It's no exaggeration to say Linear Technology Corp. has all the bases covered. Name an electronics market" automotive, communications, computing, consumer, industrial, medical, or military" and the supplier of the high-performance analog ICs is there, in many cases with single-source, high-margin products.
In a period marked by rapid component commoditization and severe price erosion, having a highly diversified and less price-sensitive product base has been a boon to Linear Technology. While most component suppliers struggled with high losses through the latest market downturn, Linear saw its sales cut almost in half in one year, but the company continued to roll out solid quarterly profits, extending a winning streak that dates back to 1986 when it went public.
No wonder chairman and chief executive Robert Swanson insists he's not waiting around for the next "killer" application to energize the global semiconductor market and help lift sales beyond the record $200 billion from 2000. Linear, he said, is focusing on enhancing its technology to deliver unique analog ICs for all segments of the electronics market.
"Our business model is based on being a specialist, which means you attempt to manufacture products that are unique in a way that the other 50 suppliers of analog ICs either don't know how to make or didn't think to do it before you," Swanson said in an interview. "No one customer can sink me, no one market can sink me, and no one geography can sink me. It doesn't matter where the end product is, because they can't get the job done without my products and my competitors' products."
That's not to say Linear Technology doesn't have challenges. In fact, the company's success and its predictability in terms of hitting or exceeding revenue and earnings targets means a single miss could turn analysts against it and spark concerns that its intense focus on high-end analog may mean it is not fully exploiting available opportunities in other sectors.
Additionally, Linear, like many of its rivals, is carrying more capacity than it needs for current demand. The company estimates its capacity utilization at around 60%, giving it enough headroom to crank up production to hit or exceed its old sales record of approximately $1 billion by simply adding to its workforce of 2,800.
Also, while Swanson and analysts agree that Linear was able to avoid some of the pricing pressures that attended the slack demand of recent years, the company has had to deal with supply chain problems that arose from OEMs refusing to honor contractual obligations.
While the inventory excess that followed the market downturn has abated, Swanson said Linear and other suppliers are still struggling with the effects of producing to inaccurate forecasts or being compelled to take ownership of products that customers ordered but later rejected because of weak end-equipment demand.
"OEMs want to be able to decide this week what vendors should ship to them next week, but unfortunately, if you're a chip company, it may take 10 to 16 weeks to make the products," Swanson said. "How can I accept that a large customer tells me to fill my line with products and he wants to be able to tell me the day before I'm supposed to ship that, guess what, he doesn't want any of the product."
Combining must-have high-end analog IC products with a hard line on customer obligations helped Linear deflect some of the excess-inventory and component ownership problems that arose in the industry's supply chain starting late in 2000.
To protect itself, the company instituted a policy under which OEMs can alter forecasts up until one month before delivery, after which they must take the components. But this hasn't worked with all customers, according to Swanson.
"Some customers have said, 'I don't like it but I accept it,' and some have said, 'I can't do business with you,' " Swanson said. "Part of hitting our analysts' forecasts so incredibly over this number of quarters is having certain discipline in the company. It's by having certain terms and conditions that are very fair to everyone."
Analysts said Linear Technology during the market downturn also secured some price stability that continues today by sticking to high-end analog ICs for areas such as audio amplifiers, communications interface circuits, comparators, DC/DC converters, instrumentation, monolithic filters, and power management and voltage regulators.
In the June quarter, for instance, the company dodged the price pressure that hurt suppliers like Motorola Inc. and Texas Instruments Inc. in the wireless sector by avoiding low-end handset business in China, according to Clark Fuhs, an analyst with Fulcrum Global Partners LLC, San Francisco.
"Linear Technology's management has always maintained the desire to participate in high-end and high-margin products, and they're executing this strategy very well," Fuhs said. "This can come at the expense of high sales. One option is for them to go after high-growth areas and give up some margins. Would that be good? That's not for me to say. As far as where they are now, they are executing on all cylinders."
It's hard to conclude otherwise. Linear Technology's revenue climbed to a record $972.6 million in its fiscal year ended July 1, 2001, but tumbled 47% to $512.3 million in fiscal 2002, when the market nose-dived.
The company recovered strongly in fiscal 2003, however, raking in sales of $606.6 million. Net income climbed 20% from the prior year while gross margins, which had fallen to approximately 72% in fiscal 2002"still among the highest in the industry"climbed above 74% in fiscal 2003, just below the 76% recorded at the height of the last market expansion in 2001.