography. It's just kind of a general improvement in sales that we see both around the world. Certainly there are certain products that have continued to do well and we continue to sell well into last quarter industrial and communications were strong for us around world. But I can’t pen it on, which I think is probably good thing in any particular one big opportunity that’s driving our growth. It seems to be pretty broad based and seems to be concentrated in the market that we are most interested in seeing our growth and that’s in the industrial and communication areas.

Craig Hettenbach

Okay. If I could followup, Paul, in terms of the end market focus in retooling and fine tuning there, do you think you are pretty much through that process in terms of where you want to be from in end market perspective?

Paul Coghlan

No, I think it’s a continual work in process for us. I mean we are concentrating much more so on the traditional linear markets industrial, communications, infrastructure et cetera. Now we continue to be opportunistic in the consumer markets where there is a technology rich opportunity with some sustainability to it. But I mean these are you are kind of constantly evolving in this process. As we said in our call, we replaced a fair bit of business last year. We probably still have a little more to replace next year. So it's a work in process, but we think we are making good progress.

Craig Hettenbach

Okay. And then last one if I could, given that your growth in September quarter is going to come from consumer or high end handset, can you just speak to some of the visibility or confidence you have in some of those products that are expected to ramp in the September quarter?

Paul Coghlan

Well gain, just to maybe to broaden the question. The September quarter is usually slower for industrial and communications particularly with some slowness in Europe. On the other hand some areas in Asia, Japan you know, we should have some reasonable growth in the quarter. And we are going to benefit from some consumer opportunities particularly in handset area and we are dependent to some extent on how those products rollout. But from this standpoint, we factor what we things is a reasonable estimate into our forecast and are actually confident we will meet that.

Craig Hettenbach

Thank you.

Operator

Thank you. We will go next to Tore Svanberg with Thomas Weisel Partners.

Tore Svanberg

Yes, thank you. First of all Paul you mentioned you have seen a pretty good start to the quarter with some strength and alike. Give maybe a (inaudible) please?

Paul Coghlan

Well, it's pretty basic, I mean the booking so far for us in July have gotten off to a reasonably good start. It's only a couple of weeks into the quarter, but for us sometimes the summer had some -- the early summer is some doldrums so far. But I mean its early to extrapolate from that, it’s just a data input to share with you.

Tore Svanberg

Great. And I think handsets as a percentage of bookings have been as high as 19% historically. Now with 3G finally starting to take off should we expect your exposure to handsets to increase over the next couple quarters?

Paul Coghlan

Well, I doubt it will ever get more than that. I am sure it won't get to 19% ever again. I think, it could increase a little bit, but primarily in the short-term and then probably revert back to kind of where it is now.

Tore Svanberg

And then finally the automotive weakness is that more end market related, interim related or there is some programs that have coming to an end specifically following attack?

Paul Coghlan

I think that’s more -- its more our involvement in certain aftermarket automotive navigation system products, I don’t think it’s the overall aftermarket in that area. I think it's just Linear's involvement and that’s become more commoditized.

Tore Svanberg

Great, thanks. Congratulation, on the results.

Robert Swanson, Jr

This is Bob. I just want to add a little bit of color to the 3G story. We think, we are optimistic about 3G goes beyond the handset. In fact our principal optimism is about infrastructure that require just for 3G.

Tore Svanberg

Great. I appreciate that. Thank you.

Paul Coghlan

You are welcome.

Operator

Thank you. We will go next to Doug Freedman with AmTech Research.

Doug Freedman

Hi, guys thanks for taking my question. I guess, just building on what you just touched on the infrastructure for 3G. Can you talk about what your exposure is and how you have done out of China. There is a lot of concern that there has been some pretty good infrastructure builds pre-Olympics. Can you give us an update on what you are expecting for the back half of the year from that infrastructure builds?

Paul Coghlan

Yeah, I am not sure, I can give you too much color on how our infrastructure business goes relative to the China Olympics. But in generally, we have talked in the past about fact that we have had pretty extensive development efforts particularly in this peak, in the area of high speed data converters. And we have had pretty good success in getting those products designed in. We are seeing the sales results from those design-ins and we have talked about over the years that we have got a high frequency [effort] within the company, which quite frankly, we don’t talk about too much in the past because it hadn’t gained a lot of attraction. But we are starting to see some traction in those programs or those products really in the infrastructure areas. So we are a bit encouraged by that. Some of those, in fact a significant amount of that sales, we see goes international and some of it goes into China. But I don’t know how much is being driven just by the China Olympics.

Doug Freedman

Do you think there is any impact to your numbers anywhere as a result of the China Olympics?

Paul Coghlan

I think, particularly if it relates to infrastructure that would have happened a long time ago. I think that the results that we are seeing right now are probably independent of the Olympics.

Lothar Marier

So aside from air fairs to our ASM conference for our Chinese guys, we don’t see too much.

Doug Freedman

Can you talk a little bit about what you are seeing sort of in the distribution marketplace, maybe just, you know, Arrow put up some good results this morning, low inventories there, margin is strong. Can you talk about what's happening in the distribution margins as far as, is it becoming more competitive to sell through distribution or are you able to still capture nice margins. What are the margins paid to distribution doing?

Lothar Marier

I don’t -- I am not aware of any significant changes in the margins that we get from a distributions. I mean they have been steady for a long time. And I can't think of any significant changes there.

Paul Coghlan

This is Paul. Doug, I don't see any changes there and I think actually, our distributors find our product line a lucrative one. So I think from a gross margins standpoint, we are probably one of, but not the highest lines they have. So again, the fact that we sell proprietary parts we sell them not only through our direct sales force but also through distribution. So I don’t think there is a lot price pressure in distribution on our parts.

Doug Freedman

Okay, Paul. And another followup question for you. You talked a little bit about the legal expense and it relating to the Jury trail. There was also as a result of that a payment for a legal expanses that was due, has that been accrued or is that something that could be in front of us pending your litigation appeal?

Paul Coghlan

The legal expenses, I referred to encompassed all of those cases, so not only the case you are talking about and both facets of that case, but some other ones, which where minor relative to that in the quarter. And that where we think where there could be some legal liability, we have a made an estimate of what that might be, and we have included that in the numbers of the quarter, but I mean, that's a difficult number to estimate, it could go from depending on the appeal that it actually revert and turn the other direction. But we have taken the conservative route and accrued something for that and that was a large contributor to why the expenses increased in the quarter.

Doug Freedman

Terrific, and I will jump back in the queue, if I need more. Thank you.

Paul Coghlan

You are welcome.

Operator

We go next to Ross Seymore with Deutsche Bank.

Ross Seymore

Hi guys, and first congrats on solid results in a pretty challenging environment for many others. Looking at the OpEx commentary and taking the legal out, Paul is there anything that you can do to help quantify that a little bit, should we thinks about the pro forma SG&A kind going back to the low 10% range where it used to be and that's kind of magnitude of legal coming out?

Paul Coghlan

Well I mean, this quarter SG&A was 13.2% Ross and the quarter before was 11.9 or 12%. So I don’t see it going back to the 10% range

Ross Seymore

But just pro forma versus GAAP so if we take out the option expense?

Lothar Marier

Okay, I have my numbers on that GAP basis

Ross Seymore

Well either way that, but how about did they go back to more like what it was in your fiscal third quarter as a percentage of sales on either GAAP or pro forma?

Paul Coghlan

Yeah I think it would revert back towards that means.

Ross Seymore

Okay. And then kind of similar house keeping issues the interest income popping up because you guys would get a one time event that probably goes back down to the same level we saw two quarters ago now, is that a fairway to think about it?

Paul Coghlan

That's a good way to think about it. Yeah probably there was also a little bit of attrition in the rate as I shared with you as you know because of the impact of Fed funds taking place. So interest income would probably go down a couple of million bugs as you do you pro forma.

Ross Seymore

Okay. And then usually at the of the year fiscal year, you guys a give us a backlog number that once a year we get it, can I get that please?

Paul Coghlan

Sure, it was 123 million.

Ross Seymore

Perfect. Well I think that’s it from my housekeeping questions. Thank you.

Paul Coghlan

You are welcome. Have a good day.

Operator

We go next to Sumit Dhanda with Bank of America Securities.

Sumit Dhanda

Yes, hi. A couple of questions Paul you talked about the fact that July is off to a strong start and you "haven't seen" anything resembling the summer doldrums yet anything in the month of June because one of your large competitors talked about a slow down in distribution in the month of June and from slide excess inventory in the channel?

Paul Coghlan

Well as we commented we didn’t see excess inventory in the channel. Relative to June is nothing you know we saw that was necessarily alarming. However, I think its fare to say the distribution channel is one of the areas we are cautious and going forward because if the impacts on the US economy what's going on. So that's one where we think it might be you know, we are not really sure how that will turnout in the September quarter. But we don’t see any reason to panic in that area. We just think there will be some stress in the US distribution but you know not great, not very significant.

Sumit Dhanda

Okay.

Paul Coghlan

Did that help answer your question?

Sumit Dhanda

I guess so maybe the way to summarize this is you haven't really seen anything but you are conscious on the US economic environment and you are worried it could cause (inaudible) in distribution at least in the US?

Lothar Maier

Yeah, but worried is maybe a strong word for us. What we do is we don’t think distribution will go back much. It could go back a little. It could be flat, so in sort of that kind of range.

Robert Swanson

One of the problems is reading distribution for the last couple of years and I have said this in last couple of conference calls is that the so much US based distribution business that goes away and it goes away none as a lost sale but it goes to some other channel, like it goes to Taiwan or winds up in China. And so it's hard to know just if it is a drop off in US distribution to US. Whether that means we have actually lost business, it's just been transferred. And I know distribution management in US is struggling with that, trying to get their arms around that.

Sumit Dhanda

Okay. I understand. The other question I had was again back to the automotive business. It seems like a fairly sizable drop as a percentage of sales in a single quarter. I know you mentioned the aftermarket navigation device segment. Sort of I mean, why I guess the sudden decision to exit that and did all these programs all of a sudden come to a halt from a Linear Tech perspective?

Paul Coghlan

Let me first address that. Sometimes these numbers get -- you get caught up a little bit in rounding. So what you had here is you rightfully so based on commons, took an absolute 2%. It actually was it rounded up last quarter and I round it down this quarter. So it's not quite as dramatic as you would think it is. Secondly, these are programs that we saw they were coming to an end for our participation in them. But we think that I want you to concentrate the overall annual number is 10% for automotive. We are confident it will go back up to 10% and actually grow beyond that, not just we have continuing opportunities in navigation systems within automotive but also because of other car applications that will start to come online. So I wouldn’t read a whole lot into that's one quarter (inaudible).

Sumit Dhanda

Okay, thank you. That’s all I have.

Paul Coghlan

You are welcome.

Operator

We will go next to Joanne Feeney with FTN Midwest.

Joanne Feeney

Thanks. Yeah, let me follow up on that auto question. So one question is can you tell whether your exposure is greater for US based car manufacturers than it is for foreign? And do you know anything about whether you are more exposed to large cars or SUVs than you are perhaps to smaller cars or even hybrid?

Lothar Maier

Well, first of all, we are probably more successful internationally in the automotive business than we are domestically and we are more successful still in higher-end cars and the features they are adding to those cars then we would be into very inexpensive cars. Now whether it comes to SUVs or whether it comes to smaller vehicles, some of our success going forward will be dependent on not so much the size of the vehicle but whether it's a hybrid vehicle, whether it's a electric vehicle and the type of features that they put in the vehicle itself. So it's difficult for us like we know sort of end applications we are going to be in, what models or what size of vehicles that application winds up in, we are not sure.

Robert Swanson

Yeah, and a lot of the opportunities that we are forecasting right now represent little or no sales. So we are talking about a penetration into new sockets that didn’t exist last year.

Joanne Feeney

So is it safe to then believe that your dollar presence in hybrid is say higher than your dollar presence in the average car that you are in today?

Lothar Maier

I am not sure about that.

Robert Swanson

Well, I would say our dollar content typically would be higher in a hybrid vehicle in general, but that’s a data point with a lot of -- not a lot of data points behind it. But I would say in general, we probably see a higher dollar content in hybrids.

Paul Coghlan

Price in hybrids currently is small, but growing.

Robert Swanson

Yeah, I think Joanne, if you look now, we are doing very well in the infotainment side of new car vehicle especially hybrid and we have some hybrid exposure and we are doing well on that. When you say -- when you talk to us two years from now or a year-and-a-half from now, whatever we will be saying then will be much more prevalent in hybrids we believe and in electric vehicles and also in other features that will be added to cost such as breaking by wire, night vision, a lot of the other features that are going to many different car.

Lothar Maier

Yeah, in many other features that will be more interesting to the smaller cars to improve mileage. We have not seen any to play as well there.

Joanne Feeney

It sounds -- yeah, that sounds really interesting. Okay then if I switch over to the outlook, can give us a sense of what your typical fiscal first quarter would look like so we know how to think about the 0 to 2% guidance you have given us. What historically more the common upside there?

Paul Coghlan

Well, that's a good very question. If you look historically at what Linear has done and we have talked to you how we are kind of reverting a little more to our historic roots of late. Historically, the summer quarter was always a slow quarter for Linear. So even in the years where for a fiscal year, we might have grown 25 or 30% for a whole fiscal year, the first quarter of that year, our growth might have been -- our first quarter, our summer quarter might have been flat to just a couple of percent. That's historically Linear. If you look at recent years with Linear, the summer quarter in years where there has been some reasonably good consumer type content whether it be in handsets or consumer devices or computers whatever that component of consumer would be, that tended to be a little stronger than historically had been for us. So I am giving you a lot input, now you are probably saying what that will mean relative to 0 to 2%. We think that the 0 to 2%, if the economies were stronger that number would be a littler better. But we think as you look at us going out, having a low summer quarter will be typical with Linear. Did that help answer your question?

Joanne Feeney

Yeah, that's really helpful. And I guess so if we want to try to quantify your degree of concern or caution about the general economic outlook, it might be that you would have guided to say, I don’t want to put words in your mouth, but maybe 0 to 3%, now you are guiding 0 to 2%. Is that about the right quantitative interpretation of our caution?

Robert Swanson

Well, when you said you didn’t want to get real specific that’s up 1 percentage points and you can't -- that’s really very fine tuned from our standpoint. Last year, we grew 5% in the summer quarter. Last year we had a little more consumer environment and last year the economy was a little better at that time. So this year, there is more doldrums around the economy. We are a little less consumer. We have some handset opportunity. So I mean, there is definitely some caution in those numbers relative to the overall economy.

Lothar Maier

That’s right. If you are waiting for the overall economy, 0 to 2% summer quarter should generate alarm.

Joanne Feeney

Generate no alarm.

Lothar Maier

No alarm. However, there is this overwriting macro issue that we ultimately get our heads around.

Joanne Feeney

Okay. And then last time on the call you talked about China slowing down a bit. Is that something you are continuing to see here of, is this concern for the economy weakness, is it really just US specific or is it a global concern at this point?

Lothar Maier

I don’t recall actually talking about China slowing down last time, but really from our perspective presently, we are actually seeing some strength in China and we have got some good opportunities particularly in the communications part of the business in China and so at least right now we are actually looking at China as being an area where we are going to see some growth.

Robert Swanson

Well, may be what you were referring to is Joanne is in the March quarter, we said that the Asia Pacific area was down as a percentage of our sale from the December quarter, which that encompasses more than just China, which it was down. But the reason it was down was the quarter prior to that is the December quarter, where a lot of goods that are sold into the holiday season that may get designed in the US or designed in other places are manufactured offshore at very -- at the most reasonable manufacturing sites which happen to be in Asia. So I think maybe you are factually right that we were down in the third quarter in our sales in say Asia Pacific, but that had more to do with just the normal seasonal holiday trend. Relative to Linear specific demand created business in China that Lothar was talking about, there was no slowdown in any of the previous quarters, actually in each of the quarters that business has been picking up.

Lothar Maier

Yeah, China was a bright spot right now for us.

Joanne Feeney

That’s great, thanks. And let me clarify for everybody. What I picked up last time was that the meliorate growth in China maybe slowing down a bit. It wasn’t that, it was slowing down in absolute terms, but growth might have been declining a bit. Is that something you are seeing, is it still growing, but growing slower?

Lothar Maier

Actually we are seeing a little bit to the opposite. We are seeing China is picking up a little bit for us.

Joanne Feeney

Okay. Well thanks for the clarity. I appreciate it.

Lothar Maier

You are welcome.

Operator

We will go next to Chris Danely with JP Morgan.

Chris Danely

Thanks guys. I guess it is sign of the times when people are asking you about your content and you peers really care about PCs anymore. I am feeling old into a…

Lothar Maier

Good point Chris. Good point.

Chris Danely

Just to keep clicking. With the increasing consumer exposure in Q3 can we expect gross margins to maybe 10, 20, or 30, something like that?

Paul Coghlan

Let's see, the gross margin -- there is kind of two aspects to it. There is what we call the standard cost and then there is the over the period cost. Standard cost could go down a little bit, maybe 0.1 or 0.2, so from 77.3 to 77.1 or 2, but then I think we might pick up some of that in our variance pools in that period. So it might go down a little bit, but I don’t think its going to be a dramatic number. We are talking in the couple of 10s to maybe nothing.

Chris Danely

Yeah, that’s helpful. And then also can you talk about how big you think this 3G phone opportunity could be for you guys. I mean we are talking a couple of percent of revenue or do you think it could be 5% of revenue in a couple of quarters?

Paul Coghlan

We prefer not to talk about that. We don’t really know how big its going to be. We would like to let that kind of play out. We don’t really know the answer to that.

Chris Danely

That’s fair. And the last question. In a little bit bigger picture longer term if we look at your margins over the next 3 or 4 years was where we are going to our long-term model. Should we expect just some rough sort of vacillations around 77.5ish on the gross margin side and 48 to 49% on the operating side just kind of sort of moving around those marks over the next 3 or 4 years?

Paul Coghlan

Yeah, I think, actually I will give you two inputs, one, I probably shouldn’t, but that well I thinks that’s for estimating purposes I think those are reasonable numbers. Internally when we talk about our plans we would hope to hit 50% or greater in the operating margin side, if we get some help on the top line. So I mean from a prudent like what's a good number for you folks to use I think your numbers are okay. You should know internally we think we can get to 50 or little better.

Chris Danely

Okay, thanks.

Operator

We will go next to Uche Orji with UBS.

Uche Orji

Thank you very much. Just it’s a direct question on gross margins again. Where does the 3G product in terms of gross margins rank within your products in general and can you just talk about handsets, because your handsets continues to grow, should we expect some kind of total change that in the gross margin range?

Lothar Marier

The 3G product that you are referring too I think on a gross margin basis it’s kind of within close band what our normal gross margin is.

Uche Orji

So it’s within complete average even at the volumes you have now, so if it increases, it wouldn’t make any change to profile?

Paul Coghlan

What you are looking like, what number range do you looking for, like give us (multiple speakers) 3 or 4% impact or it can be a couple of 10s, what's your question?

Uche Orji

Now my question is, if I go back to Chris's points about you know, if it goes on to become 5% of revenue, I just wanted to know what the gross margin impact of that could be, will it be a drag. But it sounds like you have answered that by saying it's kind of close to same as your corporate average, right?

Paul Coghlan

Yeah, I don’t think if that turns out to be very successful product, I don’t think you will have a dramatic impact on the gross margin.

Uche Orji

Okay, that’s great. Just the second question……

Robert Swanson, Jr

Yeah, I -- maybe this is too much information, maybe I should have just shut up, but the 3G opportunity -- we are going to capture that in two buckets. We are going to capture it in the infrastructure when it is in the bay station build out.

Uche Orji

Sure.

Robert Swanson

And we are going to capture some of it in handsets.

Lothar Marier

I think that the handsets margins as less than will be within -- which is very close to our average margins, the bay stations that might be a little higher. So when you average it all out will be similar to where we are now.

Uche Orji

Right now, okay. Just on the infrastructure side, I mean we are getting all kinds of -- can you just give me an idea of what kind of booking strengths you are seeing on the infrastructure side? And the reason I am asking this question is if you talk to Ericsson for example you get a sense that most of the yield out full infrastructure is pretty much largely done, but again you have -- you market (inaudible) like essentials in China. Can you talk about what demand or in terms of bookings have seen on the 3G infrastructure side now and what's your expectation for that will be say a year out, a couple of quarters out?

Robert Swanson

Well, overall the infrastructure for us has been very consistent; it's 10% of our bookings. So if you look for the year, it was 10%. If you look at the prior year, it was 10%.

Uche Orji

Sure.

Robert Swanson

When you look at things that could from your perspective, I think that could hurt that and a lot of people talk about China and the Olympics infrastructure area. What we actually see is there is a lot of new products coming into the market, products that let you for example get access to the Internet wirelessly if you have an appropriate card, things like that that are starting to stress the infrastructure, systems both here, Europe and to some extent in Asia so that my personal opinion these folks have been a little too myopic on just the Olympics but there is other things going on that could benefit infrastructure particularly 3G infrastructure.

Uche Orji

All right, great. And just one last question. I know you have explained about your industrial being slightly conservative and also what the macro issues, but on the same side, your industrial bookings grew. Is there an ageing profile within the bookings? Is it more like booking out into say December or early or -- I am just trying to translate your growth you got in bookings for industrial? And so is the fact that you are being slightly conservative than what is usually a weaker seasonal quarter for industrial. So is there something that…?

Robert Swanson

No, it's a good question. The bookings for us -- actually the answer to your question is in that reciprocal of ageing. Because our lead times are short, what we do is we get bookings that we can ship relatively quickly. So we have always told you for example the amount of turns in a quarter for Linear. It's what some people view a high number, but we have always managed very consistently too so that it's both true that we had good bookings in the industrial environment in the June quarter and it's also true that as the quarter plays out that we are in, we think the bookings in industrial and communication because of communication issues -- because of vacation issues in Europe, et cetera, will tend to slow down.

Uche Orji

Okay.

Robert Swanson

So that it's not that the bookings are ageing if anything, the answer to your question is that we have four to six weeks lead time, the bookings improvement in the June quarter some of it even shipped in the June quarter and some of it was plan to ship early in the September quarter. It's the left rest of the September quarter booking that we need to get.

Uche Orji

Perfect. Thank you very much. Thank you.

Robert Swanson

Okay. You are welcome.

Operator

We will go next to John Pitzer with Credit Suisse.

John Pitzer

Yeah, good morning guys. Thanks for taking my question. Paul, I just want to make sure I understand the moving parts in the September quarter. SG&A comes down by a couple of million as the litigation cost go away, interest income also comes down and that’s why your revenue and income before taxes is growing about at the same rate sequentially?

Paul Coghlan

Yes, I mean that in broad terms. I think the legal cost will come down a little greater with respect than the interest income will come down.

John Pitzer

And then I guess you mentioned in the June quarter that ASPs were up. Was that mix related or are you guys actually raising prices on like to like products?

Paul Coghlan

That was mix.

John Pitzer

And then...

Paul Coghlan

We are not raising price.

John Pitzer

You kind of answered the question about second half calendar year gross margins relative to mix. I am kind of curious relative to some of the variable cost increases you saw on the June quarter, what can you do in the back half of the calendar year to offset some of that?

Paul Coghlan

Well, some of it first of all was more or less a one-time event. We kind of shared that with you that some of the legal stuff we don’t expect to recur. Then there is some other costs that may get hardwired and things like raw material cost going up that US dollar if it continues to weaken and the fact that has weakened to the point it is. Those now become more fixed cost than variable costs. Things like air fare for people, there is just -- there is a lot of kind of costs that has blend into the model, but they are pretty small overall but they are 10^th here and 10^th there, maybe we are our own worst enemy in talking about two-tens differences in gross margin where other people only talk about a full point difference. But anyway, as we look out a question earlier asked, we did 47% operating margin. We have done somewhere in the 48 to 49 range or just touched 49. So we think we are going to -- we will get back up in somewhere in that 48% range next quarter.

John Pitzer

But Paul, you feel pretty comfortable in the back half of the calendar year you are not going to see big swings relative to the dollar or gold prices in you margins?

Paul Coghlan

I mean, I don’t -- if I knew the answer to that, if I knew any answer year ago, I would be a one fat cat sitting here now. So I mean I don’t really know the answer to that. Our expectation is that the dollars is maybe going to get a little weaker in one of our manufacturing areas and the other one be relatively stable. Gold prices, you know, they stabilized a bit here. All depends on the price of oil and economic events way beyond my control.

John Pitzer

And then Paul, my last question is a follow up to I think the question that Chris asked about to your 3G opportunity. If you look at the sockets you are going at after typical 3G phone, what do you guys think your dollar content could be in a 3G phone? I guess then we can make some estimates about the overall growth of that market and your share. I am just kind of curious as what kind of dollar content you are going after in that market?

Paul Coghlan

Yeah, I don’t think we are going to say what the dollar content is, but I think the point we would like to make is that really our focus is in the opportunities that we think make the most sense for the company is not so much on the handset side, but is the expansion in the non-handset, into the base station side. So for there, the content can be highly variable from one base station to the next and the products that go in the base stations are relatively high ASP and relatively high margin products, so that’s the part that we are probably the most interested in.

John Pitzer

Perfect. Thanks guys. I appreciate it.

Operator

We will go next to Craig Ellis with Citi.

Craig Ellis

Thanks guys. Congratulations on hitting 300 million a quarter.

Robert Swanson

Thanks Craig.

Craig Ellis

Paul, the first question is just on CapEx. The outlook for next year at 65 million is up from 35 this year. So how should we look at that? Is it a statement about confidence in growth or are we really just looking back towards CapEx levels that you have prior to this last year and setting the bar at that level?

Paul Coghlan

Yeah. You probably shouldn’t read too much in the difference between the CapEx between the two years and we were really forecasting that CapEx last year would be bigger than the 35 million. And what really happened is we have a couple of pretty big projects that we thought the cost would -- more of the cost would go into '08 and then it really did. So it's doing an expansion in one of our wafer fabs and redoing one of our design buildings and it just took a little bit longer to do the design and the architecture and getting the improvement approvals from the Citi and so those costs are really moving from '08 to '09

Craig Ellis

So Lothar, as we think about that 65 million, how much of that would be for incremental wafer capacity versus for buildings et cetera

Lothar Maier

Well, there really isn't I would say a huge amount of it for capacity issues because we have talked about in the past that we are pretty well tooled up from a bricks and mortar standpoint, from a capacity standpoint. A big part of the cost is we have got a new technology node that we are implementing in one of our wafer fabs and that's using a big chunk of that money.

Craig Ellis

Okay. And then just switching over to just the cash balance, we are moving back pretty close to a $1 billion now. The company has been modestly buying back stock. But Paul, can you just walk us through how you are thinking about some of your alternatives as you look at that cash balance growing?

Paul Coghlan

Sure. One of the alternatives we have been, you are correct, buying back stock to the extent that we had additional stock options. We have -- we do -- we are approaching a billion. We do have debt on the balance sheet as you are aware. We have 1.7 billion in debt. Some of that 700 million of that will need to be paid off in about in a couple of years so that and then 1 billion shortly thereafter. So we are looking at whether we want to be in a situation to have enough cash to pay that off or they want to just refinance it and do another ASR if we thought that were appropriate. So we kind of look at cash as being giving us a lot of flexibility at the moment. So we are very committed to the dividend program. We are committed to buying back shares to the extent we grant extra shares. Relative to doing anything extra with that, we want to see how the market overall has reacted to the ASR and just what's the right thing to do at the right time.

Craig Ellis

Okay. Thanks Paul.

Operator

We will go next to Michael Mcconnell with Pacific Crest Securities.

Michael Mcconnell

Thanks Paul. Just some clarification on the guidance, on the pre-tax income the flat to up 2% is that 200 basis point potentially of margin expansion on basis point percentage or is this the tax you are taking the dollar terms and looking at them up flat to 2% on a sequential basis. I think just can't get there with the dollars. But if I take your all OpEx and I would just put like 86 million in my model for the September quarter and then take interest income to negative 7 million, I can't get there. Is there something I am missing?

Paul Coghlan

I don’t want to exactly work through year model with here but I mean what I have these I had additional cost in the fourth quarter that I don’t think we repeat in the first quarter in the operating income line. And I have interest income that will go down and I think the net of those two is probably somewhere in the 3 million range. So I guess, if you add that to your model you might see how that works.

Michael Mcconnell

Okay, that’s helpful. Thank you.

Operator

We will go next to David Wu with Global Crown Capital.

David Wu

Yes I got one and two questions really. Paul can you just -- you mentioned the net number between the legal expense and interest income is $3 million? And did I hear correctly? Because I thought that the interest income the one time was less than 2 million and the legal expense I assume is between 2 and 3. How does the math really work? I must have got some numbers wrong?

Paul Coghlan

If you look at we had more than 1 legal case. If you look at all of the legal expenses and you look at the kind of one time expenses that happened in the fourth quarter primarily go some other once that we alluded too and you add all of those up, they are roughly $5 million more that 5 million is kind of unique to that quarter.

David Wu

Oh, I see.

Paul Coghlan

And then if you look at the interest income that’s roughly 2 million unique to that quarter because of the strategic and….

David Wu

Oh, I see.

Paul Coghlan

So when I net those two, that's how off the top of my head in response to the question before and I should be careful answering questions of the top off my head. And so doing that so I got to the answer I gave the gentlemen previous to you.

David Wu

Okay, great. Since we have Bob on the conference call. Bob this is a -- I was trying to tape your long experience in this cycle. This one looks very unusual in the sense that when I look at your numbers and number of your competitive we really don’t see a very bad effect from this US shops economics slow down. And I sort of wondered in all the different cycles you have been through, can you sort of relate this one to the once -- any of the once that we have seen prior to this or its program corrected that’s all in the head. This recession you two talk about.

Robert Swanson, Jr

Well, I think Graham got murdered over a comment that a lot of us think might have some merit. We're trying to figure out how the prime mortgage fiasco and these other fiascos, how they affect our core business, and, I think a lot of the effect is mental. I think the good news about Linear today versus any other cycle is we're more involved outside of the U.S. than we ever were in the '87 cycle in the '90 financial cycle. So in some mistakes we are kind of insulated more than we were in the past from what is on the US. So I am still going to fight them other parallel so internally we are optimistic that and let's say the economy totally falls apart and more banks go out of business and so forth. We are optimistic that the market is so big and we are still so small that if we block and tackle correctly we can look like the Linear old.

David Wu

Okay. Can you give us one other thing which is the -- if the programs that you are on, the automative programs are turned out to be as planned what is roughly the order of magnitude of the dollar content per car if there is such a measure of what Linear Tech's content today versus what that will be in 2 years time?

Robert Swanson, Jr

Yeah, I think we are all shaking head that we don’t know the dollar content. There is so many programs. In some areas of the world, we totally dominate the in-dash entertainment. Now in other areas, we are not involved, but going forward as you have heard us say the last couple of years and it’s a multiyear process, we have won lots of sockets from hybrid vehicles to LED lighting and on and on and on, those are now coming to fruition. They are going into production and whether the total volume of automobiles built goes up, goes flat, or even goes down, our penetration in a lot of these sockets goes from 0 to something. So as you have heard Paul say and Lothar say over the last several conference calls is that we think that on a bigger sales number that the automotive content will be double digit. Is that 11% or is that 15 we don’t know that yet.

David Wu

Okay. Thank you.

Operator

We will go next to Craig Berger with FBR Capital Markets.

Craig Berger

Good morning. Thanks for taking my question. Just to clarify on the legal, is that -- I mean as we think about 3 million coming out for the September quarter?

Paul Coghlan

I don’t really want to specifically talk about the legal just because that case is under appeal and so let me tell you what I told you before and I think will help you to get to the same place and that is because I netted a lot of things. On netting those things, I came to roughly 3 million net of the reduction in interest income and the reduction in legal and sales associated cost that were unique to the fourth quarter. So if you lump all of those together, what I am saying is probably 3 million that will not repeat in the next quarter.

Craig Berger

Okay.

Paul Coghlan

I prefer not to have you tag me down to each individual line item as to what's in each one.

Craig Berger

Okay. And then just with respect to your manufacturing capacity, what's kind of the utilizations in your fabs or what type of quarterly revenue levels could you support at this point?

Paul Coghlan

As we have said in the past from our wafer fabs and from our assembly and test capacities, our infrastructure capacity is significantly more than ourselves. So in terms of clean room space, in terms of bricks and mortars, we can grow our output to quite significantly from where it is presently. So for us to grow and respond quickly to the market, for us, it's actually pretty straightforward. We just need to add a little bit more capital equipment and hire some additional people. So we're pretty agile in that regard.

Craig Berger

Okay. And that’s it, thank you.

Paul Coghlan

You are welcome.

Operator

We will go next to Steve Smigie with Raymond James.

Steve Smigie

Great, thank you. On the networking side of the business, I was hoping you could talk a little bit about the drivers there and I am just curious, how much you may or may not participate in sort of carrier Ethernet rollouts if you do include that in your networking portion?

Lothar Maier

Networking for us, big part of networking for us is power over Ethernet. We have had a presence in that for a long time and it continues to be a good business for us. So the other part you talked about, I am not sure I understand what that is.

Steve Smigie

Okay. I was just -- I mean its maybe more (inaudible) any parts are participating and just using a more IP based systems and carrier networks versus say using a old TDM systems?

Lothar Maier

Yeah, certainly we see lots of growth opportunities in the IT based items or things rather than the old wire systems.

Steve Smigie

All right, okay. And just curious in terms on the consumer electronics opportunities where you see the higher value added, could you talk a little bit about what areas right now you are seeing, is like setup boxes or what type of device would make sense for you guys to get involved with?

Lothar Maier

When we talk about consumer devices, we talk about products that are encompass more, they would encompass handsets for example, that would encompass computers and they would encompass high end consumer things like GPS navigation systems, flat panel displays. So that’s when we have grab all of that business and we lump it together that's about 20 to 25% of our business, which means about 75% of our business then is in industrial, communications infrastructure, automotive, military all those other pieces. Within that 25% that’s consumer we have seen some opportunities particularly that we have talked to you about in the 3G handset area. There are some other random opportunities that throughout the consumer area, but they are all you know, they have kind of populated with small opportunities and none of which we think if we told you, you should model in as driving a lot of great growth.

Steve Smigie

Okay, great. Well thanks very much.

Paul Coghlan

You are welcome.

Operator

We will go next to Phil Marriott with ASP Advisors. Mr. Marriott, your line is open, please check the mute function on your phone.

We will move on to Gus Richard with Piper Jaffray.

Gus Richard

Yes, thanks for taking my question. Just had a curiosity, you have got increasing packaging cost because of increasing materials and you have got a good presence in 3G phones, is that driving you to move to more chip scale packages?

Lothar Marier

No. We don’t see really any significant movement into chip scale packages, there is a movement into what they call these QFM, DFM type of packages and that’s a direction that Linear and the industry has been going significantly moving to for the last five years, but beyond those types of packages there isn't really a lot of push to chip scale.

Gus Richard

Okay, all right. Thanks so much.

Operator

And we will take a followup from Chris Danely with JP Morgan.

Chris Danely

Okay. Thanks guys. Just a followup to, I think it was Bob's comment about getting back to Linear role and it sort of duck-tails with my previous question. If you look at the last four years, the semi industry is growing on average about 6% if we include 2008, and you guys have been growing about year round 7 or 8%. But clearly the semi industry is active as it once was and this is during the pretty descent economic environment. So as we look forward to the next four years, if we are going through -- I guess, if we are going through more single-digit growth in semis like how are you guys going to get your margins up and how can you I guess change the Linear practices to react to that environment?

Paul Coghlan

Well, okay, when I said the Linear role I am thinking about steady growth, steady year-over-year growth, steady quarter-to-quarter growth. Obviously, if the market goes back just 2% or grows just 2%, you know, growing 28 to 30% is going to be very difficult. So when I talk of the Linear role, I am talking about margins that twice the competition consistently quarter-to-quarter growth, and so year-over-year is steady. That’s my definition of the Linear evolved.

Chris Danely

Okay. And when you talk about pretty good economic environment in recent years, I mean I think the fair bid of that strength was concentrated in consumer goods in emerging markets, so that we actually think there is more kind of classical linear type end markets that can grow in the future, infrastructure markets we talked about, we talked about automotive having things that needs to do now, that it didn’t need to do in that 2 and 3 year period that you alluded. So I think when you look at the absolute grand numbers those who are heavy kind of economic years, but when you look at where it all was concentrated and now when you look were they might be some new growth concentrated it actually may turn out that the next 4 or 5 years maybe have richer analog high end content than the 4 or 5 years just prior to now that you have alluded to as having been great year?

Paul Coghlan

Yeah, and by no means in my expecting the next 5 years that the market of analog will grow at plus or minus 2%, I don’t think that’s normal, I think in an abnormal cycle now, I think the next 5 years we are going to have healthier growth in the analog business.

Chris Danely

Okay. And let's say we are here a year from now and we are in the same boat single-digit growth for linear and semi market would have guys change anything?

Lothar Marier

Well we would have to look at what -- just to add, if where a year from now and there is all kinds of new car models coming out, with all kinds of electronics on them, but they haven’t hit the market yet, and if lot of the infrastructures stuff we have talked about is about to hit, we will consider that Dan in answering your question.

Chris Danely

Okay, thanks.

Lothar Marier

You are welcome.

Operator

That is all the questions that we have in the queue for today. I will turn the call back over to management for any additional or closing remarks.

Paul Coghlan

Well, thank you very much for your good questions. We wish you all good day and bye, bye.

Operator

That concludes today's teleconference. You may now disconnect and have a great day.

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