Linear Technology: High gross

Linear Technology maintains healthy gross margins and pulls ahead of the crowd by doing the 'hard stuff' in analog.

by Drew Wilson -- Movers and Shakers, 8/15/2003

IF CONSISTENT HIGH MARGINS are the raw measure of a successful company, Linear Technology is the king of the hill. Carefully managed by analog-industry veteran Robert Swanson, the $512 million company has typically generated gross margins of more than 70 percent of revenues, even through industry down cycles.

Robert Swanson, CEO, Linear Technology

"If you exclude topline growth and just look at profitability, Linear has been the most profitable among analog companies," says Tore Svanberg, senior research analyst at US Bancorp Piper Jaffray.

Swanson observes that the prolonged industry slump hasn't done a whole lot to shake up his company. In fiscal 2002, which ended in June last year, revenues took a steep 53 percent drop to $512 million, and net profit fell by a similar percentage. Because executive pay follows earnings, Swanson's own salary dropped more than 50 percent. Still, gross margins remained above 70 percent, and net profit was 38 percent of revenues.

We're the only company that saw our sales get cut in half yet we maintained profit margins that none of our competitors was able to accomplish--even during boom periods," Swanson says. "In some respects, the only thing that's changed is that we kind of pulled ahead of the crowd."

Linear specializes in high-performance analog ICs, usually steering clear of large, well-defined markets with heavy competition. Product lines include signal-conditioning, mixed-signal power, and RF ICs that go to a wide array of end markets: Industrial, military, computer, communications, automotive. "Were all over the map," Swanson says.

Linear typically makes the same profit as companies three to five times its size, Swanson says. "We do the hard stuff that competitors don't want to do or haven't thought about doing," he notes. Linear's profits derive from pricing power, more specifically, "avoiding a duplicate solution that's already out on the market," Swanson says.

The strategy requires being first with a lot of new, innovative ICs. David Wu, analyst at Wedbush Morgan Securities, points out that the definition of high-performance analog companies is intellectual property. "If you look at Linear's gross margins, you can see how much IP there is," he says.

Over the past two years, Linear's entry into new end-application areas--multimedia cell phones, high-end consumer-electronics products, wireless basestations, and ADSL modems--has paid off well. Such areas now account for roughly 30 percent of revenues, Wu adds.

The shift in business mix over the past two years has resulted in 50 percent of revenues coming from power management, while a lower percentage (25 percent) comes from signal conditioning.

Swanson says the power end of high-end analog is the fastest-growing market segment. Linear's power focus is on handheld devices with batteries. Battery management is a critical area, and the solutions are not through commodity ICs, he adds.

"Linear has pushed precision and made all of our products extremely efficient for use in battery-powered portable products," he says. "Our ICs often dramatically reduce the total size of numerous electronic functions."

Shrinking size multiplies the complexity of the IC and hands the analog engineer a real challenge. More and more functions are crammed onto a small die so it can go into a really tiny package.

"The analog part of the total system--whether talking about a PC or switch or a rotor--is getting to be a more complex part of the total solution," Swanson says. "So solving the analog problem has become a very visible and a very daunting problem. That leads to what we consider our real strength--doing the hard stuff in analog."

Currently two end markets are driving analog-IC sales, he says. High-end digital consumer products like cell phones with built-in digital still cameras, and automotive. The number of analog ICs in digital consumer products such as PDAs now exceeds analog ICs in notebook PCs, Swanson adds.

Swanson founded Linear Technology at a time when the world was enamored with digital technology. The fundamental idea was to create a company concentrated strictly on analog. Many people failed to see this as a forward-looking strategy. "Nobody in 1981 thought that a pure-play, analog-IC company had any future," Swanson says.

Over the years, Swanson attacked the high-end analog market and refused to drift from his original strategy. When competition squeezes margins and turns a product line into a commodity, Linear drops the line.

Swanson says the analog-IC market has gone from $2 billion in 1981 to a peak of more than $30 billion in 2000. With the deployment of the Internet and wireless-communication products, analog's role became obvious, he says. Cell phone basestations and infrastructure devices such as routers and switches were packed with analog ICs. "The good news for us is that they were loaded with high-performance circuits as opposed to commodities," he says.

Swanson is confident that emerging markets will need high-performance analog parts. The dashboard of a new high-end car with telematics, GPS navigation, and entertainment functions, represents one analog-intensive application. Power-over-Ethernet products represent another.

Swanson expects annual revenue growth of roughly $100 million for fiscal 2003. And 2004 will be even better as the macro environment improves. "It's steady   and slow, but steady and up," he says.

Linear's success, Swanson believes, hinges on its 165 analog engineers. "If you had a few billion dollars, you could compete with a digital company," Swanson says. "But if you had $10 billion, you still couldn't compete with me unless you could hire the talent we've accumulated over the last 20 years.