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Diel Report™ on Linear Technology: How Linear Leads in Profitability
Venture-q(R), LLC, Oct 2008, Pages: 74
Linear Technology is the market leader in the high performance analog segment of the broader analog market. It serves approximately $25B of the total $35B analog market by highly diversified sales. Linear is a unique company in that it defies the conventional wisdom of the mainstream semiconductor business in various aspects. Since its inception, Linear’s focus and mission have remained unchanged – its business is high-end performance and precision analog integrated circuits (ICs).
Therefore, the company’s products emphasize the qualitative aspects of information signal processing while the quantitative aspects of system-level integration are effectively absent. The result is leading profitability and market valuation consistently among the highest in the industry.
Linear focuses on the single-function analog building blocks that are broadly used in diverse end-equipment applications. The company’s key competitive differentiator is the high analog performance of these products that enables its customers to diversify their products.
These product types offer high margins, annuity-type revenue streams and a range of other financial and operating benefits. Linear leverages all these benefits in its profit-driven business model. Linear participates in all major sectors of the highly fragmented analog IC market, which features a diffused competition. As a result, seasonal business has not typically been a material factor.
In addition, close to two thirds of Linear’s business are export sales. These provide a global geographic diversity that cushions the impact of economic volatility in a particular region. Linear is positioned for a continued historic leadership in profitability and growth into the foreseeable future.
Linear’s outlook particularly applies to high-end analog performance rather than to the broader end-market sector. For example, Linear’s focus on the feature rich cell-phone segment rather than the broader cell-phone business. These products require feature rich technologies and analog skill for their development and manufacturing. This knowledge-based component of Linear’s business is the primary factor that distinguishes it from other competitors in the marketplace.
Consequently, Linear is a diversified supplier of high value analog skill serving a broad range of end-markets. We have captured this unique feature of the company’s business strategy with our market hopping model described in this report. This model enables Linear to sustain its profitability leadership in the foreseeable future in spite of potential market disturbances.
For example, the model effectively decouples the company’s gross margin from the influence of pricing volatility. Moreover, it cushions the impact of revenue volatility on Linear’s net margin as demonstrated during the technology market collapse of 2001/2002.
In FY07, Linear positioned itself for future growth by significantly upgrading its capital structure, know-how resources and manufacturing infrastructure. In contrast to the industry-wide manufacturing outsourcing trend, Linear believes that it is important to be internally integrated from end-equipment application requirements to fabrication processes.
Linear’s operating and financial strategies remain unchanged since its founding in 1981, resulting in a well harnessed and fine-tuned moneymaking machine.
In the long term, the key catalyst for Linear is likely to be the end-market demand for technology rich analog semiconductor products. These products are used by its customers to differentiate their feature rich product offerings.
This type of end-market demand directly leads to Linear’s market leadership capabilities separating Linear from direct competitors. Over time, Linear’s market hopping strategies have been tailored to rapidly take advantage of opportunities presented across the broad end-market spectrum.
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