Linear Technology Delivers Solid Results, but the Future Looks Uncertain

Source: Linear Technology.

The semiconductor industry is a cyclical business, and analog circuit-maker Linear Technology has seen its share of ups and downs over the past year. Coming into Tuesday afternoon's fiscal third-quarter financial report, Linear Technology investors hoped that the company would bounce back from a seasonally weak period to post stronger growth and set the stage for further gains. For the most part, Linear Tech fulfilled those hopes with reasonable gains in revenue and earnings that hold the possibility of further increases down the road, despite some overall macroeconomic concerns. Let's look more closely at the latest from Linear Technology and what it sees ahead for its own business and for the tech industry more broadly.

Linear Tech comes out on topLinear Technology mostly satisfied investors with its primary financial numbers, posting higher figures for both sales and net income. Revenue gained nearly 7% from year-ago levels to $372 million, just barely surpassing consensus estimates among those following the stock. Net income gains of 15% produced earnings of $0.55 per share, topping projections by $0.02 per share and producing sequential gains of about 8% compared to the fiscal second quarter.

Looking more closely at the numbers, a couple of things stood out among Linear Technology's results. First, the company managed to extinguish all of its interest expense, with the company having paid off its last remaining convertible debt at the end of the 2014 fiscal year. Also, Linear Tech continues to commit itself to finding new sources of revenue and growth, with spending on research and development climbing 8% to $67.1 million. Finally, with favorable book-to-bill ratios, Linear Tech hasn't seen any signs of slowing conditions in its core business, and improving margins reflect healthy finances among its key customer groups.

Linear Technology's leadership was pleased with the turn of events for the company after a somewhat difficult period in the previous quarter. "The March quarter is historically a growth quarter for us," said CEO Lothar Maier, "and this year, we continued that trend with another successful quarter." Maier also pointed out that "our largest end markets, industrial and automotive, [were] showing the most gains."

Source: Linear Technology.

What's ahead for Linear Technology?Looking forward, Linear Tech has fairly strong ideas about how the remainder of the fiscal year will go. Maier said that the company currently believes that sales will grow by 2% to 5% in the fourth quarter compared to the third quarter, equating to between $379 million and $391 million. That range bookends the current estimate of $388 million reasonably well, even as Linear Tech anticipates that worldwide macroeconomic weakness might end up weighing on its success to some extent.

Linear Tech has also kept pushing forward with its return of shareholder capital. The company paid $73 million in dividends during the quarter and also made share repurchases of an additional $23 million. Even with those moves, though, cash levels rose during the quarter, reflecting the healthy free cash flow that Linear Technology has available to reward shareholders and potentially reinvest in its business.

Linear Technology responded somewhat favorably to the news, with shares climbing about 1% in the first half-hour of after-market trading following the announcement. Still, looking forward, it'll be interesting to see how Linear Tech's future results compare with those of some larger chipmakers. As some of the cyclical factors that have pushed up chip demand across the industry start to subside, investors have begun to gravitate away from the sector in favor of other opportunities. If lower capital spending eats into technology budgets, then Linear Tech could end up being one of the first hit in the fallout. Still, with longer-term trends still pointing toward expansionary conditions, Linear Technology has the capacity to start accelerating its growth once again if it can execute well on its big-picture strategy.

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