Linear Technology: Enviable position
Linear Technology continues to enjoy profitability about which many other companies can only dream.
By Drew Wilson -- Movers & Shakers, 11/1/2004
Big and provocative, they're nice to look at and highly desirable, especially for those in the digital world. The double-digit gross margins enjoyed by Linear Technology continue to entice the investment community, ballooning to 77 percent of revenues in fiscal-year 2004.
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| Robert Swanson, CEO, Linear Technology |
Linear's topline growth is also substantial. The company reported revenue of $807 million in fiscal 2004, representing an increase of more than 30 percent over the previous year. The company also has no long-term debt.
In short, things couldn't have been better for CEO Robert Swanson in 2004. Linear saw growth pretty much all around in the diverse markets it targets. Segments showing strength included full-featured mobile phones in the wireless segment and digital cameras and audio players in the consumer realm.
Demand also proved strong for analog chips in LCD displays, automotive telematics systems, and power-over-Ethernet controllers. "These are the new growth markets for analog," Swanson says. Finally, rebounds in Linear's traditional markets of industrial, medical instrumentation, and communications infrastructure all helped solidify sales in 2004.
"It was a big year all-around for us," Swanson says. "At the end of fiscal 2004, we were clicking on all cylinders."
The roots of the company's healthy balance sheet can be traced back to the worst chip-market downturn in history, which chopped revenues in half for fiscal 2002. The company still managed to get 38 percent gross margins, but the sobering revenue drop prompted Swanson to set two goals: Maintain financial performance, and in selected areas add or cut investment "so when the market returned we'd be rewarded for our vision," he says.
Those rewards appeared in fiscal 2004, when the company added $200 million in revenue and outgrew main competitors Maxim Integrated Products and Analog Devices. Linear attained a net profit margin of 41 percent for the year.
Linear goes after the high-end analog segment, which accounts for about a third of the $30 billion analog-IC market. Linear, Analog Devices, and Maxim dominate the space. And because their product portfolios don't really overlap, they all use pricing power to build high gross margins.
By comparison, Swanson believes the analog products from STMicroelectronics and Texas Instruments are more commodity-oriented and therefore can't bring home the same high margins as the top players in high-performance analog. "We have a lot more pricing power," Swanson says.
Linear outsources very little manufacturing. Swanson says front-end work is integral to proprietary analog products because processes can be tailored to push the performance limits of the ICs. Better performance generates higher pricing. "If design is 65 to 70 percent of what makes us different, 35 percent is still unique processes," Swanson says. "Outsourcing for us would be the death of Linear Technology."
Linear's fabs can handle $300 million per quarter in business, expanding to $500 million next year, he says. In the backend, Linear outsources 30 percent of assembly to subcontractors, just enough to keep subcontractors interested in Linear's business, Swanson says.
Swanson, who founded the company, recently announced that he plans to step down as CEO in January, although he will remain on as executive chairman. The company's new CEO will be Lothar Maier, who previously worked at Cypress Semiconductor. Analyst Svanberg believes Swanson will remain extremely influential in the company.
Linear's founding goes back to 1981, when Swanson left the head position in National Semiconductor's analog division after becoming discouraged that analog was not treated as significant. "It was seen as something to use to get into a better business, like microprocessors or digital," he recalls.
So Swanson and three other National employees started Linear. The idea was to create a smaller company concentrated strictly on analog, though during the digital revolution not many others could be convinced that this was a forward-looking strategy.
In the early days Linear focused on industrial and military applications. When the PC, wireless, and digital-consumer markets took off, analog's role suddenly became critical. "Analog now differentiates end products and plays a role in their success," Swanson says.
Today, analog is even trendy. National Semiconductor has recognized that shedding businesses not directly related to analog brings higher margins. TI is giving equal time to promoting its analog offerings alongside its DSPs.
Swanson, who has been in the analog industry since 1973, is amused by what he calls "the same cast of characters with a new battle cry. They say they're also a high-performance analog company, they've always been there, they've always been committed to it like Linear Tech."
Analog ICs translate real-world sensory information—such as temperature, time, sound and light—into the 1s and 0s of the digital chips. Analog involves a little black magic, and its success depends largely on talented engineers and little on price sensitivity and economies of scale.
"Everyone can make money in analog," Swanson says. "It's the one area left where products can still be differentiated, and I can't think of many areas in digital where you could make that claim."
Linear Technology would never have existed if Swanson had received a tiny pay raise 23 years ago. "When I think of how little it would have taken to keep me at National [in 1981], it was not much," he says.
Today, Linear treats its analog engineers, a rare breed in the chip industry, with special care. "We're 200 to 300 geniuses surrounded by 3000 helpers," Swanson says. "We make damn sure that we've got good handcuffs on them, like financial rewards. We make sure no one leaves Linear because we're not helping them share in wealth they're helping to create."
Linear has no specific challenges, but rather faces the same issues as all analog companies, Svanberg says. The company must remain clear of highly competitive markets to maintain pricing power and constantly turn out hundreds of new products. "When one market gets too competitive, they have to find new markets," Svanberg says.
