Linear Technology (LLTC) Earnings Report: Q Conference Call Transcript

Transcription

1 Linear Technology (LLTC) Earnings Report: Q Conference Transcript The following Linear Technology conference call took place on January 14, 2015, 11:30 AM ET. This is a transcript of that earnings call: Company Participants Paul Coghlan; Linear Technology; VP, Finance, CFO Lothar Maier; Linear Technology; CEO Bob Swanson; Linear Technology; Executive Chairman Other Participants Craig Hettenbach; Morgan Stanley; Analyst William Stein; SunTrust Robinson Humphrey; Analyst Tore Svanberg; Stifel Nicolaus; Analyst David Wong; Wells Fargo Securities; Analyst Wills Miller; Credit Suisse; Analyst Jim Cavallo; CorVel oration; Analyst Amit Shah; Nomura Securities; Analyst Ross Seymore; Deutsche Bank; Analyst JoAnne Feeney; ABR Investment Strategy; Analyst Chris Caso; Susquehanna Financial Group; Analyst Chris Stanley; Unidentified; Analyst Ambrish Srivastava; BMO Bank of Montreal; Analyst Steve Smigie; Raymond James; Analyst CJ Muse; ISI Group; Analyst Craig Ellis; B. Riley; Analyst Vivek Arya; Bank of America Merrill Lynch; Analyst Deepon Nag; Macquarie Capital Partners; Analyst Doug Freedman; RBC Capital Markets; Analyst Gilbert Alexander; Unidentified; Analyst MANAGEMENT DISCUSSION SECTION Good day and welcome to the 2015 fiscal second-quarter earnings call. Today's conference is being recorded. At this time, I would like to turn the call over to Mr. Paul Coghlan. Please go ahead. Good morning. Welcome to the Linear Technology conference call. I'll be joined this morning by Bob Swanson, our Executive Chairman, and Lothar Maier, our CEO. I will give you a brief overview of our recently completed second fiscal quarter and then address the current business climate. We will then open up a conference call to questions to be directed at Bob, Lothar, and myself. I trust you all have seen copies of our press release, which was published yesterday. First, however, I'd like to remind you that, except for historical information, the matters that we will be describing this morning will be 2014 TheStreet, Inc. All Rights Reserved Page 1 of 28

2 forward-looking statements that are dependent on certain risks and uncertainties, including such factors, among others, as new orders received and shipped during the quarter, the timely introduction of new processes and products, and general conditions in the world economy and financial markets. In addition to these risks, which we described in our press release issued yesterday, we refer you to the risk factors listed in the Company's Form 10-Q for the quarter ended September 28, 2014, particularly Management's discussion and analysis of financial condition and results of operations. Secondly, SEC Regulation FD regarding selective disclosure influences our interactions with investors. We've opened up this conference call to enable all interested investors to listen in. The press release and this conference call will be our forum to respond to questions regarding our estimated financial performance going forward. Consequently, should you have any questions regarding our estimates of sales and profits, [or] other financial matters for the upcoming quarter, as well as how they might impact our income statement model and our balance sheet, this is the time we are free to respond to these questions. As you can tell from our press release, the just-completed December quarter generally met our expectations, with sales down the 5% sequentially, which approximated the midpoint of our guidance. Entering the December quarter, we had commented that the December quarter historically has been seasonally slow for us, particularly automotive and industrial customers who temporarily tighten their demand to minimize calendar year and inventory levels and to compensate for annual shutdowns that coincide with December year-end holidays. We had noted that the December quarter has averaged being down 6% over the last four years, so this year's down 5% results approximated the historical average and was more reflective of seasonality than any structural demand issues. Although quarterly sales declined 5% sequentially, they grew 5% year-over-year. Gross margin and operating margin were impacted by the reduction in sales, although they were at the midpoint of the range we had forecast. Net income was down 5%, as a result of the 5% reduction in sales, partially offset by a lower tax rate. The US Congress reinstated the Research and Development tax credit, for This positively impacted our quarterly tax rate, reducing it from an estimated 26% to an actual 22%. Bookings were down modestly from the prior quarter; however, we did have a slightly positive book-to-bill ratio. As occurred last year, the bookings rate increased in the second half of the quarter. Once again, cancellations in the quarter were minor. We continue to believe that inventories worldwide at customers were relatively lean exiting the quarter. With regard to our major end markets, industrial had the largest increase, and communications had the largest decrease, just the opposite of last quarter, although none of these changes were particularly significant. With regard to the detail of our financial results, sales decreased by 5% from the prior quarter. The gross margin percentage, at 75.4%, was impacted by the reduction in sales, and consequently, was down from 76% last quarter. Average selling price at $1.88 increased from $1.87 last quarter. Operating expenses were unchanged, having benefited from a one-week shutdown at the end of December. Operating income and pre-tax income of 44.9% of sales were down from 47% in the prior quarter due to the reduction in sales. The Company's effective tax rate decreased to 22% from 26% last quarter. Finally, net income of $123.6 million decreased from $129.5 million reported last quarter, as lower sales were partially offset by a lower tax rate. Our return on sales of 35.1% was similar to last quarter's 34.9%. For the second quarter in a row, our diluted shares outstanding were slightly lower, as we purchased shares in the quarter to offset any potential dilution from employee stock options. Worldwide headcount increased 1%, most of which was in our overseas factories. In summary, the effect of the items I just listed on the published quarterly results was that revenue was $ TheStreet, Inc. All Rights Reserved Page 2 of 28

3 million for the second quarter of FY15, compared to the previous quarter's revenue of $371.1 million, and $334.6 million reported in the second quarter of the previous fiscal year. GAAP diluted earnings per share of $0.51, while down $0.02 from the previous quarter's earnings per share of $0.53, were $0.07 better than reported in that second quarter of FY14, which had lower sales and higher interest expense compared with this quarter. The Company no longer has interest expense compared with $12 million of interest expense in the second quarter of the prior fiscal year, as a result of the extinguishment of its convertible senior notes at the end of FY14. Earnings per share this quarter would be $0.56 without the impact of stock option accounting. During the second quarter, the Company's cash, cash equivalents, and marketable securities increased by $45.2 million, to $1.073 billion, net of spending, $65.8 million on cash dividends, and $34.7 million on stock purchases. The Company also announced that it would raise its quarterly dividend by 11%, from $0.27 per share to $0.30 per share. At the current stock price, the Company's dividend yield is 2.7%. The cash dividend will be paid on February 25 to stockholders of record on February 13. Looking forward, the March quarter is historically a growth quarter for us. Although there are some weaker regions in the global economy, the USA is strong. Our book-to-bill ratio was slightly positive in the December quarter and we typically see strong bookings momentum in the automotive and industrial markets in the March quarter. Accordingly, we are currently forecasting revenues to grow sequentially by 4% to 7% in our fiscal third quarter. Overall, we continue to be optimistic about the increased electronic content in our end markets, especially automotive and industrial. Now I would like to address the quarter's results on a line-by-line basis, starting with bookings. Bookings decreased this quarter over the previous quarter, although we had a modest positive book-to-bill ratio and bookings increased every month within the quarter. Geographically, bookings were up in the USA and down internationally. Within international, bookings were down in Asia and Europe and flat in Japan. By end markets, industrial was up the most, and communications down the most. At this time every quarter, we give you a breakdown of our bookings percentages by end markets to give you insight into those markets that drive our business. Industrial continues to be our largest area. Industrial was 44% of our bookings, up from 43% the previous quarter. Within industrial, USA and Japan were up, and Europe was down. This increase in industrial positions us well for the March quarter. Our industrial business is very broad-based, both geographically and by end products. The communications area, at 19%, was down from 20% last quarter. Europe was flat, whereas China and the USA networking and infrastructure companies were down, which is the opposite of last quarter. Cell phone continues to be a very small part of our business and rounds to less than 1% of our business. Computer remained at 9% of our business again, while down modestly in absolute dollars. Within computer, we service opportunities in notebooks, desktops, tablets, servers, storage devices, and printing and imaging end products. Automotive continues to be a focused area for us and remained at 19% of our bookings, while down modestly in absolute dollars. In the last 10 years, as we have emphasized this market, it has quadrupled as a percent of our bookings. The expansion of existing Linear parts into new car models and also new parts for new programs continue to help us. Our battery monitoring products for hybrid and electric vehicles are achieving expanding market acceptance. In addition, we continue to distinguish Linear as a high-quality supplier in important international automotive manufacturers TheStreet, Inc. All Rights Reserved Page 3 of 28

4 Consumer, which has been our smallest end market, remained at 3% of our business, while down in absolute dollars. Finally, the military, space, and harsh environment products remained at 6%, although up in absolute dollars. The USA and Europe are the predominant geographic areas for this business. In summary, this is a good distribution of business by end markets for us, with our largest areas continuing to show the most overall analog market share. Whereas five years ago, 14% of our business was in cell phone and high in consumer-related markets, now only 3% of our business is in these generally commodity and volatile analog areas. On the other hand, automotive, which was 8% of our business five years ago, is now 19% of our business, and industrial has grown from 35% to 44% of our business. With regard to where our bookings are actually created, 59% are created internationally, and 41% in the USA. Internationally over time, we have been helped by the strength of our Japanese and European automotive customers. Moving from bookings to sales, net sales decreased 5% from the prior quarter, while improving 5% from the similar quarter in the prior year. Sales decreased similarly, both internationally and in the USA. Within international, sales decreased the most in Europe and the least in Japan. In summary, the USA is 27% of sales, similar to last quarter. Europe, at 19%, was down from 20% last quarter, which is not unusual for Europe in the December quarter. Japan, at 16%, was up from 15% last quarter. Asia Pacific, at 38% of sales, was similar to last quarter. Gross margin, at 75.4% of sales, was down from 76% last quarter. Slightly higher ASP was more than offset by lower factory efficiencies, largely due to absorbing fixed costs over a lower sales base. ASP at $1.88 increased from $1.87 last quarter. The Company did shut down for the December holiday week this quarter, as it usually has. R&D. R&D at $65.1 million decreased $500,000 from last quarter, while increasing as a percent of sales from 17.7% last quarter to 18.5% this quarter due to the decrease in sales. Savings and labor related costs, due to lower profit-sharing and the holiday week shutdown, were partially offset by R&D-related supplies and other expenses. SG&A, selling, general, and administrative expense, at $42.5 million increased $448,000 from the previous quarter's $42.1 million, and increased, as a percent of sales, from 11.3% to 12.1%, due largely to the decrease in sales. As in R&D, labor costs were lower, due to lower profit-sharing and the holiday shutdown. These savings were offset by higher non-labor related communications cost and other expenses. Operating income. As a result of the above, operating income decreased by $16.2 million, and as a percent of sales, declined from 47% to 44.9%, primarily due to the decrease in sales. 44.9% operating profit is still strong profitability and clearly puts us ahead of our peers in this financial performance measure. Interest income was minor. Consequently, pre-tax profits approximated operating income. The Company's pretax profits were $158.5 million, down from $174.9 million last quarter. Pre-tax profits are now 44.9% of sales versus 47.1% last quarter, again, with the decrease due to lower sales volume. Our quarterly effective tax rate of 22% decreased from 26% last quarter. The US Congress reinstated the R&D credit for This resulted in a benefit to the Company's effective tax rate, which was reduced this quarter by 4 percentage points, 3 of which related to prior quarters. We expect next quarter's tax rate to be 25.5% before discrete items, if any. The resulting net income of $123.6 million was down 5% from the $129.5 million reported in the previous quarter, largely due to the decrease in sales, partially offset by lower taxes. The resulting return on sales of 35.1% was similar to the 34.9% reported in the previous quarter TheStreet, Inc. All Rights Reserved Page 4 of 28

5 The average shares outstanding used in the calculation of earnings per share decreased by 210,000 shares. Share increases relating to stock option exercises and employee restricted stock grants were offset by stock purchases in the open market. GAAP earning per share was $0.51, down from $0.53 the prior quarter, again due to lower sales. Without the impact of stock-based compensation of $17.9 million, the diluted earnings per share would have been $0.56 per share. Moving to the balance sheet, cash and short-term investments increased by $45.2 million. For the 115th consecutive quarter, the Company had positive cash flow from operations. The Company provided $148 million in cash flow from operations, of which $65.8 million was employed to pay cash dividends, $34.7 million to purchase common stock, and $16.2 million to purchase fixed assets. Our cash and short-term investment balance is now $ billion and represents 62% of total assets. Accounts receivable of $148.6 million decreased by $26.9 million, as collections from a higher sales quarter are replaced with receivables from a lower sales quarter. Consequently, our day sales and accounts receivable were 38 days, lower than the 43 days reported in the last quarter. Inventory, at $100.1 million increased $2.5 million from last quarter. This increase was in finished goods to build up shippable inventory prior to Chinese New Year when our Asian factories will be closed for a week. Raw materials and work-in-process inventory were flat. Our quarterly average inventory turns is 3.5 times, down slightly from 3.8 times in the prior quarter. Deferred taxes and other current assets of $99.7 million increased $12.8 million from the prior quarter. This was largely in prepaid taxes, partially to recognize the benefit from the reinstatement of the R&D credit. Property, plant, and equipment increased by $3.2 million. We had additions of $ million and depreciation of $ million. Most of the additions were for manufacturing equipment in fabrication and test and assembly worldwide. We have increased our capital expenditures this year in response to production requirements we anticipate in calendar We expect additions to be roughly $80 million and depreciation roughly $50 million for FY15. Identified intangibles decreased by $550,000 as in past quarters, due to quarterly amortization. Goodwill remained unchanged. Finally, on the asset side of the balance sheet, our return on assets was 28.9%, similar to last quarter's 30.9%, slightly impacted by the reduction in sales. Moving to the liability side of the balance sheet, accounts payable decreased by $7 million, largely due to timing differences on recurring payable items. Accrued income taxes, payroll, and other accrued liabilities decreased by $22.7 million. An increase in our profit sharing accrual, which is paid out semi-annually, was offset by a decrease in our income tax accrual. Deferred income on shipments into distribution increased modestly by $378,000, as our shipments to our US distributors were marginally greater than what they shipped out to their end customers. Our accounting is conservative as we do not record a sale on our books until distribution has made a sale to their end customer. Worldwide, we continue to believe our inventory levels are lean. We continue to closely control our inventory at distributors to properly position the inventory relative to potential demand. In total, current liabilities are relatively small, and therefore, we have a strong current ratio. Our current ratio was 8.4 to 1 versus last quarter's 7 to 1. Deferred tax and other long-term liabilities of $120.3 million increased by $10.4 million, largely due to increases in long-term taxes on various tax timing differences. Changes in the stockholder equity accounts were primarily the result of the usual quarterly transactions for net income, dividends paid, and employee stock activity. As stated earlier, the Company announced it will pay a quarterly dividend of $0.30 per share. The Company 2014 TheStreet, Inc. All Rights Reserved Page 5 of 28

6 believes that paying a dividend is an important way to return value to its shareholders. The Company began paying a dividend in 1992, and has increased it every year since, and currently pays approximately a 2.7% yield. Looking forward, we are coming into the second half of our fiscal year, which is normally our strongest half. The March quarter is historically a strong quarter for two of our largest end markets, industrial and automotive. The following factors impact our guidance. On the macroeconomic [front], the US economy is strong and is projecting stronger growth than reported in recent years. On the other hand, Europe, China, and Japan are experiencing reductions in growth. The dollar is strong, which has pluses and minuses. Similarly, oil prices are low, which also has positive and negative economic effects. From a Linear-specific standpoint, we have a positive book-to-bill ratio going into the March quarter. We had good bookings momentum at the end of December and so far bookings have been off to a good start in January. Chinese New Year is this quarter. Our foreign factories will be closed for a week. It's always interesting to monitor Asia momentum post the New Year holiday. Finally, we continue to believe inventory at customers are lean, based on our continuing minor cancellation activity. Summarizing these various data points has given us a positive bias in the short-term. Consequently, we are currently forecasting revenues for the March quarter to grow sequentially in the 4% to 7% range. Depending on sales, operating margin as a percent of sales should improve modestly. Our ongoing effective tax rate should be roughly 25.5% prior to discrete items, if any, that may arise. In summary, looking beyond these near-term market events, the major market opportunities that drive our business demonstrate continuing growth, particularly in the industrial and automotive end markets. Increased analog innovations in our other end markets will also benefit us. We believe we are in the right markets at the right time with the right innovative products to execute our strategy and exploit our growth opportunities. We are strong in the areas we want to be -- industrial, communications infrastructure and networking, and automotive -- and believe that we are in an innovationdriven environment. Our strategy is differentiated from our other analog competitors. We dominate in different end markets, we are a more reliable supplier with consistently lower lead times and better support, and our technology and support is valued, as is evidenced by our higher operating margins. Finally, at this time of year, we review our dividend. We have increased the dividend every year, although modestly in the last several years, as we have accumulated cash to pay down our debt. In May 2014, we extinguished the debt. Consequently, going forward, we are able to return more current cash to shareholders. Therefore, we have announced increasing our quarterly cash dividend by 11%, from $0.27 a share to $0.30 a share. Since extinguishing the debt, we have also increased our quarterly share buybacks. This quarter, we bought back 725,000 shares, and for the second quarter in a row, we have not had an increase in our outstanding shares. Increasing our dividend and our share buybacks will have us distributing roughly the quarterly cash that we generate onshore. I would now like to open up the conference call to questions be addressed either to Bob Lothar or myself. QUESTIONS & ANSWERS 2014 TheStreet, Inc. All Rights Reserved Page 6 of 28

7 (Operator Instructions) Craig Hettenbach, Morgan Stanley. Craig Het t enbach (Analyst - Morgan Stanley): Great. Thank you. Questions for Lothar. Although the near-term environment was described as you have some -- a positive bias here, the macro has been a bit choppy by region, so just wanted to get a sense of the implications of, for your customers, in terms of design wins you have and how they see business and ramping those wins? Has that had any implications? Lothar Maier (CEO): Design wins and into design sales, that is a long multi-year period, so looking at that quarter-to-quarter is a little bit hard to do. I would probably step back a little bit and say just look at the markets that we are focused on -- the automotive and industrial markets and the communications markets. Those markets are really the growth drivers for the analog business and we are highly concentrated in those markets. So a better thing to look at it is rather than what designs wins we've got in this quarter is just looking at how we are positioned, the Company relative to the markets, and what markets are doing well. We are about as good aligned as I would say we've ever been. Craig Het t enbach (Analyst - Morgan Stanley): Got it. Thanks for that. And as a follow-up, can you talk about the wireless sensor networks business. I know it's early stages, but just what the customer's appetite is for those products and any key applications as that business emerges that you would call out? Lothar Maier (CEO): Yes. We did the Dust acquisition now almost exactly three years ago and we've seen growth in sales of those initial products every single year, but granted it's on a modest base. About 1.5 years ago, we really introduced the first new products post the acquisition. These are the single-chip 5800 series Dust products. Those products have been very well-received in the market. There's a lot of interest in it. We've measured it in terms of how many demonstration kits that we give out and how many demos we do. But in terms of it becoming a significant part of our business, we are still looking at a few years for that to happen, but I can tell you the interest is very high, the products are very good, and they are really designed specifically towards more industrial applications, not consumer applications. Craig Het t enbach (Analyst - Morgan Stanley): Got it. Thanks for that. William Stein, SunTrust Robinson Humphrey William St ein (Analyst - SunTrust Robinson Humphrey): Great. Thank you for taking my question. I'm hoping to dig in the margins a little bit. They came in slightly below consensus and I understand you're adding a bit of capacity. In the past, you talked about $400 million per quarter as the [as-tooled] capacity and then we can do some math around drop-through on revenue growth as -- where we'd expect margins to ramp. Can you recalibrate us on that metric? What's your as-tooled capacity today and where do you anticipate margins going longer-term? 2014 TheStreet, Inc. All Rights Reserved Page 7 of 28

8 Lothar Maier (CEO): You got it pretty much right on. We are tooled up to do around $400 million. We can grow beyond that without having to do any brick-and-mortar type of expansion, so it would just be capital equipment and people that would be added so the cost will be gradual as we grow beyond it. The margins, as we approach of that number, we will continue to improve. If you look back at the similar seasonality quarters in 2011 and 2012 when our sales were reduced by amounts similar to last quarter, the impact the gross margin was similar, about 6/10 of a point, so I do not think there was anything unusual in gross margin that happened in the quarter that just ended. William St ein (Analyst - SunTrust Robinson Humphrey): That's helpful. Thanks, Paul. Maybe I can just follow up with one on your outlook for communications equipment and wireless base stations, in particular. You noted it was -- it certainly didn't fall off a cliff but it was slightly weaker in the quarter. I'm wondering if you have any outlook for the full year and if you have any color by region that would be helpful? Thank you. I'm impressed you've asked us that question because our historical accuracy in predicting what's going to happen in communications infrastructure is not to be proud of, although comparatively, with the rest of the industry, maybe we're equally as poor. So for us, it's really hard to tell. China, as you know, tends to be sporadic on their implementation of the infrastructure build-out. My guess is the negatives you hear out of China are that demand is weakening a bit, although still strong comparatively with other regions. Although I would think lower oil prices are probably going to help China in the near-term and maybe spur some available spending for them, and who knows, maybe that will play into that market. William St ein (Analyst - SunTrust Robinson Humphrey): Thanks for that outlook and congrats on the good outlook. Thank you. Tore Svanberg, Stifel Nicolaus T o re Svanberg (Analyst - Stifel Nicolaus): Yes. Thank you. The first question, if I look at the calendar year 2014, your sales were up 9% year-over-year. As you look at the puts and takes of the economy this year, I know it's -- and I recognize it's early on and you don't give annual guidance, but is there anything out there that would suggest why you wouldn't be able to at least repeat that again here this year? We're going into the strongest half of our year, which is the first half of the calendar year, so the guidance we've given you -- the midpoint of that guidance would have us growing 7% year-over-year, up from 5% the previous quarter. Our hope is -- long-term, our goal is to continue to grow roughly 10% TheStreet, Inc. All Rights Reserved Page 8 of 28

9 We grew last calendar year 9%. It is still early to look at We think the March quarter will be off, for us, to a reasonable start, as we have guided. So for us, right now, we don't forecast for the year, as you said, but we would hope we would do something similar at this stage to last year. T o re Svanberg (Analyst - Stifel Nicolaus): Very good, and Paul, based on your comments about operating margin be up modestly in the March quarter, should we infer that OpEx will be flat sequentially or will the improvement come primarily from sales and gross margin? The improvement would come primarily from sales and gross margin. Operating expense will be up a bit. We will not have a shutdown in the March quarter. We did have a shutdown in the December quarter. The first week of the March quarter was the week between Christmas and New Year's, so there were some extra vacation there. That'll soften a little bit the shutdown impact going into the March quarter, but the primary game will be the percentage follow-through from the increase in sales. T o re Svanberg (Analyst - Stifel Nicolaus): Okay. I'm just going to sneak in one last follow-up. Your inventory days are now at 105. They were 100 days last quarter. That is a little bit higher than what it is usually for Linear. You mentioned some inventory build or buffer because of shutdowns related to the Chinese New Year, but is there anything else structurally going on in the market that is causing you to maybe hold a little bit more inventory than historically? I don't know if it's structurally. There are a few things idiosyncratic to us. If you go back to, I don't know what historic base you're saying, but if you go back a few years, our average selling price is higher now, so that if we maintain a similar number of units, our inventory value would be higher. We have less concentration of sales in the computer market than we had several years ago, so we have a broader disbursement of our sales. Then the mix of our products is moving more towards newer products and the newer products are more complex than the older products, carry a bit higher ASP-- Unidentified Company Representative: Longer cycle times. And a little longer cycle times to build. Then if you add to that the module business, which we have, that has raw material parts that our chip sales do not have, so that raw material would have been impacted by module sales, and the module sales have been quite strong for us. So overall, if you add all those pieces together, you would get to the reason why the inventory overall has increased. T o re Svanberg (Analyst - Stifel Nicolaus): That's very helpful. Thank you very much. David Wong, Wells Fargo Securities. David Wo ng (Analyst - Wells Fargo Securities): 2014 TheStreet, Inc. All Rights Reserved Page 9 of 28

10 Thanks very much. Can you give us some idea of where in cars your products are used, and in particular, what application segments in automotive have driven automotive growing as a percentage of your total sales? Lothar Maier (CEO): If you look back a few years, the majority of our automotive sales really came in the navigation and infotainment part of the vehicle. If you probably look in the last five years, we've held that business, the navigation portion, pretty steady, and the growth we've seen is everything other than navigation, so it's in the drivetrain, it's in sensors, it's in everything else around the car, the BMS products have been a good growth for us. Basically, we're probably about one-half in navigation type of applications and the rest is around the car. Certainly, the part that's growing the fastest is the non-navigation and if you want, better fuel efficiency, you will want better -- lower emissions, those types of enhancements are all going to come from the nonnavigation, in an interesting though that have come up don't started to come up in the last few years is that the new cars for the leading-edge cars are just jammed full of sensors. And this is cameras, it is radar systems, it is laser systems, it is image detection systems. And a lot of that -- there's a lot of that electronics actually goes back through the navigation system console that's their and so there's good growth we think it going forward and people talk a lot about this autonomous driving. that's a long ways away but the a step in that direction is all of these sensing applications and that's an area that we see a lot of interest in the automotive customers. David Wo ng (Analyst - Wells Fargo Securities): Great. Thanks. And just to push on an earlier question if your were running at what you'd consider to be optimal utilization what gross margin range would you be in and in the long range what would operating margin do think you could get to? Lothar Maier (CEO): Well there's so many variables in that other than just getting to 400+ million but we would think we could get our gross margins towards the high 70 percentage numbers. We've done that in the past so we probably come close to but maybe not exactly hit our previous high peaks and then operating margins is our sales were to grow well on a quarterly basis, so that we get to the 400 and beyond quicker rather than slowly, then operating margins could probably get back in the 50% range. David Wo ng (Analyst - Wells Fargo Securities): Great. Thanks very much. John Pitzer, Credit Suisse Wills Miller (Analyst - Credit Suisse): Hello. This is Wills Miller calling in for John Pitzer. Congrats on the results and thank you for letting me ask a question. The last time your quarterly revenue was hovering just below $400 million was calendar year 2010 at which point gross margin was about 78% and operating margins were in the low to Midshipman 50% range. If I grow revenue seasonally over the next couple quarters I get revenue back in that range. What margins should we expect those levels if I assume about 80% incremental gross margin and I get about 76% gross margin is this reasonable and in the right ballpark? 2014 TheStreet, Inc. All Rights Reserved Page 10 of 28

11 So the math you just explained to me quickly said that if we grow to $40 million again I don't know how fast you got us there but you are having gross margin at 76%. You said. Wills Miller (Analyst - Credit Suisse): Correct. Which is what gross margin we had last quarter when we were at $370 million. So my guess is we could do a little better, we'd have to see how it plays out and what factory efficiencies we are able to achieve. But my guess is you are 76% might be a little conservative but not dramatically far off. Wills Miller (Analyst - Credit Suisse): Okay. Thanks. All high numbers to begin with. Wills Miller (Analyst - Credit Suisse): Thank you. That was helpful and then from again market perspective I was wondering if you could break your end markets in terms of the expectations for your year-to-year growth for Well,, the one we think there's the most growth probably potential would be automotive, industrial, to us would be second, but there's good innovation going on in other markets as well. We have POE products that are quite attractive and other products that are quite attractive it -- RF products et cetera in the communications markets so those are the three that constitute the lions share of our end markets for sure, roughly 90% and we see growth opportunities in all of them but probably automotive would be the fastest-growing. Wills Miller (Analyst - Credit Suisse): Thank you. Jim Cavallo, CorVel oration. Jim, your line is open. Results were so good, Jim, you're just speechless. Check the mute function on your phone, Jim. Jim Cavallo (Analyst - CorVel oration): Can you hear me now, guys? Sorry about that TheStreet, Inc. All Rights Reserved Page 11 of 28

12 Yes. Jim, I can just. Jim Cavallo (Analyst - CorVel oration): Okay. Sorry about that. I apologize so Paul you guys have been growing a really nice percent year-over-year clip for a handful of quarters, left couple quarters closer to verify percent or 7% range. You commented that you think your goal is 10% growth. The end markets, all of your end markets collectively don't grow 10% so that would imply your ability to gain share -- which markets do think you'd be able to most gain share in and where do think that share would come from? If not from specific customer competitors -- what products do think you could gain share in to make up the difference between your 10% growth targets and the end markets which collectively don't grow at that? Lothar Maier (CEO): Yes. Maybe I can take a stab at that. If you look at the overall analog market, it's maybe a $44 billion market. And if you look at what segments are growing in that market, it's really long-term, the industrial market has steadily grown, 10 years ago 7% of the analog market. Today's over 20% of the market. A similar story is in the automotive market where a few years ago -- it was not a big part of the business, now it's over 20% and so the industrial and automotive markets for total analog are maybe 43% of the market and their growing roughly 2% or 3% market share every year. So in a few years, automotive industrial is going to be the lions share of the analog market and that's where we as a company are very focused on. So not only are we in the markets that are growing the fastest, it's becoming a bigger and bigger portion of our business as well. So granted maybe the overall analog market is growing slower, how we look at it is we're in the segment that's growing fastest and we don't even necessarily have to take market share. We just have to ride along with the growth of the automotive and industrial markets and then to a lesser extent, just hang onto the business we have in the communications and that will allow us to do this 10% growth. Bo b Swanso n (Executive Chairman): Yes. If you look at the numbers, if the overall market grows by 5%, that's a $2 billion increase incrementally. If we can get $150 million of the $2 billion we've just grown by 10% so it's not like we have 80% market share or even 20%. We have a small market share. Jim Cavallo (Analyst - CorVel oration): So if I could specifically on the follow-up focus on the automotive business, I think that automotive has been a terrific market for the whole industry and it certainly for linear in particular. For a little while now. And if I think about 2% to 3% long-term global auto unit growth and about 5% content per box that would make that may be a 7% or 8% core market in an average year. Do you think those estimates are wrong? Or again, do you just think the share gain that you can have within automotive can make up the gap between that? And that's maybe or going forward 50% of your business, but the other 50% still wouldn't grow at 10%. I'm just trying to bridge the gap between the 10% targets and even at the best end market looking like long-term that's probably 7% or 8% growth. Lothar Maier (CEO): 2014 TheStreet, Inc. All Rights Reserved Page 12 of 28

13 Yes. it's probably not accurate to try to look at our growth in automotive relative to how many cars get sold every year. And even just taking in average number of increase in electronics, we are focused on the leading edge of products in cars and the amount of electronics that's going in these high-end cars and that's really where a lot of our business is -- is growing -- I don't have the number but I'm sure is growing a lot quicker than the 7% that you quoted. And so, we're not in the run-of-the-mill type of electronics in the car. We are -- cars are getting vision systems. They're getting stop start systems. They've got EV's and ATVs and so that's the business that we are targeting at and my sense is that's probably going to grow substantially more than the 7% you quoted. Jim Cavallo (Analyst - CorVel oration): Very helpful. Jim, in the paper last week out here, they said that there was a broad survey done by autotrader.com and they -- and the results of which were that the consumers in that survey said they would spend up to $1500 extra for more electronics in their car. So that it's not -- the other advantage we all may have in automotive is the purchaser of cars is willing to spend more for his next car. So it's not just the pure replacement. So I don't know if that might impact your 7% somewhat if that holds to be true. Bo b Swanso n (Executive Chairman): Well, and that report also talked about in their opinion we were just at the beginning of this electronics implementation in automobiles. And the other thing it said is something that we speculated on that three times as many people make a decision on buying a car based on electronics in it that horsepower. Which is pretty interesting. Jim Cavallo (Analyst - CorVel oration): Sure. That's all incredibly helpful. I appreciate all that very much. Thanks, Jim. Have a nice day. Amit Shah, Nomura Securities Amit Shah (Analyst - Nomura Securities): Yes. Thanks a lot. I was looking at the five-year and 10 year median growth rates for the March quarter, which is about 4%. And one thing that people are struggling to reconcile today is how you can be guiding for better than normal growth given the macro backdrop which, Paul, you articulated is mixed. You mentioned strength in North America but as a percentage of your business, that's only 25%, whereas the other regions -- Europe, Japan, and the rest of world which you indicated our decelerating, compromise -- or comprised the remaining 75%. Well, first of all, you are correct in saying that 27% of our sales were into the US, but I also mentioned in my 2014 TheStreet, Inc. All Rights Reserved Page 13 of 28

14 opening comments that 41% of the demand we created was created in the US. So that -- some of the actual manufacturing and selling of that have been done offshore but the demand was created in the US. Secondly, and I'm no economist but historically if the US economy's been strong, that's the best of having strength in any of the other economies. So the US economy tends to have more of a worldwide impact if it's strong then if Europe's a little weak, or Japan's a little weak, or China is a little weak. And China, being a little weak, it's still growing 7% so that's a pretty solid number. And then, when we look at oil prices,, people I know Wall Street every day for the past couple weeks has let us all know that lower oil prices is bad for the stock market but for consumer demand, for people that may want to buy a car, or by a product whose oil prices dropped 50%, I don't know if we fully anticipated economically what that impact will be in the next year or two or so. So you said our midpoint a little higher than the 4% and you alluded to but not dramatically higher than that. So we feel we can do what we've estimated. Amit Shah (Analyst - Nomura Securities): And this point on oil prices, Paul, is an interesting one, and you mentioned that it has potential positives and negatives for linear. I'm curious what you think it means for your industrial business. My impression would be that this would negatively impact your industrial business, but based on your outlook, it sounds like things are pretty good. I don't know why offhand you would think it would be negative. One of the significant costs to an industrial company is generally the cost of energy, heat, light, and power. And to the extent that cost is less, that would give the money that they could find projects like someone earlier asked us about how our wireless business is going. And those are projects that industrial companies have to decide to fund and they don't like to abort. So if they have a little more lower expenses, that can give them more cash to help fund the projects like that. What particularly did you have in mind as to why lower oil prices would harm industrial companies? Amit Shah (Analyst - Nomura Securities): Well, my understanding of that many of these companies have 20% to as much as 50% of their exposure -- revenue exposure to the oil and gas markets and given the decline in the commodity, that might affect their CapEx investments and therefore spending on projects that linear may be tied to. Well, -- again, I haven't heard that percentage but I would personally think that industrial companies have much greater exposure to the automotive end market than they would to the down hole exploration end market. So that certainly in Europe a lot of industrial companies feed into the automotive market. And they are, if you have lower fuel costs, you may have people willing to buy a new car sooner. Lothar Maier (CEO): And maybe if I could add, is from an industrial customer, the benefit of low oil prices is not just in their electrical bills but a lot of raw materials have their origins in petroleum as well. And so, you'll see a broader impact as well where just the cost of raw materials that have their source with petroleum are also going to go down which I can only see being good for our industrial customers. Bo b Swanso n (Executive Chairman): 2014 TheStreet, Inc. All Rights Reserved Page 14 of 28

15 Yes. I saw another statistic that said that what this $50 barrel price means it to consumers in the US alone. It is an extra $400 million a day of extra money they have to spend. They're going to buy things that drive all kinds of markets. Amit Shah (Analyst - Nomura Securities): Yes. I -- your logic makes sense. You wouldn't know it though looking at the way industrial stocks are trading today but I appreciate the feedback. Thank you. Bo b Swanso n (Executive Chairman): It takes a while. Thank you Amit. Ross Seymore, Deutsche Bank. Ross Seymore (Analyst - Deutsche Bank): Hello guys but I wanted to switch the conversation over onto the cash usage perspective. You raise the dividend which is great. Congratulations on that. Can you just talk about what your goal in returning cash to shareholders is? And specifically I wanted to get into the percentage of your ongoing cash flow and even the cash that's on your balance sheet that domestically held. It seems like every dollar of your domestically held cash flow is going back to shareholders but the vast majority of that is going to be in the dividend. So any color around your framework there would be helpful. Well, our -- the percentage of our domestic cash that originates -- let me restart again. The percentage of our cash that originates domestically is probably somewhere in the 70% to 75%. The amount of -- the 70% to 75% needs to fund the corporate expenditures so we can't use our offshore cash to pay the dividend we can't use our offer cash to buy back stock. We have to use our domestic cash to do that. If you were to look at our balance sheet you would not get the same proportion 70% of the cash being onshore and 30% offshore because just a few months ago we paid off a big piece of debt. We extinguished that debt. So on our balance sheet, maybe as little as 10% or 15% of our cash is onshore where as the cash that gets generated is dramatically higher percentage. So when we look at the cash we have, we look at -- we don't need to accumulate more cash to pay off debt as we had been doing for several quarters. And I'll remind you that was -- and for several years. That was to pay off debt that was incurred to buyback 27% of the shares outstanding. So when we look at -- we no longer have that need for cash and we look at the dividend and the repurchase of shares our top priority is to continue to have a strong dividend and to increased it every year. And concurrent, with somewhat secondary priority would be to buy back stock. Ross Seymore (Analyst - Deutsche Bank): Great. Thank you. Shifting gears a little bit to a different topic, the COMs business you answered earlier the question about what was going on in the COM's infrastructure or at least take your best shot of as you joked 2014 TheStreet, Inc. All Rights Reserved Page 15 of 28

16 about. Out of that 19% or 20% of sales can you give us a rough estimate on how that splits between wireless infrastructure and Wireline would be the other category? This is a guess because we accumulate the data by customers. So as you might imagine, some customers you can pick a large Chinese customer and that customer would be both in networking and wireless infrastructure for example. But with a rough cut, my guess is wireless infrastructure maybe 40% of our COM's business and networking and the cloud and all of those good opportunities for us at roughly 60%. Ross Seymore (Analyst - Deutsche Bank): Perfect. Thank you. 60% of our business in communications. Ross Seymore (Analyst - Deutsche Bank): Got it. Thanks again. You're welcome. JoAnne Feeney, ABR Investment Strategy. Jo Anne Feeney (Analyst - ABR Investment Strategy): Yes. Thanks and congrats on that nice guidance. First a specific question on inventories I'm wondering if you can shed a little bit of light on the situation at your distributors both US and internationally and in terms of sell in versus sell through over the last quarter and what has transpired so far in January. Well, our US distributor's, as I said, Eric deferred income at distributors hardly changed so what we shipped into distributors last quarter very, very closely approximated what they shipped out and I don't think it's -- and it's probably quite similar or not probably does it is quite similar for our international distributor. So I don't think we've built any inventory disturbance last quarter. Jo Anne Feeney (Analyst - ABR Investment Strategy): Thanks. That's helpful and then a longer-term question. Maybe the issue of long-term growth prospects came up earlier in a couple of questions and it was really helpful clear for cash in on the auto side. I'm wondering though longer-term, if you are trying to target 10% do you think that this way of doing it relying on the electronics content increases in auto and industrial would be sufficient to generate a long-term prospect of 10% or so growth? Or do you need to see a turn towards a greater aggressiveness in acquisitions and what metrics would you be happy with to do further acquisitions? Lothar Maier (CEO): We can do our growth plans really without the need of acquisitions. I think that history have proven that out TheStreet, Inc. All Rights Reserved Page 16 of 28