Zacks_Analysts' Blog : Linear Provides Encouraging Outlook - Analyst Blog

Linear Technology (LLTC) reported disappointing second quarter results, with both revenue and earnings missing expectations. But Linear’s revenue guidance for the fiscal third quarter surpassed Street expectations, so share prices jumped 8.3% in after-hours trading.

With gross profit dollars declining 11.8% sequentially and operating profit dollars declining 15.5% sequentially on a revenue decline of 10.8%, it is apparent that the company saw some issues in the last quarter that were not entirely related to the revenue decline.

The gross margin lost 90 bps on a sequential basis and 355 bps on a year-over-year basis, while the operating margin was down 255 bps and 720 bps, respectively on the same bases.

The balance sheet remains in moderately good shape, with inventories up 5.5% (may not be such a bad thing, given the higher revenue expectations for the next quarter). Inventory turns dropped to 3.8X from 4.3X. The cash balance increased $69.8 million. DSOs went down again by a couple of days to 43.

The company provides limited information in the press release, so details for the quarter will not be available until it has its conference call later today.

The positive guidance of a 4-8% sequential increase in revenue was provided on the basis of order trends, which management stated have been trending up. It may be noted here that with the miss in the last quarter, Linear has now reported three successive quarters of misses.

This is exactly the opposite of what we had come to expect of the company, since its previous track record was extremely good. Therefore, we should probably remain a bit cautious about the strong guidance, since there is a possibility that growth could be lower than expected.

That said, we note that the company’s business is well diversified across end markets and geographies with nearly 2/3 of revenue coming from the high-margin industrial and communications markets. Additionally, Linear has defocused the computing market, which is a positive in the current environment where most of the growth is expected to come from lower-margin devices. Moreover, HDD supply chain issues are expected to have a near-term negative impact on computing companies, which will not have such a significant impact on Linear.

Linear shares have been allotted a Zacks Rank of #3, implying a Hold rating in the near term (1-3 months).