Linear Technology Corporation F2Q08 (Qtr End 11/30/07) Earnings Call Transcript

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Linear Technology Corporation (NASDAQ:LLTC) F2Q08 Earnings Call January 16, 2008 11:30 AM ET

Executives

 

Paul Coghlan – V.P. Finance, CFO

Lothar Maier - CEO

Robert H. Swanson – Chairman, Founder

Analysts

 

John Pitzer – Credit Suisse

Doug Freedman – American Technology Research

Ross Seymore – Deutsche Bank Securities

Tore Svanberg – Thomas Weisel Partners

Daniel Berenbaum – Caris & Company

Craig Ellis – Citigroup

Christopher Danely – J.P. Morgan

Joanne Feeney – FTN Midwest Securities

Steve Smigie – Raymond James

Sumit Dhanda – Banc of America Securities

[Roman Shaw – Lehman Brothers]

Auguste Richard – Piper Jaffray

Uche Orji – UBS

Krishna Shankar – JMP Securities

David Wu – Global Crown Capital

Michael Mcconnell – Pacific Crest Securities

[Unidentified analyst]

 

Operator

Good day everyone and welcome to the Linear Technology Corporation fiscal 2008 second quarter earnings release conference call. (Operator Instructions) At this time for opening remarks and introductions I would like to turn the call over to Mr. Paul Coghlan, Chief Financial Officer. Please go ahead sir.

Paul Coghlan

Hello, good morning and welcome to the Linear Technology conference call. I’m joined this morning by Bob Swanson, our Chairman and Founder and Lothar Maier our CEO. I will give you a brief overview of our recently completed second quarter and then address the current business climate. We will then open up the conference call to questions to be directed at Bob, Lothar or myself.

I trust you’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 that we will be describing this morning will be forward-looking statements that are dependant 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 September 30th, 2007, particularly management discussion and analysis of financial condition and results of operations.

Secondly SEC regulation FD regarding selective disclosure influences our interaction with investors. We have opened up this conference call to enable all interested investors to listen in. The press release and this conference call will be our sole 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 in April, 2007 the company entered into a $3 billion accelerated share repurchase ASR transaction funded by $1.3 billion of the company’s own cash and $1.7 billion of convertible debt. This has had little impact on the comparability of Linear’s financials from Q1 to Q2 since the ASR occurred in April. However it has had a significant impact on the year over year comparability between Q2 of this year Q2 of last year. Specifically interest income decreased, interest expense increased and shares outstanding were reduced by roughly 25%. The resulting impact on EPS has been positive.

For the just completed second fiscal quarter sales increased from the previous quarter within the range of 1% to 4% that we had forecasted in our last conference call. Revenue was $288.7 million, up 2.6% from revenue of $281.5 million for the previous quarter. Net income and EPS each increased 2.5% with EPS being $0.41 up from $0.40 last quarter. On a pro forma basis without the impact of stock based compensation EPS would have been $0.46 versus $0.45 and net income would have been $104 million versus $101.4 million in the September quarter. So the impact of stock based compensation was 11% of net income or $0.05 at the EPS level.

For the quarter just ended our GAAP return on sales was 33% and our pro forma return on sales was 36%. Income tax expense had a minor affect on the results of the December quarter compared with the September quarter as our quarterly tax rate increased from 29% in September to 30% in the December quarter due to the temporary expiration of the Federal R&D tax credit. Other line items within the income statement were more in line with previous quarters. Gross margin percentage decreased slightly from 77.2% to 77.1% in the quarter. This was more than offset by operating expenses as a percentage of sales decreasing from 28.6% to 28.2%. Employee compensation costs increased modestly in the quarter due to increases in stock based compensation, profit sharing, new hire costs and annual merit raises. These modest compensation cost increases were partially offset by decreases in other expense categories. So expenses overall only increased by 1% on a sales increase of 2.6%.

Consequently the resulting operating margin as a percent of sales improved to 48.9% from 48.6% in the prior quarter. During the quarter the company’s cash and short term investments increased by $54.5 million. For the 87th consecutive quarter the company had positive cash flow from operations. The Board of Directors authorized the company to increase its cash dividend from $0.18 to $0.21 per share. The dividend will be paid on February 27, to shareholders of record on February 15.

During the quarter bookings increased and we again had a positive book-to-bill ratio. On an end market booking basis as expected, we saw improvement in industrial partially offset by a reduction in consumer as we exited the holiday season. Communications, auto, computer and space level products were generally unchanged as a percentage of bookings. Our ending on hand inventory at distributors is within historical turns levels. Cancellations are minor and lead times have remained unchanged at four to six weeks.

In summary we continue to have an excellent business model and are therefore able to remain both highly profitable and cash flow positive. Our return on assets was 27%. The ASR and associated debt has improved our returns on equity and invested capital. Our debt is modest relative to our cash generation capabilities and our current ratio is 7:1. Looking ahead to the March quarter, inventory appears to be reasonably balanced in the marketplace however recession concerns in the economy could cloud the ability of forecast confidence. From a Linear specific point of view, March should be a good growth quarter. We had a positive book-to-bill ratio in the December quarter and we would expect the March quarter to have strengthened the industrial and communications end markets which would more than offset the normal, seasonal softness in the consumer end market. However, the overriding general economic conditions merit concern. Consequently we presently estimate that revenues and earnings will grow 1% to 5% sequentially from the December 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, cancellations were minor and we had a positive book-to-bill ratio. Demand created bookings were up in both US and international geographical 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 continues to be our largest areas. Industrial grew the most with the quarter increasing from 31% of bookings last quarter to 33% this quarter. Communications remained at 32% of bookings while increasing in absolute dollars. For us the three significant areas within communications are cell phone and telecom infrastructure, networking and cell phone handsets. Cell phone and telecom infrastructure decreased slightly from 10% to 9%. Networking remained at 15% of bookings while increasing in absolute dollars. Power-Over-Ethernet circuits and How Swap circuits, areas rich in technology, lead our presence in this area as we continue to offer unique solutions to the world’s leaders in networking areas. Cell phone handsets at 8% grew from 7% last quarter. Computer at 12% of our business was down modestly from 13% last quarter. As expected high end consumer decreased from 10% to 8% of our bookings as seasonally we exit the holiday season. Automotive remained unchanged at 10% although it grew in absolute dollars. This area has grown steadily over the last two years and projects to be a continuing area of growth for us. Finally, the military and space level products at 5% of our business increased a percentage point from the prior quarter.

In summary we believe we have very good diversity by end markets which contributes to our leadership positioning and high performance analog. Note that 49% of our bookings were created in the USA roughly similar to last quarter.

Moving from bookings to sales, as I said earlier, product sales grew 2.6% from the prior quarter and 7.8% from the similar quarter in the prior year. Sales grew internationally; Asia and Japan were the strongest areas while Europe also grew. USA OEM grew modestly. US distribution was down causing overall USA to be down modestly. In summary the USA at 29% was down one percentage point from last quarter. Europe at 17% of sales was unchanged. Japan improved from 12% to 13% of sales. Rest of world, which is primarily the rest of Asia aside from Japan, remained 41% of sales. This is our largest geographic sales area since manufacturing for a high end consumer and other OEMs is largely done here in Asia.

Gross margin was 77.1%. This impressive number validates our strategy of selling unique, high performance analog semiconductors into a broad customer base. This gross margin percentage decreased slightly by 1/10 of a point from last quarter. The weakening US dollar and increases in gold costs added to our manufacturing expense base. These increases were largely offset by modestly lower depreciation costs and by absorbing fixed costs over a larger sales base. ASP or average selling price, declined to $1.49 from $1.55 last quarter in concert with seasonal strength in the consumer end market. We expect ASPs to increase in the March quarter reflective of seasonal strength in the industrial end market.

R&D at $47.8 million was unchanged in absolute dollars while decreasing as a percentage of sales from 17% to 16.6% this quarter. Modest increases in labor for compensation, profit sharing and stock based compensation were offset by decreases in R&D related expense areas.

Selling, general and administrative costs were unchanged at 11.6% of sales while increasing in absolute dollars by $776,000 to total $33.6 million. The increase was the result of headcount additions both in US and international sales as well as modest increases in profit sharing and stock based compensations.

As a result of the above, operating income increased by 3.1% or $4.3 million on a sales increase of $7.2 million. Operating income as a percent of sales was 48.9% versus 48.6% which continues to be industry-leading performance. Interest expense at $14.5 million was similar to last quarter. Interest income increased $854,000 as we had an increase in average cash invested of $98 million. This affect was partially offset by a decrease in the average interest rate from 3.77 to 3.72 in the quarter. Our tax rate was 30% versus 29% last quarter. Our affective tax rate going forward increased from 29.5% last quarter to 30% this quarter due to the temporary, hopefully, expiration of the R&D tax credit. Going forward, we expect our affective tax rate to continue to be approximately 30%. The major tax savings items that currently support our affective tax rate are the benefits from our tax holidays overseas, our tax exempt interest and our foreign sales tax benefits.

The resulting net income of $93.8 million is an increase of $2.3 million from the previous quarter due largely to the increase in sales. On a pro forma basis before stock based compensation net income would have been $104 million versus $101.4 million last quarter. The average shares outstanding used in the calculation of earnings per share decreased by 2,111,000 shares during the quarter. The company received roughly another 1.5 million shares from the ASR. In addition the company bought back an addition 1.0 million shares in the open market. These reductions were partially offset by stock option exercises during the quarter. Next quarter we expect the diluted shares outstanding to be down roughly another 2 million shares. The resulting earnings per share was $0.41 an increase of 2.5% from the prior quarter and 21% from the $.034 in the second quarter 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 which happened in April. Finally on a GAAP basis our return on sales was 32.5% similar to last quarter.

Moving to the balance sheet, cash and short term investments increased by $54.5 million. During the quarter the company bought back 1,028,000 shares of its common stock for $33.1 million. The amount of $105.5 million was provided by operations including a payment of $26.9 million for the bi annual interest payments on our $1.7 billion convertible debt. The amount of $41 million of cash was paid in cash dividends and $6 million was used to purchase fixed assets. Our cash and short term investment balance is now $806.6 million and represents 57% of total assets. Accounts receivable of $150 million is up $16 million from last quarter. This is a higher increase than the increase in sales because at calendar year-end many customers delayed payments into the new year, either because of shut downs or balance sheet window dressing purposes. Our day sales in accounts receivable were 47 days versus 43 days last quarter. This time last year our DSO, or day sales, was 51 days. Inventory at $52.5 million increased $1.1 million from the $51.4 million reported last quarter. Most of the increase was in [WIP at the die] stage. Our inventory turns was 5.1 times, a slight improvement from last quarter’s 5.0 times.

Deferred taxes and other current assets decreased by $9.6 million from the September quarter largely due to a re class from income taxes payable and an increase in deferred taxes resulting from a higher charge for stock bases compensation. Property, plant and equipment decreased by $4.3 million. We had additions of $6,034,000 and depreciation of $10,330,000. Most of the additions were for test production and fab equipment. We plan to spend roughly $35 million to $40 million in fiscal 2008 for capital additions. Other non current assets totaling $92 million decreased by $1.5 million primarily due to the amortization of both technology agreements and the convertible debt offering fees.

Moving to the liability side of the balance sheet accounts payable hardly changed, up $939,000. Accrued income taxes, payroll and other accrued liabilities decreased by $4 million. The largest items here are profit sharing accrual, income taxes payable and accrued interest payable on a convertible debt. Increases in profit sharing accruals which we pay out in the first and third quarters were largely offset by decreases in our interest payable accrual on a convertible debt which we pay out in the second and fourth quarters. Deferred income on shipments to distribution decreased this quarter by $930,000 as we shipped roughly $1.2 million less into US distributors than they shipped out to their end customers. Our accounting on shipments to US distribution is conservative. We do not record a sale nor income in our results of operations until the distributor ships the product out to its end customer. We continue to closely control our inventory distribution to properly position the inventory without any unneeded buildup.

Deferred tax and other long term liabilities increased by $7.7 million due to several tax related items none of which was significantly large in amount. Changes in the stockholder equity accounts were primarily the result of the usual quarterly transactions for net income, dividends paid and employee stock activity. The company announced that it’s increasing its quarterly cash dividend by 17% from $0.18 per share to $0.21 per share. The company began paying a dividend in 1992 and has increased it every single year since.

Looking forward, as you can tell from my previous comments December was a reasonable quarter for us. Business improved as sales, operating income, net income and cash and short term investments all increased. The company’s bookings grew in the quarter and our turns requirement for the March quarter is similar to last quarter. Turns are orders that must be both booked and shipped in the quarter. Our lead times are four to six weeks which can support this level of turns as we have often done in the past.

Looking ahead to the March quarter, inventory levels in the marketplace appear to be generally in balance. Although as we have witnessed in the stock market this past week and a half, there are concerns that the economy could head into a recession. However, from a Linear-specific point of view March should be a good growth quarter. We have positive book-to-bill ratio in the December quarter and we have gotten off to a decent start so far in January. We would expect the March quarter to have strength in the industrial and communications end markets, to more than offset the normal seasonal softness in the consumer end market. However the overriding general economic conditions merit concern and make this a difficult quarter to accurately forecast. Consequently we presently estimate that revenues and earnings will grow 1% to 5% sequentially from the December quarter.

In summary, we’re in a strong segment of the electronics marketplace, namely high performance analog where we continue to be a market leader. We are optimistic about the long and mid term growth opportunities for our markets and for Linear. From an investment standpoint, we believe we are well positioned visa vie investor concerns as follows. We have reduced our share count within this past year by roughly 25%. We have significantly grown our dividend for the 16th year in a row. Despite investor concerns to the contrary our margins have remained strong. We actually increased our operating margin this quarter and have roughly twice that of our competitor. We are growing probably at a rate that will be judged to be faster than the overall market. We just completed our third consecutive quarter of sequential quarterly growth, we’re guiding for growth this quarter. We have gradually over the last several quarters diminished our exposure to consumer, cell phone and computer end markets while increasing our presence in more technology-rich end markets such as industrial, communications and automotive.

We are a focused company that brings analog excellence to its customers. We continue to have product superiority in very complex areas. For example, Power-Over-Ethernet solutions in the networking area are complex and we are introducing our second generation products while others are struggling perfecting their first generation offerings. This enables us to command and maintain significant market share in these areas in response to the value we bring. This is just one of the many areas where we are differentiated in the marketplace. We are very diversified by product and by end market as we continue to grow the company within our present financial structure.

We represent approximately $1.2 billion in sales out of a $37 billion market which is projected to grow roughly $4 billion more in 2008. Therefore we have plenty of headroom to execute this strategy. I would now like to open up the conference call to questions to be addressed to either Bob, Lothar or myself.

Question-and-Answer Session

Operator

Our first question comes from John Pitzer – Credit Suisse

John Pitzer – Credit Suisse

Good morning Paul, I appreciate all the detail and congratulations on a decent quarter. Just kind of curious, you talked about the turns business in March being about similar levels with December, can you kind of give us a quantified range of what turns business needs to be to hit your guidance and I guess the second question I’ll ask is, when you look at your guidance for the March quarter, is that what the bottoms up business model is telling you or is the bottoms up business better and you guys are discounting because of some of the cautiousness around the macro environment. Thanks.

Paul Coghlan

My response to your first question, our turns requirements are roughly 60% maybe a little less than that this quarter and that’s similar to what we’ve been having the last several years. So turns should not present any kind of issue for us. Relative to our guidance, as we said in our introductory comments, from our perspective, from the Linear perspective looking out, business is looking good for us. We would expect business to look good going into a March quarter. We had a positive book-to-bill ratio, the March quarter is when industrial picks up, distribution in the US and Europe normally gets stronger, communications areas have strength and the only area with some weakness is normally seasonally consumer. So from a Linear introspective standpoint, it looks like it would be a good March quarter for us. However, there are a lot of concerns about the overall economy, the concerns about recession; people particularly say in the distribution channel which deals with many, many end customers are cautious saying “look we don’t know how this is going to play out.” So I think when considering all of that we gave you the guidance of 1% to 5%, that’s normally a little broader than we normally would give. But given the general economic climate out there we think it’s appropriate at this time.

John Pitzer – Credit Suisse

And then Paul just a quick follow-up, distribution inventory in December declined as you said by about $1 million, what’s the expectation in March, would you see higher sell in than sell out or do you think we’ll see another quarter where sell out is higher than sell in?

Paul Coghlan

No I would expect actually, historically March is a good quarter for US distribution so both sell in and sell out would improve actually pretty significantly over December if historical trends took place. I think we believe it will improve maybe not as significantly as in past years because of the recessionary issues but certainly we think distribution will pick up. So my guess is we’ll have both more shipped in and more shipped out and inventory probably won’t change a great day at the end distributor.

John Pitzer – Credit Suisse

Great thanks guys, appreciate it.

Operator

Our next question comes from Doug Freedman – American Technology Research

Doug Freedman – American Technology Research

Hi guys, thanks for taking my questions. Paul if you look at things that are going on out there one of the things noticeable is the company is carrying a higher level of inventory these days than say two or three years ago, can you talk about the requirement there to have the turns at five, is that driven by the lead times that you’re seeing and any shift that you’re expecting in Q1 if you could talk about from OEM to distribution as far as a percentage of sales.

Lothar Maier

I can take that question. We’ve got our lead times typically are very short on the order of four to six weeks and that does require us to carry inventory to react quickly to our customers’ requests. On the other hand though, the companies, and we’ve talked about it in the past, the company factories are sized to support sales on the order of right around $300 million and so we do a bit of a balancing act to keep our inventory and our factories efficiently and so that’s really what holds a little bit the inventory where its at. Certainly we feel comfortable with the level of inventory that we have right now, we’re very careful not to let the inventory grow much more than it is presently but sales are growing and I think you’d expect that the inventory would go up a little bit as well which is what happened last quarter.

Doug Freedman – American Technology Research

Alright and then looking forward, traditionally Linear has been very successful about moving away from markets that mature and into new markets, can you sort of talk about some of the markets that you’re excited about this year and what your ability to continue to move from some of the older, staler markets and into some of the newer markets.

Lothar Maier

This isn’t kind of recent news, this is something that’s been ongoing for awhile is that we’re moving away from more consumer commodity focused business to areas where customers value the performance our products bring and quite frankly are willing to pay for them. We’ve talked about this at a number of conference calls that automotive is an area that’s been quite interesting for us. We’ve been working with automotive customers now for several years and we’re starting to see really the results of that work. This last quarter automotive sales grew in absolute dollars and we are now double-digit at 10% and the result of that work is not something that we’ve done a quarter or two ago, it’s something that started several years ago because of the design and time it takes to get into the automotive business is really several years and you’re just beginning to see the beginning of those efforts. So automotive looks interesting for us. We’ve focused on it and if you look at with the WFTS forecasting, automotive is presently I think probably is the biggest if not the second biggest area in analog that’s going to be growing for the next several years. We’ve seen an up tick in our business in military space that was up 1% again, that’s an area for the last couple of years we’ve been focusing on and we’re seeing some payback for it. And then just the continued focus on the industrial market. This particular quarter was our biggest bookings quarter in terms of percentage of our business was in industrial, so I don’t think it’s kind of a one point focused effort it really focuses at a number of markets that we’ve got products that are very competitive. And if there’s kind of a one focus to it, it’s really steering away from the crowded consumer-type business.

Paul Coghlan

And Doug, as we’ve said in our call, at sales of roughly $1.2 billion out of a market of roughly $37 billion projected to grow another $4 billion this year, for several years we consider this a strategy that can several years going forward be very affective at both growing revenue and continuing our margin structure so we’re pretty comfortable with our positioning right now in the marketplace.

Doug Freedman – American Technology Research

Alright, terrific, my last question for you, can you talk about in the past Linear has been very resilient on the operating expense level in times of softening economy and you definitely raised the concerns that you guys are sharing, that there is the potential for a softening economy, how much flexibility is there and can you sort of compare your flexibility today to what might have been in the last cycles and thanks so much for the time.

Paul Coghlan

Well I think we do have a large percentage of our costs are variable. So we have very significant profit sharing we have at the company and we have other avenues of variable costs so that when business gets tight there’s certainly an ethic here within the company that everybody shares in the issue not just the investor in the earnings per share but also the employees and other areas where have discretionary spending. So I think we still have a lot of flexibility in that area. If you want to compare that back to the last cycle in the year 2000, back then stock option accounting was different that it is now. So what was kind of either a non P&L cost has now become a fixed cost. So there’s a little bit more fixed costs due to stock based compensation and how it’s accounted for, but certainly we continue to have a lot of flexibility in our operating model.

Doug Freedman – American Technology Research

Great thank you and congratulations on a nice quarter.

Operator

Our next question comes from Ross Seymore – Deutsche Bank Securities

Ross Seymore – Deutsche Bank Securities

Just had a couple of questions here on the bookings, it looked like industrial and military are up, consumer down, anything beyond just the normal seasonality within those areas.

Paul Coghlan

Repeat it again.

Ross Seymore – Deutsche Bank Securities

When you gave the by end market bookings as a percentage of your total bookings it looked like pretty much what we would have expect from normal seasonality; industrial up, military up, consumer down. I was just wondering if there was any more color from within that beyond just normal seasonality.

Paul Coghlan

No I mean we’ve talked to you that those are areas that we think are rich in technology so they’re good places for Linear to be.

Ross Seymore – Deutsche Bank Securities

Nothing surprising I guess is what I’m getting at.

Paul Coghlan

No nothing surprising.

Ross Seymore – Deutsche Bank Securities

Okay and then Paul you mentioned that the [DIS D] side of things has been a little cautious just in general because of what’s going on in the macro environment and I’m sure you guys get that same question every time you talk to investors but in general has the caution from [DIS D] been just them verbally saying they’re not sure what’s happening or have you seen that caution actually manifest itself in your order books?

Paul Coghlan

Well I think we mentioned to you that in the December quarter the [DIS D] numbers were down so that we’ve seen some of it exhibited in our order books and we think there’s some of it that’s also, a lot of it’s also them just looking forward and saying its not as clear what to expect from their very, very broad customer base given these economic conditions. But we haven’t seen any dramatic downturn if that’s your question in the order booking.

Ross Seymore – Deutsche Bank Securities

Okay and then the last one, and I might be remembering incorrectly but you said CapEx it looks like $35 million to $40 million this year, if I remember right, didn’t you say it would be maybe even $20 million or $30 million more than that as of last quarter and if I’m right with that math I’m just wondering what the declines for.

Lothar Maier

Yes we did forecast a little bit more than we’re doing presently. We’ve just got some projects that are going to push out a little bit and just to be honest; we’re kind of in between projects. A few years ago we did an expansion in Singapore, last year we did an expansion in our Penang facility, this year we’ve got some expansion that we’re going to do in one of our wafer fabrication facilities adding some equipment and clean room and some equipment for some process technology and that’s just being pushed out a little bit, which will end up going a little bit into next fiscal year as well. So it’s a little bit lower than normal but nothing unusual.

Ross Seymore – Deutsche Bank Securities

Okay great thank you.

Operator

Our next question comes from Tore Svanberg – Thomas Weisel Partners

Tore Svanberg – Thomas Weisel Partners

Thank you and good morning, I think last year your bookings into handsets were down in December yet this year they had a pretty big increase, anything I should read into that?

Paul Coghlan

Well from a handset standpoint we’ve told you before that those areas within handsets, cell phone handsets which are particularly technology-rich, or where they have unique products, we tend to do better than just the commodity type so there’s a couple of opportunities that you’re aware of out there that tend to be doing a little better now than were happening last year and we’re in those. So that’s the reason for the up tick.

Tore Svanberg – Thomas Weisel Partners

Great and then on capacity, what’s utilization today and can you just remind us again how much capacity you have, meaning based on the equipment you have today, how much revenue can you generate?

Paul Coghlan

The way the factories are presently configured we can from a capital equipment and labor standpoint, we can support over $300 million a quarter in sales. From an infrastructure, bricks and mortars, that type of clean room capacity, we can support sales upwards to a couple of billion dollars so the infrastructure is in place to grow sales a lot and all we have to do is add additional production capital equipment and direct labor.

Tore Svanberg – Thomas Weisel Partners

Great, one last question, communications is still one of your biggest markets and the last couple of years you’ve been talking about PoE being market-rich in analog technology, any other areas within communications we can hang our hat on?

Paul Coghlan

Well we’ve talked to you about this whole module project we have and the module we sell, there’s a lot of opportunities for the module in communications as well as in industrial so that’s an area that could be strong for us. The other area I think in communications is we’ve had a lot of strength in recent years in our high speed mixed signal products, our high speed A to D’s and our DACs and we’ve had increasing market share growth in those areas and those are predominantly in the communications area. So there’s really pretty good opportunities for us in communications going forward.

Tore Svanberg – Thomas Weisel Partners

Great thank you very much.

Operator

Our next question comes from Daniel Berenbaum – Caris & Company

Daniel Berenbaum – Caris & Company

Just to follow-up on the CapEx what do you think capital intensity will be moving forward, is there a need at capital intensity as we move above that $300 million per quarter revenue run rate where you need to increase the capital intensity to add equipment to get above that run rate?

Lothar Maier

For a company like us, usually the capital intensity really picks up when you require to build a new wafer fab. And from a wafer fabrication standpoint, we’ve got lots of headroom. We don’t see one for a number of years or at least until we reach $2 billion in sales so I don’t see any big pick up. Typically we do between $60 million and $70 million a year, this year it’s a little bit lighter but at least for the next several years I don’t see that changing.

Daniel Berenbaum – Caris & Company

So you’re just able to do de-bottlenecking in the fabs, you can add incrementally, you don’t need to add tranches of equipment to get above that $300 million a quarter level?

Lothar Maier

No it’ll just be incremental adds because for us the buildings and the clean room is largely in place for growth in sales. The capital equipment is expensive and we’ll have to add incremental capital equipment to grow our sales above $300 million but it’ll be really kind of at the rate we’ve traditionally done and we’ll gain some efficiencies because we’re better utilizing the infrastructure that we have in place.

Daniel Berenbaum – Caris & Company

Okay great, thanks very much.

Operator

Our next question comes from Craig Ellis - Citigroup

Craig Ellis - Citigroup

Thanks and congratulations on the dividend increase guys. Paul first question for you, can you just refresh our memory on the first quarter’s linearity, how does it play out, is it fairly steady or do you see kind of a sag in February given Chinese New Year.

Paul Coghlan

Well probably because of Chinese New Year some of our factories will be shut down and obviously some of our customers in Asia will be shut down so that there’ll be a little blip in the mid month but we don’t think that will cause any problem for us reaching our objectives in the quarter.

Craig Ellis - Citigroup

Okay and then I think your prepared comments indicated that you had a decent start to January, would we take that to mean that communications and industrial were a little bit stronger and that high end consumer was weaker or is there any further color you can provide there.

Paul Coghlan

To be frank with you, we only put together the end market data at the end of a quarter Craig, we don’t really run the business day-to-day by that so that my sense is since we have gotten off to a reasonable start in January it is in areas that you mentioned, but I don’t really have the granularity on a weekly basis or daily basis by what the end markets are. But it feels pretty broad based so it’s not, it feels like we’re off to a reasonable start and it’s pretty broad based.

Craig Ellis - Citigroup

Okay and then clearly the company is devoting significant resources across it’s array of opportunities, obviously high end consumers is an area where you participate very selectively, with that selective participation should we expect that bookings should remain near current levels as a percent of total bookings or would we expect that the rest of the business would really out grow high end consumers we think about the longer term trends for Linear Technology.

Paul Coghlan

Well Craig we’ve always told you we have an overriding strategy and within that we’re also opportunistic. So the overriding strategy is to deal with the technology-rich areas where the customer is willing to differentiate what’s good technology, good product and pay for it. And there’s many more of those opportunities in areas other than consumer, but from time to time there are opportunities that present themselves in consumer and it’s hard to project over a three or four year period like when they will occur and when they won’t. But I think the general trend for consumer to be down in the high single-digits as opposed to the low double-digits is correct, your assumption is correct. That’s where Linear will probably be, but you shouldn’t conclude that that means we will never do anything in those areas. Again, if there’s an area with some opportunity that looks like it’s got some lasting nature to it as exampled by some of the business we already have in high end consumer we’ll continue to do that.

Craig Ellis - Citigroup

Alright thanks for the insight Paul.

Operator

Our next question comes from Christopher Danely – J.P. Morgan

Christopher Danely – J.P. Morgan

A couple of questions on the margins first, your R&D did not go up for the first time I think in a few years, how do you look at R&D going forward. Should we think of your spending rate as slowing a little bit or is this a bit of an aberration.

Paul Coghlan

I wouldn’t read too much into that. I think what we’ve done in a few quarters ago and go back several quarters, we opened several new satellite design centers and we haven’t and don’t have a present plan to open another one. So what we’re doing is rather than incurring the infrastructure expenses of new design centers, more to the expenses in headcount and areas like that within present design centers, and within headcount here, so that R&D has come down a bit. Certainly if we grow sales in the mid to high teens we’d probably struggle to grow R&D at that rate but yet every year we should grow R&D somewhere in around the 10% range.

Christopher Danely – J.P. Morgan

And then on the gross margin, it sounds like it will be up a little bit in Q1 due to the mix, can you just talk about your gross margin expectations a little bit longer term and what the factors would be. Is it mostly mix or is there anything else out there that could play with them a little bit.

Paul Coghlan

I mean we’re quite proud of where they are to be frank with you. At 77% gross margin, that’s a significant leader in the industry and we think evidence is the customer bases acknowledgement of our technology and our ability to deliver it. So I don’t think there’s going to be much change as we said in past quarters to those numbers there. I don’t think they’re going to erode. There are some opportunities for it to improve. I guess if sales level picks up. But I wouldn’t change those numbers dramatically in any model you have from what they’re presently.

Christopher Danely – J.P. Morgan

Okay and then last question is just on cash and usage of cash. It’s nice to see the dividend going up here and a 3% yield, going forward do you guys have a set [pant] ratio or level of cash you would like to keep and then anything above that would get paid and then can you also expand upon dividend versus further buy back in terms of usage of cash and what you would favor?

Paul Coghlan

We’ve done a lot of things with cash in an environment with the stock price keeps getting lower and lower and lower so I think we’ve been pretty clear as to what we do with our cash and I don’t think there’s any fundamental changes on it. We’re very committed to the dividend policy. We think we’ve, this has been our 16th year in a row we’ve increased it. We increased it at a rate that we expect medium to long term will grow the company. So that I think that policy will stay the same. Relative to cash buy backs and relative to stock buy backs and what to do with additional cash we generate from operations, I think we just view that in current periods and say what’s the best thing to do looking at both currently and long term to long term strategies. We’ve reduced our share count by 25%; we don’t have any plans now to significantly reduce it by a similar amount again in the short term. But that doesn’t mean that we wouldn’t if an opportunity arose we wouldn’t take advantage of it.

Christopher Danely – J.P. Morgan

Should I guess that the cash is gone from I think $630 million to a little over $800 million in a couple of quarters, what are the great problems to have with margins like yours, I guess can we expect that cash balance to continue to build or is there a level where you would say okay lets either raise the dividend again or buy back some more stock.

Paul Coghlan

Well there’s a third thing we could do which is pay off the debt so what we could do, we have $1.7 billion in debt and one of those tranches is due to be paid within three years now. So that one of the things we could do with the cash is pay off the debt. Or we could accumulate it and have another big significant buy back. We could have modest buy backs so we’d like the flexibility to make those decisions as time plays out.

Christopher Danely – J.P. Morgan

 

But I guess are you willing to give us any hint as to which of those three options you would favor?

Paul Coghlan

No I just told you, we’re willing to address those situations as the situations arise.

Christopher Danely – J.P. Morgan

Okay thanks.

Operator

Our next question comes from Joanne Feeney – FTN Midwest Securities

Joanne Feeney – FTN Midwest Securities

 

Just a question to get back to the [inaudible] economic situation here. Given Linear’s exposure to industrial, we might expect you guys to see evidence of a downturn ahead of some others in the economy, ahead of some other tech players, I’m just wondering what you are tracking to determine whether these economic concerns that everybody is talking about might be materializing for Linear. What would be the signals that you would expect to see?

Paul Coghlan

Well first of all Joanne, we’re not economists. So we don’t really analyze lots of that data at a macro level and then make an operating decision based on a macro economic analysis to be frank with you. Relative to how it impacts our business we do look on; we mentioned distribution as maybe a little bit of a canary in the coal mine about the overall industrial climate. Relative to consumer, that’s not a big part of our business but there’s all other ways of looking at consumer spending. But I think for us it’s really very, very basic. We look at order patterns and we talk to customers and distributors to find out if changes in order patterns are as a result of real diminished end demands or whether their sense is well, it’s not really diminished yet but we’re cautious about it. And then we kind of play it maybe a little closer to the vest in looking at those things than someone with a more macro outlook would. Like for example, we’ve told you is that a lot of the macro headlines if you will, say everything is going into a recession. Yet we’ve told you we had a pretty good bookings quarter in December and we’re off to a reasonable start in January. So the tea leaves that are very hot in our cup that have just been poured are still pretty good but when you read the overall market and innuendos from people, they say be cautious it may turn down.

Joanne Feeney – FTN Midwest Securities

 

So it sounds like your making some of those to be cautious like pushing out CapEx, are you taking any other precautions, are you reducing hiring or keeping leaner inventory, are you doing anything else to prepare for a possible down turn.

Paul Coghlan

We are cautious on the adding people now. That doesn’t mean we’re not adding people. This can be a time when good people come up. You get an opportunity to pick up some people you might not have other times. But to be frank with you you’re standards, although they were always very high get even higher at times like this. So I think we’re a little cautious on the hiring front right now but we don’t have a hiring freeze for example. Another cautionary thing is between Christmas and New Years we shut down. So that was a bit cautionary just again to make sure everybody’s belt is pretty tight going into this period. But we haven’t done anything which would in any way impair our ability to react if this turns out to be not as dramatic a recession or turn down as people are projecting.

Joanne Feeney – FTN Midwest Securities

Okay, that last point is good news. Thanks very much.

Operator

Our next question comes from Steve Smigie – Raymond James

Steve Smigie – Raymond James

I was wondering if you could tell us if there are going to be any unusual items in R&D or SG&A this quarter that might make it very, any extra accruals or mask sets coming up or is it pretty much expect in line as a percentage of revenue roughly.

Paul Coghlan

Probably remain in line.

Steve Smigie – Raymond James

Okay and if you haven’t already done it, can you give some guidance on interest expense.

Paul Coghlan

You know I really haven’t done it. You got me on that one. There are two offsetting currents. One is we again expect to be cash flow positive as we generate cash in the next quarter which when invested obviously would lead to more interest income. That’s going to be offset by a drop in the rates, and the FED has dropped rates and I think we’re all just waiting for them to drop next week even more. So probably not a great change in interest income going forward because you’ll have growth in cash be offset by reduction in rates.

Steve Smigie – Raymond James

Okay great. Thanks a lot.

Operator

Our next question comes from Sumit Chanda – Banc of America Securities

Sumit Chanda – Banc of America Securities

Hi Paul, first question for you. Sort of splitting hairs here, you noted book-to-bill is positive exiting the quarter. You had a similar comment last quarter. Qualitatively could you compare without giving actual numbers whether it’s stronger this time versus where it was the previous quarter.

Paul Coghlan

Not sure I really understand the question. I mean bookings grew. They’re similar. I’d say they’re probably similar. There contents are a little different because I have less consumer bookings at the end of the December quarter than I did at the end of the September quarter and I have more industrial bookings so I mean it’s a, I don’t think there’s anything big to say that there’s been any seismic switch in the quarter that’s worth noting.

Sumit Chanda – Banc of America Securities

Okay I guess my question was, is it 1.1 versus 1….[inaudible]

Paul Coghlan

We don’t think that’s going to make a difference. We’re not going there.

Sumit Chanda – Banc of America Securities

Okay. The other question I have was on the auto business. It’s been growing well. Is it at the point now where you have some more visibility in terms of what the seasonal patterns are or is it still a very lumpy business and could you talk again about how your module business there is doing?

Paul Coghlan

Automotive for us is still, it’s at 10%. We actually expect over time that’s going to be a bigger percentage. The electronic content that’s growing in cars is really just now starting to accelerate so for us a lot of really the good news is still in the future and that we have a lot of design in activity and we’re waiting for some of that to come into production in given year models. We have some stuff in models pretty soon and some stuff models pretty far out. So I think there’s really a lot more, when we talk about automotive, probably two years from now we’ll be able to give you a lot more granularity to respond to that question then now.

Sumit Chanda – Banc of America Securities

Okay thank you, that’s all I have.

Operator

Our next question comes from [Roman Shaw – Lehman Brothers]

[Roman Shaw – Lehman Brothers]

Thanks and nice quarter. Just noticed with Telco infrastructure networking that as a percentage they were roughly flat going into what’s typically a pretty healthy quarter, Paul could you just elaborate on customer behavior in those two segments and are those areas where you’re seeing a bit more reluctance to order components?

Paul Coghlan

Can you just repeat the question again?

[Roman Shaw – Lehman Brothers]

 

My question was on Telco infrastructure and networking, those two segments I think were flat as a percentage of total bookings going into what’s usually a good quarter, could you just elaborate a bit more on customer behavior in those two segments. Are those areas where you’re seeing a bit more reluctance to order components?

Paul Coghlan

No actually I don’t really see much difference in those areas. If you look over the last six quarters the change has been pretty minimal. The infrastructure has been anywhere from 9% to 11% and networking has been anywhere from 14% to 15% so 15% if you look over the last six quarters, you know we had some 14% and some 15% so I think the order pattern has been pretty steady in those areas. I think the businesses we’ve talked to you about are strength in particularly the networking area and how it continues to be. I don’t’ think there’s really any change in those markets.

[Roman Shaw – Lehman Brothers]

 

Okay and this goes back to an earlier question, you had mentioned that debt levels were low relative to cash flow generation, I guess given where the stock is, and the fact that the business is holding up well, does the company believe that they have the financial flexibility to pursue another major stock buy back.

Paul Coghlan

The company has financial flexibility that’s for sure. Look at the balance sheet and the debt that the company has $1.7 billion given its cash generation capabilities it could have more debt than that. But I mean that doesn’t mean that it should employ that immediately to do something in the markets to buy back more stock necessarily. We’ve done a major big stock buy back and one could question how beneficial that’s been. Actually we still think it was the right thing to have done and we’re not second guessing it. Right now I think the overall financial markets really are less concerned with what you do with your cash and have other concerns on their mind which is where your business is going, and how you’re going to grow and how you’re positioning. That’s really where we’re spending more of our efforts and where we think we’ll get more of a response from the overall investor community.

[Roman Shaw – Lehman Brothers]

 

Okay thank you.

Operator

Our next question comes from Auguste Richard – Piper Jaffray

Auguste Richard – Piper Jaffray

Quickly, when you’ve gone into economic difficulty in the past and difficult environments, can you contrast the inventory levels today in the industry or your inventories in the channel relative to past down turns?

Paul Coghlan

I’ll take a stab at it. One thing is, the last big down turn, you guys count up more down turns then we do here, we look at more seismic ones, and the last big one was in 2001. And that 2001 turn down, what you had was all of us were aware of more inventory if you will, in the channel, particularly in the networking areas. So you had infrastructure areas where you had several big companies all claiming to have 50% of the business so when you added up everybody’s 50% market share you came up with 250% businesses particularly in the networking area. And so that once the spigot shut off or once the down turn hit, the phones literally didn’t budge and there were just massive amounts of inventory out. We don’t have any sense now that when we look at these markets that this present situation, now whether it turns into a down turn or not this may be a little premature to say at the moment, but certainly from an inventory level we’re not hearing anybody say there’s excess inventory. We told you our cancellations and requests for cancellations are very, very minimal. So I don’t think the issue now is inventory where too many people concentrated buying too much stuff in certain particular segments. I think this is just a much, much broader thing that’s got something more to do with the financial markets then it does really with the technology business markets. So from that standpoint, I view them differently but I’m just looking at two major ones if you want to call this a major one.

Auguste Richard – Piper Jaffray

Right and I would assume then that really if we have a down turn, again if, it’s going to be a demand driven down turn and not exacerbated by a swamp of inventory.

Paul Coghlan

That’s what we believe.

Auguste Richard – Piper Jaffray

Okay and then sort of an off question, over the last year or so, is it save to assume that your largest customers, about a 6% to 7% customer not who but just sort of the order of magnitude?

Paul Coghlan

You know Gus we really don’t go into that too much. We say we have nobody that’s 10% or more because they move around in quarters Gus. So I certainly have had quarters where I’ve had one that might be 6% or 7% but that would not have been one for three quarters in a row or two quarters in a row. I don’t think we have one running that high consistently through the year.

Auguste Richard – Piper Jaffray

Okay and then finally on this new PoE product you have, how does that differentiate from your prior generation and the competitors. What’s the customer care about that’s going to drive that product?

Paul Coghlan

There’s a lot of new features that the second generation PoE parts have but one of the biggest features is the ability to basically just put more power over the cable and so people want to drive more and more products off of the connection to the network and that’s what’s going to be possible with these second generation products.

Auguste Richard – Piper Jaffray

Is that product in the process of being sampled at this point or when would that hit sort of the revenue line just out of curiosity.

Paul Coghlan

It’s in the sample stages presently.

Auguste Richard – Piper Jaffray

Got it, perfect, thanks so much.

Operator

Our next question comes from Uche Orji – UBS

Uche Orji – UBS

Thanks Paul, let me just ask you a question about how we should think about [inaudible] going forward. I know you’re guidance is about 3% for this quarter, but if I look back in history, you know March has always been a much stronger quarter. Should we assume going forward that this should be how we should expect [inaudible] to occur. Should we expect at some point [inaudible] something around like 8% to 10% you normally have in the March quarter. Is there something about, I now understand the whole concern about the [inaudible] environment, but I just want to be able to put this current quarter guidance in the context of historical trends for the March quarter.

Paul Coghlan

Alright if you go back several years, history was more consistent than it is now. Actually last year our March quarter was a down quarter. So I think we actually guided down 4% to 7% this time a year ago and now we’re guiding up 1% to 5% this quarter. But on a long term view of the company we would view in a typical average growth year for analog, March would be a good quarter for us, a strong quarter for us. And whereas in the past when we had no consumer business and very little consumer related business, we might grow 8% in a March quarter. Now probably a reasonable March quarter would be more in the 5% to 6% range, if there were to be quote unquote what you’re alluding to as a classical March quarter.

Robert H. Swanson

You’ve got to remember that this past year 2007 was a flat to down year. So when the company grew 7% to 8% in the March quarter the background market was growing in the low teens.

Uche Orji – UBS

 

In terms of the last March quarter, we were in the middle of an inventory correction so I think that was one [inaudible] exception.

Paul Coghlan

I agree with you.

Uche Orji – UBS

 

You’re saying because of the current mix we should be thinking about March quarter now as more like 5% in a typical time frame [inaudible]

Paul Coghlan

Yes in a normal market.

Uche Orji – UBS

Right okay. Let me ask you….

Paul Coghlan

But in a normal market going forward in the historical content you presented this question, the summer would have been a flat to down quarter whereas now the summer may have a few percentage growth points in it for a classical quarter. So we think you’ll get to the same end result, just distributed a little differently within the quarters.

Uche Orji – UBS

Okay, a different question about distributors. One of the things we’ve noticed since the last inventory correction is seeing a reluctance by distributors to take on inventory, is that reluctance still an issue, are we starting to see a slight change in behavior and if you can also comment if you see anything in China given the current tightening of credit within China, whether that’s affected the way that the [inaudible] that would be helpful.

Paul Coghlan

I don’t think we’ve seen any shift in distributors moving to be more reluctant to take on inventory. Quite frankly we’re always reluctant to give our distributors too much inventory because we think of from an inventory control standpoint we can do a better part of managing our inventory around the world ourselves. So I think you’ll find that our inventory distribution is and historically has been always pretty modest.

Uche Orji – UBS

Okay that’s helpful, thank you very much.

Operator

And our next question comes from Krishna Shankar – JMP Securities

Krishna Shankar – JMP Securities

As you look at the industrial market, can you sort of contrast what’s happening in industrial and communications within some of your US based customers versus what you see internationally. I’m just trying to get a sense for whether there are any regions or pockets that can send you more.

Paul Coghlan

Not when you think of service more, we think we’ll see weakness?

Krishna Shankar – JMP Securities

Right.

Paul Coghlan

No I don’t think so in the industrial markets. Europe has always been a strong industrial area for us. We don’t expect anything unusual to happen in Europe in the near term. Asia is a growing opportunity for us so that we actually have more growth potential there because we’re not as well penetrated there as we are in the US and in Europe. So I don’t think we have any particular geographic concerns at the moment.

Krishna Shankar – JMP Securities

I see and then switching gears as you sort of reflect on your accelerated stock buy back, obviously with the stock at that kind of a higher price would you do things differently now in the future in looking at dividend increase versus a stock buy back versus perhaps deploying the cash for an accretive acquisition, how would you think about that going forward given the last experience.

Paul Coghlan

I don’t know. That’s a very difficult question to answer. I think you have to just; you look at each situation as it presents itself. You try to think about them and not act too quickly. I don’t think we’ve ever been accused of acting too quickly and then you just look at the current situation so that there are three things you can do with your cash. You’ve mentioned them, you can buy back part of your company, you can buy back somebody else’s company or you can increase your dividends and I think you mix that and you look at what’s going on in the environment. Right now we look at the ASR transaction and to be frank with you we don’t regret having done it. We were proud of having done a collar, I don’t know if I’m proud of having done that now, sharing humorously with you. So we probably bought stock at a little higher rate than we would have but frankly if we hadn’t intended to do the collar it would have meant we didn’t think it was a good time to do the ASR. So in hindsight I don’t think we would have changed anything. Frankly Krishna we still think that over time a lot of you folks are going to think that Linear having bought its own stock at 36 or 37 was a really smart move. It doesn’t look that way today but we certainly think given our growth prospects and given our margin strengths etc that the company at 35 was undervalued.

Robert H. Swanson

 

Certainly the stock is lower now but the ability to borrow money is way more difficult.

Krishna Shankar – JMP Securities

That’s true. And then how do you look at the comparative landscape now. High performance analog given the fairly fragmented market and some of your smaller competitors the properties out there are probably more attractive now then at any time in the last five years. Are you rethinking your acquisition possibilities and would you care to talk about some of the margin model going forward whether you’d be willing to step to perhaps a mid sixties gross margin model to accelerate the top line growth.

Paul Coghlan

Well first of all relative to margin we’ve been pretty consistent with you Krishna telling you that we think there’s more fools gold to go from where we are to, you make it sound like there’s a whole bunch of business there that one could get and we’ve shared with you collectively, that we think this strategy is better than doing that. So we don’t have any intention of lowering our margins. It’s not; you make it sound like it’s a one to one, like this perfect elasticity. And there isn’t. Its very step functional the elasticity. So that where there are lots and lots of competitors the price is going to plummet to the lowest competitor’s willingness to take the part. It’s not going to stop at 60. And where there are areas where there isn’t competitors you should try to get your product at what it’s valued in the marketplace not what some other person’s willing to sell it for. And then relative to acquisitions, we’ve never been an acquisition focused company because we haven’t, we don’t see someone out there with the technology that we long to have that we think we’d be better off if we owned them. So I think we still, we look at it, we look at companies, we certainly hope we don’t appear to be arrogant, we’re not perfect at everything we do but we don’t see someone that we salivate at the moment and we’re just looking for a good price to jump on it.

Robert H. Swanson

I might want to add from competitive landscape standpoint as we refocus our sales effort into the industrial, automotive and military markets, the competitive landscape is actually less because there are just fewer of our competitors that either have the product, the technology or the feature sets of quality and reliability that can sell in those markets. So in some ways our competitive landscape is improving going forward.

Krishna Shankar – JMP Securities

Great, thank you.

Operator

Our next question comes from David Wu – Global Crown Capital

David Wu – Global Crown Capital

A simple one actually, so Paul you’re present business looks like its business as usual and I guess we see CNBC everyday telling us there’s a recession going on, possibly how long do you think you will be able to judge whether these wonderful pundits are correct or your present business goes pretty much immune or less affected by what’s happening in the credit crisis out there in this country.

Paul Coghlan

I’m going to disappoint you in the answer because I don’t know the answer to that. I mean I don’t know.

 

David Wu – Global Crown Capital

But you know by after Chinese New Year where the business bounce back and that gives you a better feel for how much of a problem we are having.

Paul Coghlan

I’m not really sure. I don’t know there’s going to be major shifts in the business but I think we’re in for a, I’m not an economist, but I think broadly there’s financial issues that need to be resolved and it’s going to take longer than a couple of months to resolve them. So I don’t think this is a false start, this recession that people are going to announce in three weeks that it was just a mistake and it’s over. But I don’t know if its going to be as significant as people think it presently is either in the industrial markets and in the areas we service. So I don’t know if I’ll have a better feel for that at the end of Chinese New Year. If something dramatic happens, I’ll know that. But I think there’s going to be a bit of just drifting for awhile and that business will probably be a little closer to the vest but probably a little better than the overall market expects, but it’s not going to be a seismic change one way or the other. But I’m not an economist David, that and a couple of bucks will get you a cup of coffee frankly that advice will.

Robert H. Swanson

Obviously we’re going to know more at the end of the March quarter and the end of the June quarter.

David Wu – Global Crown Capital

 

But the way you’re running your business, it doesn’t appear that you’re doing the belt tightening that you even did during the inventory correction we had towards the end of ’06 and the early part of ’07.

Paul Coghlan

David we didn’t do anything dramatic back then.

David Wu – Global Crown Capital

No, you didn’t do anything dramatic but you did tighten more than it sounds like you’re doing at this point.

Paul Coghlan

Actually we told you we had a shut down at the end of December. We had a shut down a year ago at the same time. I don’t think there’s been a big change. And remember, we’ve got, one of the things we have David is we’ve got a really good balance sheet, good cash position etc so we don’t have to do these knee jerk reactions because we don’t have debt covenants we have to worry about or things like that so we can be pretty consistent and pretty thoughtful going up. I don’t see us as being any different today necessarily how we’re reacting then we did a year ago.

David Wu – Global Crown Capital

Okay, thank you.

Operator

Our next question comes from John Pitzer – Credit Suisse

John Pitzer – Credit Suisse

 

Paul just a follow-up question relative to your turns guidance for the March quarter, just given the economic backdrop, why not provide March quarter guidance that’s less dependent on turns than you were in the December quarter.

Paul Coghlan

I don’t understand the question.

John Pitzer – Credit Suisse

Well you said that turns in March, the turn you need in March is about flat with the turns you need in December at about 60% plus or minus a little bit, and I guess just given the macro backdrop and the conservative below seasonal guidance you’re already given for Q1, why not give guidance that’s less dependant on turns for the March quarter to be prudent.

Paul Coghlan

We have done something different John in the guidance than we have in past quarters in that we have a broader range. So I think we’ve responded to your question by giving you a broader range. Are you saying I should be giving you lower guidance, what are you…?

John Pitzer – Credit Suisse

Why not give guidance that assumes a 50% turns business for the quarter instead of something that’s closer to 60%, what gives you confidence that the turns business is going to come through.

Paul Coghlan

You know I’ve been running this business for a long time and what we have is turns business, you have to relate turns business to what our lead times are. So when, if you just do the math, if you have a four to six week lead time, your turns should be, just purely mathematic, should be 65% or 67%? So what we have is, I don’t feel it’s appropriate to tell you I’m going to use a lower turns number when I’m going to keep my lead times where there are. I’m giving you what I think is our best guidance John for how we think the quarter will play out. I mean I could monkey with those numbers but I don’t know what good it does me. And I’ve told you now if the recession turns out to be worse than it was, it turns out to be worse than we projected but I’d rather be straight with you at this point in what we think will happen.

Robert H. Swanson

If you go 1% it’s going to be a lower turns rate, if you go 5% it’s going to be a higher turns rate.

John Pitzer – Credit Suisse

Okay thanks I appreciate it.

Operator

Our next question comes from Michael Mcconnell – Pacific Crest Securities

Michael Mcconnell – Pacific Crest Securities

If we look at the EPS and revenue guidance that you issued for the March quarter typically we would see a bump if I looked over the last ten years in your margins is given the richer mix from the industrial and communications businesses, it didn’t seem like that’s necessarily coming through this March quarter. I wanted to make sure that that’s the case or if you could just talk about the relationship with margins as we get the better mix here in Q1 and what you’re expecting there relative to the December quarter.

Paul Coghlan

If we grew at the high end of our forecast which I’m not saying we will, but to respond to your question, if we grew at the high end we could have some improvements in some of the margin numbers you’re talking about Mike. So I think what you concluded is correct that we’ve got a really good business model and that with more rich business in the industrial and other areas and with ASPs going up we could do a little better in the March quarter from a margin standpoint. Given the guidance, given what’s going on in the economy we think just staying in the present range is probably the best guidance to give you.

 

Michael Mcconnell – Pacific Crest Securities

Any comments, I know obviously the model moves away from areas where there is price competition or you feel like, like you alluded to you’re not getting paid for the value you’re providing in the marketplace but just in general any comments on the overall pricing environment from a competitive standpoint in the industry. Anything you’re seeing that is maybe accelerating pricing or any moves by competitors that are leading to a more aggressive pricing environment in general.

Lothar Maier

I don’t think I see much in terms of significant change. I think the most significant changes were seeing is as we’re moving into these markets with less competitors we’re finding less competitive pricing being an issue I think if anything, that’s a positive move.

Michael Mcconnell – Pacific Crest Securities

Just with the PoE business, it’s been a pretty healthy business for you longer term, how do you feel about market share in that business as we kind of move through this year into next, are you relatively confident you can maintain share particularly on some of your top customers.

Lothar Maier

Our sense is that we’re pretty well positioned to maintain market share in that area. We’ve had a pretty good market share for the last several years. It’s been proven to be a pretty difficult product for competitors to get into and in particular we’re feeling good about it right now because we’re really on the verge of introducing a next generation product as well. I think we’re really seeing that our position is going to be the way it is or it’s going to continue to improve.

Michael Mcconnell – Pacific Crest Securities

 

Great thank you.

Operator

Our next question comes from [unidentified analyst]

[Unidentified analyst]

Can you comment on your opportunities in the PC space and how you see competitive pressure arising out of ongoing commoditization in that space and if you can address that in the context of where you see your opportunities in the next notebook platform that would be helpful.

Paul Coghlan

We don’t really compete in the areas you’re talking about. We see into the PC space and we sell into notebooks and some desktops, but in the very commoditized circuits, we don’t sell those. We sell more unique type circuits into that market. So some of the names you mentioned, we don’t run into.

[Unidentified analyst]

Can you talk about your opportunities in that technology rich area going forward even in the PC space.

Paul Coghlan

It’s really into not the consumer type of desktop or notebook PCs we’re in [inaudible] notebooks PCs, we’re into servers and we have opportunities with the modules going forward into that market. It tends to be a little bit rich in terms of mix of the products and upcoming there’s a lot of innovative type of new products that are coming out, very small and thin notebooks and desktops, there’s very portable notebook PCs on the horizon and so if those particular products have a need for the kind of products that we have then those opportunities will look good to us.

[Unidentified analyst]

Thank you.

Operator

And our next question is from Uche Orji - UBS

Uche Orji - UBS

 

Paul, did you say you don’t expect gross margin to fluctuate so we should be modeling kind of flat gross margin next quarter is that correct?

Paul Coghlan

Yes, things can move tense and stuff like that so I mean yes, maybe they could groove a slight bit next quarter if we reach the, depending on how well we do, but the numbers, maybe I’m kind of fumbling around because I don’t know the context of your question. Are you talking [inaudible], are you talking full percentage points, what’s the essence of your question.

Uche Orji - UBS

Just wanted to know what’s ….

Paul Coghlan

I mean these margins are pretty much going to be where they are.

Uche Orji - UBS

Fair enough. Different question, do you think you may have gained market share in the last quarter within your guidance do you think and [inaudible] the fact that you’re getting market share?

Paul Coghlan

I think, people can do lots of stuff Uche with the numbers and this is probably a period of time given our business model, the areas where we do particularly well that compared to the overall market we would be gaining market share on those competitors that you view as competitors, that you collectively view, when you list all the analog guys. All of the other analog guys are more into consumer; they’re more into commodity cell phone type stuff. They’re more into stuff which is not going to be as strong this quarter as it was last quarter so I could gain market share for sure this quarter. Whether that means I’ll be gaining it overall in the overall context of the year, is a different question and whether in some of those areas where I don’t compete I don’t really care about market share. So in the areas that we care about, we’ve tried to communicate with you we’re growing well and we believe in those areas we’re definitely gaining market share. But relative to the overall market it may not look that way if you add the whole year up.

Uche Orji - UBS

Great thanks Paul.

Operator

There are no further questions at this time, for closing remarks I’d like to turn the call back over to you Mr. Coghlan.

Paul Coghlan

Thank you all for your attention. This is difficult times as we’ve talked about to forecast, however, even in the context of this kind of uncertain economic times we’re looking forward to a reasonable March for Linear Technology, grow 1% to 5% and think we’re continuing to be well positioned in the markets that we value. Thank you very much for your attention and have a good day.

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