Linear Technology’s (LLTC) second quarter earnings beat the Zacks consensus by 11 cents. Revenue beat the consensus by 4.0%. We also expect the entire peer group Incorporatedluding Maxim Integrated Products (MXIM), Intersil Corporation (ISIL) and Semtech (SMTC) to report above expectations.

The stock fell 1.9%, probably on account of the better-than-expected earnings falling below the year-ago quarter.

Revenue

Revenue of $256.4 million was up 8.6% sequentially and 2.9% year over year. Revenue also exceeded the high-end of management’s expectations of a 2-5% increase. The sequential strength was broad-based across all geographies, although the industrial, communications and computing end-markets were the strongest. The year-over-year increase in revenue followed four quarters of decline.

Revenue by Geography

Revenue distribution by geography was unchanged from the previous quarter, with the U.S. generating 29%, Europe 16%, Asia excluding Japan 40% and Japan 15%. Consequently, all regions were up over 8% sequentially. On a year-over-year basis, the U.S. and Europe remained weak, declining 3.8% and 8.6%, respectively, while Asia (excluding Japan) and Japan increased 8.3% and 18.7%, respectively.

Both distribution and OEM sales grew in the U.S. Distributor inventories decreased on a net basis, as the decline at international distributors offset the increase at U.S. distributors. The ASP increased from $1.49 to 1.59. Volumes were up 1.7% sequentially, also contributing to the higher revenue.

Orders

Management stated that order strength continued in the last quarter, resulting in a strong backlog. Lead times remained short, in the 4-week range. Required turns are likely in the 60% range. Historically, management has always met or exceeded guided revenue numbers and we don’t expect any problems in the March quarter either. The current momentum in the industrial market is encouraging in this respect, as the market is seasonally strong in the March quarter.

Bookings by end-market were as follows—industrial 36%, communications 26, computing 14%, high-end consumer 6%, automotive 11% and aerospace/defense 7%. Approximately 54% of orders came from international markets.

Margins

Pro forma gross margin for the quarter was 76.8%, up 109 basis points (bps) from the previous quarter’s 75.7%. The gross margin benefited from higher volumes, better absorption of fixed costs over a larger sales base, as well as significantly higher average selling prices (ASPs).

Operating expenses of $64.3 million were higher than the previous quarter’s $61.8 million. The operating margin was 51.7%, up 217 bps from 49.6% recorded in the previous quarter. All the three components of cost—R&D, COGS and SG&A, decreased as a percentage of sales, contributing to the higher operating margin.

Excluding the impact of stock compensation expenses, the amortization of debt discount, which is a non-cash interest expense related to the adoption of FSP APB 14-1 and the associated tax impact, the pro forma net income was $93.9 million or 36.6% net margin, compared to $78.5 million or 33.2% in the previous quarter and $87.9 million or 35.3% in the year-ago quarter. Including the special items, the GAAP EPS was $0.33 compared to $0.27 in the September quarter and $0.38 in the December quarter of last year.

Balance Sheet

Inventories increased 5.8%, with inventory turns dropping from 4.6X to 4.5X. Days sales outstanding (DSOs) were flat at around 44. The company ended with cash of $4.22 per share, better than $4.08 at the start of the quarter. During the quarter, Linear spent $51 million on dividend and $4.1 million on capex (mainly to be used for equipment in its assembly and test operations).

Guidance

The second quarter guidance is for sequential revenue increase of 7-10%, higher than historical trends would indicate.

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