Investopedia: Linear's Ups And Downs

For long-term shareholders, Linear Technology (Nasdaq:LLTC) is anything but linear. Although this company has a phenomenal record of producing top-notch margins, returns on capital and free cash flow, the reality is that the analog semiconductor business is cyclical and even a top operator cannot do anything about that. With disappointing (albeit not completely surprising) fiscal third quarter guidance, semiconductor investors are left wondering what 2011 will hold for the sector. 

The Quarter That Was
While it will likely be overshadowed by the guidance, Linear's reported second quarter results were actually quite good. Revenue fell 1% sequentially (and rose 50% annually) and beat the average estimate on the Street. Strong Apple (Nasdaq:AAPL) iPad sales no doubt helped, but the ongoing recovery in the industrial and automotive markets were more significant.

The company also did a solid job (as it almost always does) on profitability. Gross margin was flat sequentially at 78.5%, but up about 250 basis points from the year-ago level. Operating income did drop 2% sequentially (and jump 74% annually), but this was better than expected. At the bottom line, the company beat estimates, even after excluding a boost from lower taxes. (For more, see The Bottom Line On Margins.)

The Rocky Road Ahead
Although Linear's second quarter was solid, its is likely that guidance for the third quarter will dominate the story. While the Street had been expecting a 1-2% sequential decline, the company announced that revenue would fall 6-10% instead. There appear to be two primary causes for this negative outlook.


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