Born amid doubt and uncertainty 19 years ago, Linear Technology Corp. has ridden the wave of convergence with a singular focus on analog products to achieve one of the most enviable positions in the semiconductor industry.
Back then, the analog market totaled just $2 billion, recalled Robert H. Swanson Jr., co-founder, chairman, and chief executive of Linear. "There were people questioning the wisdom of what we were trying to do. With the analog market now in excess of $22 billion, there are no doubters."
Linear will finish its fiscal year next month with sales growth of 40%, to more than $700 million. Net income is expected to increase 45%, to more than $280 million. And the expectations for fiscal year 2001 are also strong, with analysts projecting revenue of nearly $1 billion and net income of more than $380 million.
"It's hard to find a company that has been better managed than Linear," said Terry Ragsdale, an analyst at J.P. Morgan Securities Inc., New York. "Linear has arguably been the most predictable and least volatile company in the semiconductor business."
As Linear approaches the $1 billion mark, however, analysts question how it will deal with the next chapter in its corporate evolution. "It'll be interesting to see if they can hold the ship together as it gets that big," said Dan Scovel, an analyst at Needham and Co. Inc., New York. "Almost without fail, every company that has hit $1 billion has had to restructure significantly. Some fell back and never really made it through, and others marked time for many years before eventually moving on to the next level."
Analysts also believe Linear will face increasing pressure in the years ahead from larger semiconductor companies like Texas Instruments Inc. and National Semiconductor Corp., which have a renewed interest in the high-performance analog market.
"As some of the big boys get more aggressive, it may make the market less attractive and life much harder for Linear," Ragsdale said. "But a lot of us said when they were a $300 million company that they'd probably never get to $1 billion with their business model of a complete analog focus and cream-skimming the high-margin part of analog. We were wrong. They're going to get there without even breathing hard."
A year after being formed, Linear opened its first 4-in.-wafer fab at its headquarters in Milpitas, Calif., and later added a second 4-in.-wafer fab there. Both fabs continue to operate at full capacity.
The ability to use what might be considered outmoded manufacturing capacity in the digital world, and to bring on new capacity at a lower capital expense than leading-edge facilities, enables Linear and other pure-play analog companies such as Maxim Integrated Products and Burr-Brown Corp. to maximize profits while maintaining relatively low capital expenditures, analysts said.
Linear opened a 6-in.-wafer fab in Camas, Wash., four years ago, and is now expanding that operation. A 6-in.-wafer fab is nearing completion in Milpitas, and is expected to be operational in the first quarter of next year.
"Even before the [new Milpitas] fab comes up, we have enough capacity to support $1 billion in sales," Swanson said. "Phase one of the new fab will add another $300 million plus, and by the time we finish it could provide capacity for another $500 million to $750 million."
Despite the available capacity, the company is beginning a site search for its next fab, with Idaho, Texas, and Europe under consideration.
Ten years ago, the company established its Asian headquarters in Singapore, where it completes the final test of its products. That operation also is undergoing expansion.
Linear launched its primary assembly plant in Penang, Malaysia, five years ago, and recently doubled that campus to a total of eight acres.
Linear used its Singapore headquarters to launch its first design center about seven years ago. That operation was followed by a design center in Boston four years ago, Colorado Springs, Colo., three years ago, and Raleigh, N.C., last year. The company plans at least two more design centers in the United States, and is also looking at Europe.
"If we can find a nucleus of eight to 12 analog designers who live in a community, or will live in a community, it's sufficient mass to establish a design center," Swanson said. Despite the capital improvements, Linear had capital expenditures of only $85 million in its current fiscal year, and plans to spend $110 million in fiscal 2001.
"It's relative," Swanson said. "We built our first fab for $7 million, and now the smallest module of our new wafer fab is $100 million. It's not the $2 billion the digital companies may have to spend, but it's not $7 million anymore either."
The low cost of capital, high margins, and steady growth have left Linear with about $1 billion in cash and related assets on hand. Although the company has never completed an acquisition, it is now in position to make a strategic move if one should present itself.
"We've got plenty of cash, but really there are no companies worth buying," Swanson said. "One of the things I've really been the high priest of here is having us stick to doing what we know. We are specialists. We don't know squat about DSP. If we can acquire a company that fits into what we're doing, we'd only be too happy, but those companies usually don't exist."
Fine-tuning the model
The emergence of communications-driven products such as cell phones and Internet appliances has expanded the need for high-performance analog components to interface with digital devices such as microprocessors and DSPs.
The escalating demand for its products, an overall uptick in the semiconductor market, and the company's move closer to the $1 billion revenue mark led Linear last year to restructure its business.
Linear created four business units:- Power products, principally DC/DC converters, regulators, and other power-management devices
- Signal-conditioning products, largely amplifiers, filters, and references
- Mixed-signal devices, including analog-to-digital converters, digital-to-analog converters, and interface products
- High-frequency devices, a product- development unit targeting RF
Power products account for 54% of Linear's revenue, 23% comes from mixed-signal, 23% from signal conditioning, while high frequency has yet to produce sales.
As another part of the restructuring, Linear named Clive Davies, a 17-year veteran of the company, president, a job previously held by Swanson.
"As we moved toward $1 billion in shipping rates, it became clear that having one individual running all the design effort was just too big a task," Davies said. "We thought we'd be better served by having each of these business units focus on the relative products for their particular market segments."
Within the product groups there are teams of design managers responsible for the individual strategic market outlooks, such as telecom products, particular cell phones, and notebook computers.
Linear has targeted four primary market areas for its new product-creation focus: networking, wireless, transportation, and industry, including science and medicine.
Linear has seen its percentage of revenue derived from communications grow from 12% three years ago to 40% this year.
"Current industry growth's being driv-en by the communications boom, or at a minimum communications interacting with computing," Swanson said. "Whenever that happens, there's a strong need for analog components. This boom is particularly more analog rich than any in the past. In the 25 years I've been associated with analog, this is the strongest analog-content semiconductor-market uptick I've ever experienced."
The company has seen its regional sales move from 51% North America, 24% Europe, and 25% Japan and Asia-Pacific in 1997 to 46% North America, 24% Europe, and 30% Japan and Asia-Pacific in 1999.
Swanson believes Linear's strength is in maintaining its focus on high-performance analog.
"If you're going to make it in the semiconductor business, you'd better pick a few areas where you're damn good and stick with it," he said. "When we first got started, TI was the ultimate 'all things to all people' company, and our specialty approach was pooh-poohed as being too limiting. Now TI has recognized that the future for them needs to focus on DSP and analog. National has made a similar move."