Linear Technology Keeps Shrinking, but a Turnaround Could Be Almost Here

Image: Linear Technology.

The technology industry is a huge part of the overall economy, with countless niches in which companies aim to make money. With its integrated circuits and other key products, Linear Technology has had to deal with falling revenues and the subsequent impact on earnings, and coming into Tuesday afternoon's fiscal first-quarter financial report, Linear Technology investors weren't certain whether the company would be able to start turning things around in the hard-hit market. Although Linear Technology's results weren't extremely impressive, its guidance for the future gave investors hope that sales could finally start to go back up. Let's look more closely at what Linear Technology said and why some investors are getting more excited about the tech specialist.

Linear Tech sees continued sales and income declinesLinear Technology suffered from poorer results during its fiscal first quarter. Revenue fell nearly 8% to $341.9 million, which was just slightly worse than the $343 million consensus figure among investors following the stock. Net income declined an even steeper 13.4% to $112 million, producing earnings of $0.46 per share, which met expectations despite falling by double-digit percentages from the year-ago quarter's figure.

Looking more closely at the financials, Linear Technology revealed some troubling aspects to its business. Even with the big decline in revenue, cost of sales fell at a much slower pace, sending gross profits down 9%. Research and development spending accelerated from last year's fiscal first quarter despite the drop in revenue, and that contributed to a double-digit percentage drop in operating income that carried downward to the bottom line.

Linear Technology faced tough conditions throughout the company. Sales dropped in every one of its geographical segments, and most of the company's key business areas suffered losses. In particular, the Industrial segment led all divisions lower in terms of revenue declines, while the Communications and Transportation arena also contributed to falling sales. Slight growth in the Computer segment wasn't enough to overcome the headwinds during the quarter.

As CEO Lothar Maier put it, "We expected a difficult September quarter due to lower bookings as our customers reacted to sluggish global macroeconomic conditions." Yet even though sales were weak, Maier was pleased with earnings, which he characterized as "a good result in a difficult quarter."

What's ahead for Linear Technology?Maier's comments about the near future for Linear Technology were somewhat mixed. On a positive note, the CEO repeated that "we expected the current negative cycle to be a short one as inventories are rebalanced to the current demand." Yet Maier also said that the second quarter of Linear Tech's fiscal year is traditionally weak, and ongoing concerns about the macroeconomic environment could continue to weigh on the tech company's business, especially in the Industrial segment.

That said, some investors will be pleased with what Linear Technology saw as modest guidance. The company said that revenue in the current fiscal second quarter would likely be flat to up 3% on a sequential basis, which would suggest that year-over-year sales could come close to breaking even compared to last year's fiscal second quarter. Given that investors were expecting a decline of nearly 4% on the top line, that guidance was actually fairly positive.

Linear Technology also increased the pace of its share buyback activity. The compay spent $56.6 million during the quarter, up by nearly two-thirds compared to this time last year. So far, the impact on the share price has been minimal, and the number of shares outstanding has actually increased compared to year-ago levels because of stock-based compensation.

Overall, Linear Technology investors seemed pleased with the company's overall message, as the stock rose nearly 4% in the first hour of after-market trading following the announcement. If revenue has finally hit bottom for the company, then the next step in an eventual recovery could bring higher share prices with it. For those who've patiently endured the current downturn, a bounce will come as welcome news.

The article Linear Technology Keeps Shrinking, but a Turnaround Could Be Almost Here originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Linear Technology. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.