Below is the transcript of the Linear Technology Corporation (NASDAQ:LLTC)’s Q2 2015 Earnings Conference Call, held on Wednesday, January 14th, 2015 at 11:30 a.m. EST.
Linear Technology Corporation (NASDAQ:LLTC), a member of the S&P 500, has been designing, manufacturing and marketing a broad line of high performance analog integrated circuits for major companies worldwide for three decades. The Company’s products provide an essential bridge between our analog world and the digital electronics in communications, networking, industrial, automotive, computer, medical, instrumentation, consumer, and military and aerospace systems.
Company Executives:
Paul Coghlan, Vice President, Finance, Chief Financial Officer, Linear Technology Corporation.
Lothar Maier, Chief Executive Officer, Linear Technology Corporation.
Bob Swanson, Executive Chairman, Linear Technology Corporation.
Analysts:
Craig Hettenbach, Morgan Stanley
William Stein, SunTrust
Tore Svanberg, Stifel, Nicolaus
David Wong, Wells Fargo
John Pitzer through Bruce Miller , Credit Suisse
Jim Covello, Goldman Sachs
Amit Shah, Nomura Securities
Ross Seymore, Deutsche Bank
JoAnne Feeney, ABR Investment Strategy
Chris Caso, Susquehanna Financial Group
Chris Danely, JPMorgan
Ambrish Srivastava, BMO Capital Markets
Steve Smigie, Raymond James
CJ Muse thru representative, ISI Group
Craig Ellis, B. Riley
Vivek Arya, Bank of America Merrill Lynch
Doug Freedman, RBC Capital Markets
Gilbert Alexander, Darfil Associates.
Operator
Good day and welcome to the 2015 Fiscal Second Quarter Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the call over to Mr. Paul Coghlan. Please go ahead.
Paul Coghlan, Vice President, Finance, Chief Financial Officer
Good morning. Welcome to the Linear Technology conference call. I will be joined this morning by Bob Swanson, our Executive Chairman and Lothar Maier, our CEO. I will give you a brief overview of our recently completed second fiscal quarter and then address the current business climate. We will then open up the conference call to questions to be directed at Bob, Lothar and myself. I trust you all seen copies of our press release which was published yesterday.
First, however, I would like to remind you that except for historical information, the matters that we will be describing this morning will be forward-looking statements that are dependent on certain risks and uncertainties, including such factors, among others, as new orders received and shipped during the quarter, the timely introduction of new processes and products and general conditions in the world economy and financial markets. In addition to these risks, which we described in our press release issued yesterday, we refer you to the risk factors listed in the company’s Form 10-Q for the quarter ended September 28, 2014, particularly management’s discussion and analysis of financial condition and results of operations.
Secondly, SEC Regulation FD regarding selective disclosure influences our interaction with investors. We have opened up this conference call to enable all interested investors to listen in. The press release and this conference call will be our forum to respond to questions regarding our estimated financial performance going forward. Consequently, should you have any questions regarding our estimates of sales and profits or other financial matters for the upcoming quarter, as well as how they might impact our income statement model and our balance sheet, this is the time we are free to respond to these questions.
As you can tell from our press release, that just completed December quarter generally met our expectations with sales downs 5% sequentially, which approximated the midpoint of our guidance. Entering the December quarter, we had commented that the December quarter historically has been seasonally slow for us, particularly automotive and industrial customers who temporary tighten their demand to minimize calendar year and inventory levels and to compensate for annual shutdowns that coincide with December year-end holidays.
We noted that the December quarter has averaged being down 6% over the last four years. So this year’s down 5% results approximated the historical average and was more reflective of seasonality than any structural demand issues. Although quarterly sales declined 5% sequentially, they grew 5% year-over-year. Gross margin and operating margin were impacted by the reduction in sales although they were at the midpoint of the range we had forecasted. Net income was down 5% as a result of the 5% reduction in sales, partially offset by a lower tax rate. The US congress reinstated the Research and Development tax credit for 2014. This positively impacted our quarterly tax rate reducing it from an estimated 26% to an actual 22%.
Bookings were down modestly from the prior quarter, however we did have a slightly positive book-to-bill ratio. As occurred last year, the booking rates increased in the second half of the quarter. Once again, cancellations in the quarter were minor. We continue to believe that inventories worldwide at customers were relatively lean exiting the quarter. With regard to our major end-markets, industrial had the largest increase and communications had the largest decrease, just the opposite of last quarter, although none of these changes were particularly significant.
With regard to the detail of our financial results, sales decrease by 5% from the prior quarter. The gross margin percentage at 75.4% was impacted by the reduction in sales and consequently was down from 76% last quarter. Average selling prices at $1.88 increased from $1.87 last quarter. Operating expenses were unchanged having benefited from a one-week shutdown at the end of December. Operating income and pretax income of 44.9% of sales were down from 47% in the prior quarter due to the reduction in sales. The company’s effective tax rate decreased to 22% from 26% last quarter. Finally, net income of $123.6 million decreased from $129.5 million reported last quarter, as lower sales were partially offset by lower tax rate. Our return on sales of 35.1% was similar to last quarter’s 34.9%. For the second quarter in a row, our diluted shares outstanding were slightly lower as we purchased shares in the quarter to offset any potential dilution from employee stock options.
Worldwide headcount increased 1%, most of which was in our overseas factories. In summary, the effect of the items I just listed on the published quarterly results was that revenue was $352.6 million for the second quarter of fiscal year 2015 compared to the previous quarter’s revenue of $371.1 million and $334.6 million reported in the second quarter of the previous fiscal year. GAAP diluted earnings per share of $0.51, while down $0.02 from the previous quarter’s earnings per share of $0.53 were $0.07 better than reported in the second quarter of fiscal 2014, which had lower sales and higher interest expense compared with this quarter. The company no longer has interest expense compared with $12 million of interest expense in the second quarter of the prior of fiscal year as a result of the extinguishment of its convertible senior notes at the end of fiscal 2014.
Earnings per share this quarter would be $0.56 without the impact of stock-option accounting. During the second quarter, the company’s cash, cash equivalents and marketable securities increased by $45.2 million to $1.73 billion. Net of spending $65.8 million on cash dividends and $34.7 million on stock purchases. The company also announced that it would raise its quarterly dividend by 11% from $0.27 per share to $0.30 per share. At the current stock price the company’s dividend yield is 2.7%. The cash dividend will be paid on February 25th, to stockholders of record on February 13th.
Looking forward, the March quarter is historically a growth quarter for us. Although there were some weaker regions in the global economy, the USA is strong. Our book-to-bill ratio was slightly positive in the December quarter and we typically see strong bookings momentum in the automotive and industrial markets in the March quarter. Accordingly, we are currently forecasting revenues to grow sequentially by 4% to 7% in our fiscal third quarter. Overall, we continue to be optimistic about the increased electronic content in our end-markets, especially, automotive and industrial.
Now I would like to address the quarter’s results on a line-by-line basis, starting with bookings. Bookings decreased this quarter over the previous quarter although we had a modest positive book-to-bill ratio and bookings increased every month within the quarter. Geographically, bookings were up in the USA and down internationally. Within international, bookings were down in Asia and Europe and flat in Japan. By end-markets, industrial was up the most and communications down the most. At this time every quarter, we give you a breakdown of our bookings percentages by end-markets to give you insight into those markets that drive our business.
Industrial continues to be our largest area. Industrial was 44% of our bookings, up from 43% the previous quarter. Within industrial, USA and Japan were up and Europe was down. This increase in industrial positions us well for the March quarter. Our industrial business is very broad-based both, geographically and by end-products. The communications area at 19% was down from 20% last quarter. Europe was flat, whereas China and USA networking and infrastructure companies were down, which is the opposite of last quarter. Cell phone continues to be a very small part of business and rounds to less than 1% of our business. Computer remained at 9% of our business again, while down modestly in absolute dollars. Within computer, we service opportunities in notebooks, desktops, tablets, servers, storage devices and printing and imaging end-products. Automotive continues to be a focused area for us and remained at 19% of our bookings while down modestly in absolute dollars. In the last 10 years, as we have emphasized this market, it has quadrupled as a percent of our bookings.
Expansion of existing Linear parts into new car models and also new parts for new programs continue to help us. Our battery monitoring products for hybrid and electric vehicles are achieving expanding market acceptance. In addition, we continue to distinguish Linear as a high quality supplier in important international automotive manufacturers. Consumer, which has been our smallest end-market remained at 3% of our business while down in absolute dollars. Finally, the military, space and harsh environment products remained at 6%, although up in absolute dollars. The USA and Europe are the predominant geographic areas for this business.
In summary, this is a good distribution of business by end-markets for us, with our largest areas continuing to show the most overall analog market share. Whereas five years ago, 14% of our business was in cell phone and high-end consumer related markets, now only 3% of our business is in these generally commodity and volatile analog areas. On the other hand, automotive which was 8% of our business five years ago is now 19% of our business and industrial has grown from 35% to 44% of our business.
With regard to where our booking are actually created, 59% are created internationally and 41% in the USA. Internationally over time, we have been helped by the strength of our Japanese and European automotive customers. Moving from bookings to sales, net sales decreased 5% from the prior quarter while improving 5% from the similar quarter in the prior year. Sales decreased similarly both, internationally and in the USA. Within international, sales decreased the most in Europe and the least in Japan. In summary, the USA is 27% of sales similar to last quarter, Europe at 19% was down from 20% last quarter, which is not unusual for Europe in the December quarter. Japan at 16% was up from 15% last quarter. Asia-Pacific at 38% of sales was similar to last quarter. Gross margin at 75.4% of sales was down from 76% last quarter. Slightly higher ASP was more than offset by lower factory efficiencies, largely due to absorbing fixed costs over lower sales base. ASP at $1.88, increased from $1.87 last quarter. The company did shut down for the December holiday week this quarter as it usually has.
R&D. R&D at $65.1 million, decreased $500,000 from last quarter, while increasing as a percent of sales from 17.7% last quarter to 18.5% this quarter due to the decrease in sales. Savings and labor related costs, due to lower profit sharing and the holiday week shutdown were partially offset by R&D related supplies and other expense. SG&A. Selling, general and administrative expense at $42.5 million increased $448,000 from the previous quarter’s $42.1 million. An increased as a percent of sales from 11.3% to 12.1%, due largely to the decrease in sales. As in R&D, labor costs were lower due to lower profit sharing and the holiday shutdown. These savings were offset by higher non-labor related communications costs and other expenses.
Operating income. As a result of the above operating income decreased by $16.2 million, and as a percent of sales, declined from 47% to 44.9%, primarily due to the decrease in sales. 44.9% operating profit is still strong profitability and clearly puts us ahead of our peers in this financial performance measures. Interest income was minor. Consequently, pretax profits approximated operating income. The company’s pretax profits were $158.5 million, down from $174.9 million last quarter. Pretax profits are now 44.9% of sales versus 47.1% last quarter, again with the decrease due to lower sales volume. Our quarterly effective tax rate of 22% decreased from 26% last quarter. The US Congress reinstated the R&D credit for 2014. This resulted in a benefit to the company’s effective tax rate which was reduced this quarter by four percentage points, three of which related to prior quarters. Expect next quarter’s tax rate to be 25.5% before discrete items if any. Resulting net income of $123.6 million was down 5% from $129.5 million reported in the previous quarter, largely due to the decrease in sales partially offset by lower taxes.
Resulting return on sales of 35.1% was similar to the 34.9% reported in the previous quarter. The average shares outstanding used in the calculation of earnings per share decreased by 210,000, shares. Share increases relating to stock-option exercises and employee restricted stock grants were offset by stock purchases in the open market. GAAP earnings per share was $0.51 down from $0.53 in the prior quarter, again due to lower sales. Without the impact of stock-based compensation of $17.9 million, the diluted earnings per share would have been $0.56 per share.
Moving to the balance sheet, cash and short-term investments increased by $45.2 million. For the 115th consecutive quarter, the company had positive cash flow from operations.The company provided $148 million in cash flow from operations of which $65.8 million was employed to pay cash dividends, $34.7 million to purchase common stock and $16.2 million to purchase fixed asset. Our cash and short-term investment balance is now $1.729 billion and represent 62% of total assets. Accounts receivable of $148.6 million decreased by $26.9 million as collections from a higher sales quarter are replaced with receivables from the lower sales quarter. Consequently, our day sales and accounts receivable were 38 days, lower than the 43 days reported in the last quarter. Inventory at $100.1 million increased $2.5 million from last quarter. This increase was in finished goods to build up shippable inventory prior to Chinese New Year, when our Asian factories will be closed for a week.
Raw materials and work-in-process inventory were flat. Our quarterly average inventory turns is 3.5 times, down slightly from 3.8 times in the prior quarter. Deferred taxes and other current assets of $99.7 million increased $12.8 million from the prior quarter. This was largely in prepay taxes partially to recognize the benefit from the reinstatement of the R&D credit. Property, plant and equipment increased by $3.2 million. We had additions of $16,201,000 and depreciation of $13, 05,000 million. Mostly additions were for manufacturing equipment in fabrication, and test and assembly worldwide. We have increased our capital expenditures this year in response to production requirements we anticipate in calendar 2015. We expect additions to be roughly $80 million and depreciation roughly $50 million for fiscal 2015. Identified intangibles decreased by $550,000 as in past quarters, due to quarterly amortization. Goodwill remained unchanged. Finally on the asset side of the balance sheet, our return on assets was 28.9%, similar to last quarter’s 30.9%, slightly impacted by the reduction in sales.
Moving to the liability side of the balance sheet, accounts payable decreased by $7 million, largely due to timing differences on recurring payable items. Accrued income taxes, payroll and other accrued liabilities decreased by $22.7 million, an increase in our profit sharing accrual which is paid out semi-annually, was offset by a decrease in our income tax accrual.
Deferred income on shipments into distribution increased modestly by $378,000, as our shipments to our US distributors were marginally greater than what they shipped out to their end customers. Our accounting is conservative as we do not record a sale on our books until distribution has made a sale to their end customer.
Worldwide, we continue to believe our inventory levels are lean. We continue to closely control our inventory at distributors to properly position the inventory relative to potential demand. In total, current liabilities are relatively small and therefore we have a strong current ratio. Our current ratio was 8.4:1 versus last quarter’s 7:1. Deferred tax and other long-term liabilities of $120.3 million increased by $10.4 million largely due to increases in long-term taxes on various tax timing difference. Changes in the stockholder equity accounts were primarily the result of the usual quarterly transactions for net income, dividends paid and employee stock activity. As stated earlier, the company announced it will pay a quarterly dividend of $0.30 per share. The company believes that paying a dividend is an important way to return value to its shareholders. The company began paying a dividend in 1992 and has increased it every year since and currently pays approximately a 2.7% yield.
Looking forward. We are coming into the second half of our fiscal year, which is normally our strongest half. The March quarter is historically a strong quarter for two of our largest end-markets: industrial and automotive. The following factors impact our guidance. On the macroeconomic upfront, the US economy is strong and is projecting stronger growth than reported in recent years. On the other hand Europe, China and Japan are experiencing reductions in growth. The dollar is strong, which has pluses and minuses. Similarly, oil prices are low which also has positive and negative economic effects. From a Linear-specific standpoint, we have a positive book-to-bill ratio going into the March quarter. We had good bookings momentum at the end of December, and so far bookings have been off to a good start in January. Chinese New Year is this quarter. Our foreign factories will be closed for a week. It is always interesting to monitor Asia momentum post the New Year holiday. Finally, we continue to believe inventory at customers are lean based on our continuing minor cancellation activity. Summarizing these various data points has given us a positive bias in the short-term. Consequently, we are currently forecasting revenues for the March quarter to grow, sequentially in the 4% to 7% range. Depending on sales, operating margin as a percent of sales should improve modestly. Our ongoing effective tax rate should be roughly 25.5% prior to discrete items if any that may arise.
In summary, looking beyond these near-term market events, the major market opportunities that drive our business demonstrate continuing growth, particularly in the industrial and automotive end-markets. Increased analog innovations in our other end-markets will also benefit us. We believe we are in the right markets at the right time with the right innovative products, execute our strategy and exploit our growth opportunities. We are strong in the areas we want to be: industrial, communications infrastructure and networking and automotive, and believe that we are in an innovation-driven environment. Our strategy is differentiated from our other analog competitors. We dominate in different end-markets, we are more reliable supplier with consistently lower lead times and better support and our technology and support is valued as is evidenced by our higher operating margin.
Finally, at this time of year, we review our dividend. We have increased the dividend every year, although modestly in the last several years, as we have accumulated cash to pay down our debt. In May 2014, we extinguish the debt. Consequently, going forward, we are able to return more current cash to shareholders. Therefore we have announced increasing our quarterly cash dividend by 11% from $0.27 a share to $0.30 a year share.
Since extinguishing the debt, we have also increased our quarterly share buybacks. This quarter we bought back 725,000 shares and for the second quarter in a row we have not had an increase in our outstanding shares. Increasing our dividend and our share buybacks will have us distributing roughly the quarterly cash that we generate onshore.
I would now like to open up the conference call to questions to be addressed to either Bob, Lothar or myself.
Question and Answer Session
Operator
And at this time, if you’d like to ask a question, please press star and 1 on your touch tone phone. You may withdraw your question anytime by pressing the pound key. Once again, to ask a question, please press star and 1 on your touch tone phone. Please limit to one question and a follow-up. We will take our first question from Craig Hettenbach. Go ahead, sir.
Craig Hettenbach, Morgan Stanley
Great. Thank you. Questions for Lothar. Although the near-term environment was described as you have a positive bias here, the macro has been a bit choppy by region, so just wanted to get a sense of the implications for your customers in terms of design wins you have and how they see business and ramping those wins, has that had any implications?
Lothar Maier, Chief Executive Officer
Design wins into design sales, now that’s kind of a long multi-year period, so looking at that kind of quarter-to-quarter is a little bit hard to do. I would probably step back a little bit and say just look at the markets that we are focused on — the automotive and industrial markets and the communications markets. Those markets are really the growth drivers for the analog business and we are highly concentrated in those market, so I think better thing to look at is rather than what design wins we got on this quarter is just looking at how we are positioned, the company relative to the markets and what markets are doing well We are about as good aligned as I would say we have ever been.
Craig Hettenbach
Got it, thanks for that. As a follow-up, can you talk about the wireless sensor networks business? I know it is early stages, but just what the customers’ appetite is for those products and any key applications as that business emerges that you would call out?
Lothar Maier
Yes, we did Dust acquisition now almost exactly three years ago and we have seen growth in sales of those initial products every single year, but granted it is on a modest base. About a year-and-a-half ago, we really introduced the first new products post the acquisition and these were the single-chip 5800 series Dust products and those products have been very well received in the market. There is a lot of interest in it. We measured in terms of how many demonstration kits that we give out and how many demos we do. But in terms of it becoming a significant part of our business, we are still looking at a few years for that to happen. But I can tell you the interest is very high. The products are very good and they are really designed specifically towards kind of more industrial applications not consumer applications.
Craig Hettenbach
Got it, thanks for that.
Operator
We will take the next question from William Stein. Go ahead. Your line is open.
William Stein, SunTrust
Great. Thank you for taking my question. I am hoping to dig in the margins a little bit. They came in slightly below consensus and I understand you are adding a bit of capacity. I think in the past, you talked about $400 million per quarter as kind of the as-tooled capacity and then I guess we can do some math around drop through on revenue growth as where we would expect margins to ramp. Can you recalibrate us on that metric? What is your as-tooled capacity today and where do you anticipate margins going longer term?
Lothar Maier
I think you got it pretty much right on. We are tooled up to do around $400 million. We can grow beyond that without having to do any sort of brick-and-mortar type of expansion so it would just be capital equipment and people that would be added so the cost will be sort of gradualist as we grow beyond it and the margins as we approach that number will continue to improve.
Paul Coghlan
Well, if you look back and the are similar seasonality quarters in 2011 and ’12, I think, when our sales were reduced by amount similar to last quarter, impact on gross margin was similar about six-tenths of a point, so I do not think there was anything unusual in gross margin that happened in the quarter just ended.
William Stein
That is helpful. Thanks, Paul. Maybe I can just follow up with one on your outlook for communications, equipment and wireless base stations in particular. You noted it was — certainly didn’t fall of a cliff, but it was slightly weaker in the quarter. I am wondering if you have any outlook for the full-year and if you have any color by region that would be helpful. Thank you.
Paul Coghlan
I am impressed you have asked us that question because our historical accuracy in predicting what is going to happen in communications infrastructure is not to be proud of, although comparatively with the rest of the industry maybe we are equally as poor, so for us it is really hard to tell. I mean, I think China as you know tends to be sporadic on their implementation of the infrastructure build-out. My guess is that negatives you hear out of China are that demand is weakening a bit, although still strong comparatively with other regions, although I would think lower oil prices are probably going to help China in the near-term and maybe spur some available spending for them and who knows, maybe that will play into that market.
William Stein
Thanks for that outlook and congrats on the good outlook.
Paul Coghlan
Thank you.
Operator
We will take our next question from Tore Svanberg. Go ahead. Your line is open.
Tore Svanberg, Stifel, Nicolaus and Company
Yes. Thank you. The first question, if I look at the calendar year ’14, your sales were up 9% year-over-year. As you look at the puts and takes of the economy this year, I mean I know and I recognize it is early on and you don’t give annual guidance, but is there anything out there that would suggest why you would not be able to at least repeat that again here this year?
Paul Coghlan
Well, we are going into the strongest half of our year, which is the first half of the calendar year. The guidance we have given you, the midpoint of that guidance would have us growing 7% year-over-year, up from 5% the previous quarter. Our hope is, long-term our goal is to continue to grow roughly 10%, So we grew last year, last calendar year 9%. So it is still early to look at 2015, we think the March quarter will be off for us to a reasonable start as we have guided, so for us right now we don’t forecast for the year as you said, but we would hope we would do something similar at this stage until last year.
Tore Svanberg
Very good and Paul, based on your comments about operating margin being up modestly in the March quarter, should we infer that OpEx will be flat sequentially or will the improvement come primarily from sales and gross margin?
Paul Coghlan
The improvement would come primarily from sales and gross margin. Operating expense will be up a bit. We will not have to shutdown in the March quarter. We did have a shutdown in the December quarter. Now the first week of the March quarter was the week between Christmas and New Year, so there were some extra vacation there, that will soften a little bit, the shutdown impact going into the March quarter but I think the primary game will be the percentage follow-through from the increase in sales.
Tore Svanberg
Okay. I am just going to sneak in one last follow-up, so your inventory days are now at 105. I think they were 100 days last quarter and that is a little bit higher than what it is usually for Linear. Now you mentioned some inventory build or buffer because of the shutdown a related to Chinese New Year but, is there anything else structurally going on in the market that is causing you to maybe hold a little more inventory than historically?
Paul Coghlan
Well, I don’t know if it is structure but there are few things idiosyncratic to us. If you go back to, I don’t know what historic base your saying, but if you go back a few years, our average selling price is higher now, so if we have maintain a similar number of units, our inventory value be higher. We have less concentration of sales in the computer market than we had several years ago, so we have a broader disbursement of our sales. In the mix of our products is moving more towards newer products and the newer products are more complex than the older products, carry a bit higher ASP…
Lothar Maier
Longer cycle times.
Paul Coghlan
And longer cycle times to build. Then if you add to that the module business, which we have, that has raw material parts that our chip sales do not have, so the raw material would have been impacted by module sales and the module sales have been quite strong for us. So, overall, I think if you add all those pieces together, you would get to the reason why the inventory overall is increased.
Tore Svanberg
That is very helpful. Thank you very much.
Operator
We will take our next question from David Wong. Go ahead. Your line is open.
David Wong, Wells Fargo
Thanks so much. Can you give us some idea of where in cars your products are used in particular what application segment in automotive have driven automotive growing as a percentage of your total sales?
Paul Coghlan
If you look back a few years, the majority of our automotive sales really came in the navigation and infotainment part of the vehicle. If you probably look in the last five years, we have held that business, the navigation portion, pretty steady and the growth we have seen is in sort of everything other than navigation. So it is in the drive train, it is in sensors, it is in everything else around the car, the BMS products have been a good growth for us. Basically, we are probably about half in sort of navigation type of the applications and the rest is around the car. Certainly the part that is growing the fastest is sort of the non-navigation. If you want better fuel efficiency, you want one better, lower emissions — those types of enhancements are all going to come from sort of the non-navigation. Kind of an interesting thing though that is starting to come up in the last few years is that, the new cars or the leading-edge cars, are just jammed full of sensors and this is cameras, it is radar systems, it is laser system, it is image detection systems and a lot of that electronic actually goes back through sort of the navigation system, console that is there, so there is good growth we think going forward. People talk a lot about this, autonomous driving. I think that is a long way away, but sort of a step in that direction is all of the sensing applications and that is an area that, we see a lot of interest in the automotive customers.
David Wong
Great. Thanks. Just a push a bit on an earlier question, if your sales were running at what you would consider to be optimal utilization, what gross margins range would be in, and in the long run, what operating margin do you think you get to?
Paul Coghlan
Well, there are so many variables in that other than just getting to 400+ million, but we would think we could get our gross margins towards the high 70 percentage numbers. We have done that in the past so we could probably come close to but maybe not exactly hit our previous high peaks. Then operating margins, if our sales were to grow well on a quarterly basis, so that we get to the 400 and beyond quicker rather than slowly then operating margins could probably get back in the 50% range.
David Wong
Great. Thanks very much.
Operator
We will take our next question from John Pitzer. Go ahead. Your line is open.
Bruce Miller, calling in for John Pitzer, Credit Suisse AG
This is Bruce Miller calling in for John Pitzer. Congrats on the results and thanks for letting me ask you a question. The last time your quarterly revenue was hovering just below $400 million was calendar year 2010 at which point gross margin about 78% and operating margins were in the low to mid 50% range. If I grow revenues evenly over the next couple of quarters, I get revenue back in that range. What margins we expect to those levels? If I assume about 80% incremental gross margin then I get about 76% gross margin. Is this reasonable and the right ballpark?
Paul Coghlan
I think the math you just explained to me quickly, you said if we grow to $4 million, again I don’t how fast you got us there, but you having gross margin at 76% you said.
Bruce Miller
Correct.
Lothar Maier
Which is what the gross margin we had last quarter when we were at $370 million. So my guess is we could do a little better, I mean, we’d have to see how it plays out and what factory efficiencies we are able to achieve but my guess is your 76% might be a little conservative, but not dramatically far off.
Bruce Miller
Okay, thank you.
Lothar Maier
There are high numbers to begin with.
Bruce Miller
Thank you. That was helpful. Then from end market perspective, I was wondering if you could force rank your end-markets in terms of expectations for year-over-year growth for 2015?
Lothar Maier
Well, the one we think there is the most growth probably potentially would automotive, industrial, cars would be second, but there is good innovation going on in other markets as well. We have POE products that are quite attractive and other products that are quite attractive, RF products et cetera, in the communications markets. So those are the three that constitute the lion’s share of our end markets for sure, roughly 90% and we see growth opportunities in all of them but probably automotive would be the fastest growing.
Bruce Miller
Thank you.
Operator
We will take our next question from Jim Covello. Go ahead. Your line is open. Jim, your line is open.
Paul Coghlan
The results were so good, Jim, you are just speechless, huh?
Operator
You might check the mute function on your phone, Jim.
Jim Covello, Goldman Sachs
Can you hear me now, guys? Sorry about that. I apologize.
Paul Coghlan
Yes, Jim. I can just hear you now.
Jim Covello
Okay. Sorry about that. Paul, you guys had been growing really nice kind of 10% year-over-year clip for a handful of quarters. Last couple of quarters, closer to 5% or the 7% range, you commented that you think your goal is 10% growth. The end-markets — all of your markets collectively don’t grow 10%, so that would imply your ability to gain share. Which markets do you think you would be able to most gain share in and where you think that share would come from? If not from specific customer or competitors, what products do you think you could gain share and to make up the difference between your 10% growth targets and the end markets which collectively do not grow.
Paul Coghlan
Yes. I can take a stab at that. If you look at the overall analog market, it is maybe a $44 billion market and if you look at what segments are growing in that market, it is really long-term the industrial market has steadily grown. 10 years ago, it was 7% of the analog market, today it is over 20% of the market. A similar story is in the automotive market where a few years ago it was not a big part of the business, now it is over 20%. So, the industrial and automotive markets for total analog are maybe 43% of the market and they are growing roughly 2% or 3% market share every year. So, in a few years, automotive industrial is going to be the lion’s share of the analog market and that is where we as a company are very focused on. So not only are we in the markets that are growing the fastest, it is becoming a bigger, bigger portion of our business as well.
Granted maybe the overall analog market is growing slower, how we look at it is that we are in the segment that is growing fastest and we don’t even necessarily have to take market share. We just have to ride along with the growth of the automotive and industrial markets and then to a lesser extent just hang on to the business we have in communications. That will allow us to do this 10% growth.
Bob Swanson, Executive Chairman
If you look at the number, if the overall market grows by 5%, that is a $2 billion increase incrementally. If we could get $150 million of that $2 billion, we are just growing by 10%, so like we have a 80% market share year or even 20%, we have a small market share.
Jim Covello, Goldman Sachs
If I could specifically on the follow-up focused on the automotive business, I mean, I think that automotive has been a terrific market for the whole industry and then certainly for Linear in your particular for a little while now. If I think about your 2% to 3% long-term global auto unit growth and about 5% content for box that would make that may be a 7% or 8% kind of core market in an average year. Do you think those estimates are wrong or. Again, I mean, do you just think the share gain that you can have within automotive can make up the gap between that and that is maybe 40% or going forward 50% of your business, but then the other 50% still would not grow 10%. I am just trying to bridge the gap between the 10% targets and even the best end market looking like long-term that is probably 7% or 8% growth.
Lothar Maier
Yes. I think it is probably not accurate to try to look at our growth in automotive relative to how many cars get sold every year. Even just taking an average number of increase in electronic, we are focused on kind of the leading-edge products in cars and the amount of electronics that is going in these high-end cars and that is really where a lot of our business is growing. I don’t have the numbers, but I am sure is growing a lot quicker than the 7% that you quoted, so we are not kind of in sort of the run-of-the-mill type of electronics in a car. Cars are getting vision systems, they are getting stop-start systems. They have got EVs in ATVs, so that’s the kind of business that we are targeting at and my sense is that is probably going to grow substantially more than 7% you quoted.
Jim Covello
Very helpful.
Paul Coghlan
Jim, in the paper last week out here, I think they said that they was a broad survey done by autotrader.com and the results of which were that the consumers in that survey said they would spend up to $1,500 extra for more electronics in their car. It is not like the other advantage we all may have in automotive is the purchaser of cars is willing to spend more for his next car, so it is not just the pure replacement. I do not know if that might impact your 7% somewhat if that holds to be true.
Bob Swanson
Well, then also that report also talked about in your opinion we were just at the beginning of this electronics implementation automobiles. The other thing is that is something that we speculated on that as many people make a decision on buying a car based on electronic contents than horsepower, which is pretty interesting.
Jim Covello
Sure. That is all incredibly helpful. I appreciate all that very much.
Lothar Maier
Thanks, Jim. Have a nice day.
Operator
Here we will take our next question from Amit Shah. Go ahead. Your line is open.
Amit Shah, Nomura Securities
Yes. Thanks a lot. I was looking at the five-year and 10-year medium growth rates for the March quarter, which is about 4% and I think one thing that people are struggling to reconcile today is, how you could be guiding for better than normal growth given in the macro backdrop which, Paul, you articulated as mixed? You mentioned strength in North America, but as a percentage of your business that is only 25%, whereas the other regions Europe, Japan and the rest of the world, which you indicated are decelerating comprised of the remaining 75%.
Paul Coghlan
First of all, you are correct in saying that 27% of our sales were into the US, but I also mentioned in my opening comments that 41% of the demand we created was created in the US, so some of the actual manufacturing selling of that would been done offshore, but the demand was created in the US. Secondly, and I think and I am no economist, but historically if the US economy has been strong that is the best of having strength in any of the other economies, so the US economy tends to have more of a worldwide impact if it is than if Europe is a little weaker or Japan is a little weak or China is a little weak. China being a little weak, it is still growing 7%, so that’s a pretty solid number.
And then I know when we look at oil prices, I know Wall Street every day for the past couple weeks has let us all know that lower oil prices is bad for the stock market I guess, but for consumer demand for people that may want to buy a car or buy a product whose oil prices dropped 50%, I don’t if we fully anticipated economically what that impact will be in the next year or two or so. So you said, our mid-point is a little higher than the four percentage you alluded to, but not dramatically higher than that, so we feel we can do what we have estimated.
Amit Shah
This point on oil prices, Paul, is an interesting one. You mentioned that it has potential positives and negatives for Linear. I am curious what you think it means for your industrial business. My impression would be that this would negatively impact your industrial business, but based on your outlook it sounds like things are pretty good.
Paul Coghlan
I don’t off-hand know why you would think it would be negative. One of the significant costs to an industrial company is generally the cost of energy — heat, light and power. To the extent that cost is less, that would give the money that they could fund projects like someone earlier asked us about how our wireless business is going and those of projects that industrial companies have to decide the fund and they don’t like abort, so I think if they have a little more lower expenses that can give the more cash to help fund projects like that. What particularly did you have in mind as to why lower oil prices would harm industrial companies?
Amit Shah
Well, my understanding is that many of these companies have 20% to as much as 50% of their revenue exposure to the oil and gas markets and given the decline in the commodity that might in fact affect their CapEx investments and therefore spending on a projects that Linear maybe tied to.
Paul Coghlan
Well, again, I haven’t heard that percentage, but I would personally think that industrial companies have much greater exposure to the automotive end-market than they would to the down-hole exploration end-market so that certainly in Europe a lot of industrial companies feed into the automotive market and there if you have a lower fuel cost, you may have people willing to buy new car sooner.
Lothar Maier
Maybe, if I can add, from an industrial customer the benefit of low oil prices is not just in their electrical bills, but a lot of raw materials have their origins in petroleum as well, so I think you will see of a broader impact as well where just the cost of raw materials that have their source with the petroleum are also going to go down which I can only see being good for our industrial customers.
Bob Swanson
Yes. I saw another statistic that said that what this $50 a barrel price means to consumers in the US alone is an extra $400 million a day of extra money they had to spend. They could buy things that drive all kinds of markets.
Amit Shah
Yes. I mean, your logic make sense. You would not know what they were looking at the way industrial stocks are trading today, but I appreciate the feedback, guys. Thank you.
Paul Coghlan
Alright, thank you, Amit.
Operator
We will take our next question from Ross Seymore. Go ahead. Your line is open.
Ross Seymore, Deutsche Bank
I just want to switch the conversation over onto the cash usage perspective. You raised the dividend, which is great. Congratulations on that. Can you just talk about what is your goal into returning cash to shareholders is? Specifically, I wanted to get into the percentage of your ongoing cash flow and even the cash that is on your balance sheet that is domestically held. It seems like every dollar of your domestically held cash flow is going back to shareholders, but the vast majority of that is going to be in the dividends, so any color around your framework there would be helpful.
Paul Coghlan
The percentage of our cash that originates domestically is probably somewhere in the 70% to 75%. The amount of that 70% to 75% needs to fund the corporate expenditures, so we can’t use our offshore cash to pay the dividend and we can’t use our offshore cash to buy back stock. We have to use our domestic cash to do that. If you were to look at our balance sheet, you would not get the same proportion — 70% of the cash being onshore and 30% offshore — because just a few months ago, we paid off a big piece of debt. We extinguished the debt. So on our balance sheet may be as little as 10% or 15% of our cash is onshore, whereas cash that gets generated is dramatically higher percentage of that. So, when we look at the cash we have, we don’t need to accumulate more cash to pay off debt as we had been doing for several quarters. And I’ll remind you, that was for several years, that was to pay off debt that was incurred to buy back 27% of their shares outstanding. When we look at we no longer have that need for cash, and we look at the dividend and repurchasing of shares, our top priority is to continue to have a strong dividend and to increase it every year. Our concurrent, but somewhat secondary priority would be to buy back stock.
Ross Seymore, Deutsche Bank
Thank you. Shifting gears a little bit to a different topic. The Comm.’s business, you answered earlier the question about what was going on in comm. infrastructure to at least take your best at it, as you joked about. Out of that 19% or 20% of sales, can you give us a rough estimate on how that splits between wireless infrastructure and, I guess, wireline would be the other category.
Paul Coghlan
This is a guess, because we accumulate the data by customers. As you might imagine, some customers, you could pick a large Chinese customer and that customer be both in networking and wireless infrastructure for example. But with a rough cut my guess is wireless infrastructure is maybe 40% of our Comm.’s and networking and the cloud and all of those good opportunities for us at roughly 60%.
Ross Seymore
Perfect. Thank you.
Paul Coghlan
60% of our business in communications.
Ross Seymore
Got it. Thanks again.
Paul Coghlan
You’re welcome.
Operator
We will take our next question from JoAnne Feeney. Go ahead. Your line is open.
JoAnne Feeney, ABR Investment Strategy
Yes, thanks and congrats on that nice guidance. First, a specific question on inventories, I am wondering if you could shed a little bit of light on the situation at your distributors both US and internationally in terms of sell-in versus sell-through over the last quarter and what has transpired so far in January.
Paul Coghlan
Well, our US distributors as I said are deferred income and distributors hardly changed, so what we shipped into distributors last quarter very, very closely approximated what they shipped out. And I don’t think it’s — and it is probably quite similar or not probably it is quite similar for international distributors, so I don’t think we built any inventory at
distributors last quarter.
JoAnne Feeney
Okay, thanks. That’s helpful. And then a longer term question. The issue of long-term growth prospects came up earlier in a couple of questions and that was really a helpful clarification on the auto side. I am wondering though, longer-term, if you are trying to target 10%, do you think that this way of doing it — relying on the electronic content increases in auto and industrial — would be sufficient to generate a long-term prospect of 10% or so growth or do you need to see a turn towards a greater aggressiveness in acquisitions and what sort of metrics would you be happy with to do further acquisitions?
Lothar Maier
I think, we can do our growth plans really without the need of acquisitions. I think that history has kind of proven that out. As we talked about earlier, you we are confident that the automotive and industrial markets are going to continue to grow both, in dollars and in market share of the overall analog market, so we have got all of our design efforts or not all, but most of our design efforts, our sales efforts have management focus on those markets. As automotive and industrial grows, and if we hold our own in communications, I think the odds are pretty good that we will achieve these sort of 10% per year growth targets that we have, barring no note changes in macro environment. But as mentioned earlier, from a product standpoint, from a market standpoint, from a market penetration standpoint, we are about as well positioned as we have ever been.
Bob Swanson
Again, we are 3.5% of a 40-plus billion-dollar opportunity, so the size of the opportunity has never really been the issue for Linear.
JoAnne Feeney
Okay. That is helpful. Then just one quick question back to this quarter’s guidance. It is as someone else noted, a bit ahead of seasonal patterns over the last year few years, even post the recovery from the recession, so I am wondering if you could give us a split of the breakdown of the guidance that is coming from electronic content gains versus coming from a pick-up in those strong end-markets. Are you able to separate those two at all?
Lothar Maier
Not by quarter. No, we would not be able to do that.
JoAnne Feeney
Okay.
Lothar Maier
We couldn’t tell you that by next quarter.
JoAnne Feeney
Okay, thanks.
Lothar Maier
You’re welcome.
Operator
We will take our next question from Chris Caso. Go ahead. Your line is open.
Chris Caso, Susquehanna Financial Group
Yes, thank you. I guess, just summing up some of your earlier comments, would it be safe to say that what you are seeing in your outlook is some degree of strengthening in the business? You mentioned where you were versus normal seasonality and I guess the guidance is little ahead of where it was last year, but I guess we are hovering close to normal seasonality, so I am just interested in kind of the tone from customers if this is indeed something to see some improving conditions.
Paul Coghlan
Well, I mean, I think our guidance last year, was it 3 to 6, I think now it is 4 to 7, so I mean, they are very, very similar. Last year, our December quarter was down, I think, one percentage point or 1.2 percentage points and this year it is down five. I think when you look overall, we think businesses if we look vis-à-vis the past couple of years, we think the macro outlook particularly, in the United States is a bit stronger. Since we are feeling that a little bit from US customers. When I was driving home last night they said this survey they do of a confidence level of American businessmen was at the highest it has been since 2008, this commentary I heard on the news driving home. So I think overall in the US, I mean, people have seen several good quarters in a row on a macro side, so I think the US, we hope, should be a good market for us.
Chris Caso
Just as a follow-on I believe in your prepared remarks you talked about the bookings up in the second half of the quarter. Could you characterize it? Is that normal seasonal behavior for your business?
Paul Coghlan
Yes. If you look at our lead times are four to six weeks, so somebody ordering early in the December quarter would be ordering for shipment to take place in the month of December. In the month of December, we told you particularly in Europe, you have got a lot of vacations and also industrial and automotive plants, some of them in the US and Europe had shutdown at the end of December. If you kind of look at that relative to lead times, you would say we will then probably want you get near the end of November, people are looking at shipments coming in the New Year, in January and that they probably would pick up their order patterns greater than what they wanted to be shipped in December, so I think it is straightforward as that, Chris.
Chris Caso
Okay, that makes sense. Thank you.
Paul Coghlan
You’re welcome.
Operator
We will take our next question from Chris Danely. Go ahead. Your line is open.
Chris Danely, JPMorgan
Hey, thanks guys. Just a quick one then the clarification. So it sounds like know your business overall maybe have gotten a little bit better, but roughly in the seasonal range over the last whatever 3, 6, 12 months. Would you guys say your visibility has improved at all or is everything more or less the same as it was 3 months, 6 months, 12 months ago?
Paul Coghlan
I think it is pretty similar. I mean if the customer doesn’t have a lot of inventory, then your visibility is about the same as it has been for the last 12 months. We have little cancellations, sometimes you get a 911 call, somebody in a hurry to get product, so we would probably have more of that than we would have if there was a lot inventory out at the customers, so I think that visibility has been similar.
Chris Danely
Okay, thanks, Paul. Then just two quick housekeeping ones, what should we assume for the tax rate going forward? Then you talked a little bit about the stronger dollar, you know, if the dollar continues to appreciate, what would be the impact on your business and your P&L if any?
Paul Coghlan
Okay, the first one, the ongoing tax rate will be 25.5%, probably through to the end of June and then once you get into that second half of the calendar year or our new fiscal year, if the R&D credit hasn’t been approved that would probably have a 0.75 or one point impact on the effective tax rate. So I guess for the next six months the one we have — provided we don’t have discrete items should be good, after that it might get a little higher depending on the R&D credit.
Lothar Maier
The dollar, that is always a tough question, because for me anyways, when I look at it as a financial guy in a close room, I think if the dollar get stronger that will hurt you internationally, yet my experience has been a stronger dollar really hasn’t hurt internationally. If it changes dramatically quickly and then keeps going up and down then it impacts you, but if it strengthens bit by bit and stays stable in that pattern as obvious it may sound, found I think historically that has not hurt our business.
Chris Danely
Okay. Thanks. As an evidenced, so long I forgot it was like.
Paul Coghlan
Yes. We do as well, yes.
Chris Danely
Time to go to shop in Europe.
Paul Coghlan
There you go. Have a nice vacation, Chris. Take the family this summer.
Operator
We will take our next question from Ambrish Srivastava. Go ahead. Your line is open.
Ambrish Srivastava, BMO Capital Markets
Thank you. I just have a quick on the industrial side, guys. You had put together a pretty long and impressive streak of close to 10% growth on a year-over-year basis and I am just looking at the bookings. Could you just help us understand what are the – and I know it is a very diverse business — but what are some of the specific drivers for your business? Then just looking forward, do you see any changes to that in terms of any applications or geos that should be continuing that growth or do you expect kind of the same going forward? Thank you.
Paul Coghlan
Well, I think the areas that, as you correctly stated and thank you for that, it is a very, very diverse business, industrial business. But if you ask me to pick maybe the top three or four of ours, I’ll probably be medical and you can see there is more automation going on in the medical world when you and I visit our GP, he has got more equipment in his office and hospitals are buying more equipment that form, fit and function of equipment getting smaller, so to upgrade equipment has a smaller footprint for hospitals, so I think medical equipment has been pretty good. Factory automation has been very good over recent years, and I think if you think of the changes in the automotive industry, if the automotive industry is growing, factory automation with robotics that would probably grow concurrently with it. Then another strong area for us is test and measurement as there is more electronics showing up in any part of your life, be it inside a car, be it inside your house, all of that electronics needs to be tested and measured, so I think more so test equipment could be helpful. So I think those are some of the drivers, sensor business, Lothar alluded to earlier, that’s a big part of manufacturing, alternate sources of energy, solar power, green tech. Those didn’t exist years ago. They are not as strong as the first ones I mentioned, but they are there. Even something like broadcast, which was not big years ago, now with the move to HDTV and better and better clarity and cameras and data being sent over the lines, all has an impact on the industrial world.
Ambrish Srivastava
ASPs are higher here versus automotive. Is that a fair assumption?
Paul Coghlan
Yes. Generally that is a fair assumption.
Ambrish Srivastava
Okay, thank you.
Operator
We will take our next question from Steve Smigie. Go ahead. Your line is open.
Steve Smigie, Raymond James
Great, thanks a lot. Just wanted to touch on Asia a little bit more. Government there seems to be really trying to push more investment in semiconductors at a national level in China. Then also there has been some movement in China to use less American technology maybe for security reasons et cetera. So I am wondering if that has impacted your business at all or if you think that even will?
Paul Coghlan
I have heard both of those. I can’t say that I could put my finger on any instance where that has had any impact on us, so maybe long-term it could be, but presently we have not seen any impact.
Steve Smigie
Okay, great. Then just on Europe, as you mentioned things are a little bit softer there. Have you seen that to be any sort of meaningful color or is just you have so many customers that it is more general tone is got nervous but doesn’t really overall impact demand and ultimately, European customers seem to be more shipping products elsewhere, so maybe back into the US or even into Chinese auto customers. So is the softness in Europe something that would dramatically impact you?
Paul Coghlan
I know we said softness in Europe, but we really meant to imply that that softness was seasonality, where factories are slowing down, doing shutdowns in the December quarter. We didn’t want to imply that we thought there was some softness in the European business. Again, so much of European production is for export, so really even if there is some softness in the European economy, it would probably be cushioned a bit, because that economy is pretty much – at least the products we are in — are very highly export-driven.
Steve Smigie
Okay great. Lastly and just to follow-up on the question about the stronger dollars. I think you guys and many of the semi guys price in dollars, so, as you have seen drop in other currencies, I am just trying to clarify, so your point was that even though you have seen the drop those other currencies, it hasn’t really seem to have much of an impact on your demand from those guys that might have European currency to buy with. Is that what you are saying there?
Paul Coghlan
Well, certainly your customer – first of all, remember we sell generally high-performance products, so we are selling products where there is not a lot of socket-for-socket competition for us. Once we win the design, we are pretty much in there. Then if the dollar strengthens, then our customer — the end customer — if he is Europe or Japan would have to pay more. Now, if it is a distributor, let us say, he may come to us and say can we help them out a little bit, we may or may not do that and depending on the circumstance. So I think what we are saying is, if we were selling a lot of commodity products, which sources from different parts of the world for the same product, a strengthening dollar would have more of a negative impact than a company like Linear, which doesn’t sell commodity products and doesn’t have as much competition from many other analog sources around the world.
Steve Smigie
Okay, thank you.
Operator
We will take our next question from CJ Muse. Go ahead. Your line is open.
Caller for CJ Muse, ISI Group
Hey guys. This is calling Ata calling you for CJ. Thank you for taking my call. Could you maybe provide some additional color on some of your smaller segments: computer, consumer, military, any areas of strength that you are seeing there?
Paul Coghlan
The military I told you was a little stronger, but I mean it is only 6% of our business. Consumer remained at 3%, so there really isn’t much to tell you there. Computer, you know, it is 9% of our business, we have some very valued customers in that space. I do not think there has been any kind of dramatic shift there though. There hasn’t been any anything that I would caution you that could lead that number to significantly go up or significantly go down. I think we are pretty well established where we are and have a broad base of customers in that, but it is only 9% of our business.
Caller for CJ Muse
Great, thank you. There have been a lot of questions around Europe, does the uncertainty and instability in Russia do anything for you guys or your exposure there is pretty minimal?
Paul Coghlan
Well, our direct exposure to Russia is very minimal. However, if the Russian situation were to get bad enough that it concerned Western Europe, well, then that could impact Western Europe spending patterns potentially or like if Russia didn’t supply them any natural gas or fuel for the winter, I mean, that could impact some companies, but we do not see that happening, but I think overall if you had talk to a European businessman, he probably feels there nothing dramatic going to impact them, but a year ago he wasn’t even thinking about Russia. Now think about the political situation there.
Caller for CJ Muse
Great. Thank you so much.
Paul Coghlan
You are welcome.
Operator
We will take our next question from Craig Ellis. Go ahead. Your line is open.
Craig Ellis, B. Riley
Thanks for taking the questions and there are really just a couple clarifications. Paul, first on inventory was the point that the on-hand increase in the fiscal second quarter being due to planned facility shutdowns around Chinese New Year. Was that meant to imply that we should expect inventory days to go back down by five or so exiting this quarter or what are the points on the change in the composition of inventory really meant to imply that will probably stay at these current levels as we look ahead?
Lothar Maier
At the moment we think inventory will go down at the end of the March quarter, but again we have to see how that plays out, but not go down dramatically but we think it would go down.
Craig Ellis
Okay. The other follow up was, just on some of the comments around the strength that you would expect to see in the US. As you look inside the orders that you have seen in the business recently — whether it would be on an application basis for those orders that are driven in the US or by customer type, small to medium size business versus very large industrial or auto OEMs — are you seeing a change in some of those areas relative to what you were seeing last year at this time that went further confidence to the outlook for 5% top-line growth?
Paul Coghlan
That is hard. I mean, we told you that our industrial business overall grew — the bookings in it grew — and that’s where you would have more of these smaller customers as opposed doing something like computer or communications. When we look at our expectations of our smaller customer base, we think they would be using – we were designing in well more product there. Overall, I think it is probably early to make any say, wow, call at. that’s all picked up, but on the margins probably it has probably pick up a bit and we will see as the year goes on if it picks up even more to help us attain goals we set earlier for annual year-over-year growth.
Craig Ellis
That’s it. Thanks, guys.
Paul Coghlan
You’re welcome.
Operator
We will take our next question from Vivek Arya. Go ahead. Your line is open.
Vivek Arya, Bank of America Merrill Lynch
Thanks for taking my question. I am wondering, I believe you are in a sell-in model in your overseas markets, where everyone is seeing a lot of volatility. Do you think that impacts your visibility in any way? I am just curious, what do you have in your dashboard to monitor overseas demand trends beyond just the reports from the distribution channel?
Paul Coghlan
Well, a lot to say, some of my overseas sales although they go down through distribution it is our sales force that is dealing with the customer and designing in the product. For example in Japan, almost all of us sales go through distributors, but yet we have a very significant sales force and a lot of the actual selling activity takes place with them, so we have got direct knowledge from our sales force. Then in places like Europe, what was your question there again?
Vivek Arya, Bank of America Merrill Lynch
No. Just in general, Paul, because you are in that sell-in model in overseas markets and that is where we are seeing the most flux because of oil prices and other macro factors. I am just trying to reconcile that with the seasonal patterns that you are noticing and I am wondering if the visibility is impaired in any way because you are more of a sell-in overseas versus sell-through here in the US.
Lothar Maier
Just a point of clarification, even though we are sell-in, we also know what they sell-through, so we have visibility into what they sell-out and into what customers they sell it to, so is not a black box. We don’t ship-in and then forget about it we know it sells through.
Vivek Arya
Got it. I understand. Then the second question is on, I believe questions were asked about your domestic cash balance. I am wondering what your plans are for your overseas cash balance, which I think is over 80% of the cash and I believe 20% to 25% of ongoing cash generation. What do you think is the most productive use of that cash?
Paul Coghlan
First of all where we can employ it overseas, any plant expenditures or things like that that we have, we employ it for those purposes. To employ it, we needed to bring it back to the United States either for corporate purposes or for some US fixed asset addition, then we would have to pay tax on it. Currently, with the US government talking a lot about tax reform, we think it wouldn’t be wise to pay 35% tax on something that the whole tax situation may change, so that presently we are leaving the cash where it is and not having any plans to repatriate.
Vivek Arya
Got it. One last one if I may, I think you mentioned auto as a key growth driver and you also mentioned that channels are lean, but do you see any concerns with the build in and finished car inventories, because many people have mentioned that in China for example, built car inventories are at multi-year highs. Is that a concern at all for you?
Paul Coghlan
Well, China, we have a very small automotive business there in China. We already told you, we sell a lot into high-end cars in Europe and Japan. I am not sure, are you saying, there is high inventory in those?
Vivek Arya
No. I am asking, do you monitor finished car inventories also? When you say your channels are lean, you are only looking at your specific channels? Are you are reconciling…
Paul Coghlan
We only look at our channels, we look at designing in product to get greater content of our product in cars that it is going to be produced three years from now.
Vivek Arya
I understand. Thank you.
Paul Coghlan
You’re welcome.
Operator
We will take our next question from Deepon Nag. Go ahead. Your line is open.
Deepon Nag, Macquarie Capital Partners
Thanks a lot for taking the question, guys. You spoke a lot about content growth opportunities in auto, is it possible to kind of give us an idea of your exposure by application on the comm. side and whether if your content growth opportunities in new technologies, whether it would be small sales in the wireless side, 25, 40, 100 gig wireline side?
Lothar Maier
I am not sure we have that close visibility in that market, but I would say on the sort of infrastructure side we see good opportunities probably more in sort of the smaller pico-femto type of base station applications rather than sort of the big iron ones, so I think that is which is probably they sell two or three times as many of the small ones as they do they do the big ones, so that is an areas probably if I could add a little color to it, but more detailed than that I do not have any.
Deepon Nag
That basically it is radio exposure and do you have – on the backhaul as well?
Lothar Maier
On the backhaul, we are having the RF, we have on the power that powers these base stations, we have mixed signal products, B to A converters in those applications as well. We kind of sell across the portfolio. Then a lot of these small base stations, they want to the power and data over the same Ethernet cable, so we were seeing opportunities for our POE products, where they provide both the power and the data traffic for these small base station. I would say there is probably good opportunities for us in these smaller stations.
Deepon Nag
Great. That is very helpful. One final one, just housekeeping thing. The actual churns you saw in the December quarter and under the required turns you are expecting in the March quarter?
Paul Coghlan
We don’t say what the actual turns ultimately, we have never had, so I do not have that number in front of me — what they were in December. But we anticipate turns in the March quarter being in the mid-50% range.
Deepon Nag
Great, okay. Thanks a lot. I appreciate it, guys.
Operator
And once again you would like to ask a question, please press star and 1 on your touch tone phone. Star and 1. We will take our next question from William Stein. Go ahead. Your line is open.
William Stein, SunTrust
Thanks for taking my follow-up. Paul, maybe I will ask you to opine again on a different end-market. I know it is much smaller part of your sales, but the military space, harsh part of your business, we have heard some views about that market improving and I would like to hear your thoughts beyond just the current quarter maybe for the full-year.
Paul Coghlan
I think our bias there is we have also seen some improvement in that business. It is a small piece of our business at 6%, so I do not have a lot more color than that when I talked to the mil people, they are they are talking about more activity than was a year ago and they are talking about a pickup in it.
William Stein
Is that a more strict mil stuff or commercial air?
Paul Coghlan
I do not know. You got me there. I think, it is a mixture of both. I think some of it now might be as you move into the start of a year, budgets open up and it could be something that you probably might need to pulse for whole year to see if it is big trend or if it is not just seasonal and I do not have in front of me the breakdown between the commercial and military. Most of our business is commercial, so I have to say it leans more towards that, but I do not have a good answer for that.
William Stein
Okay. Thank you.
Lothar Maier
You’re welcome.
Operator
And once again to ask question, press star and 1 on your touch tone phone. We will take our next question from Doug Freedman. Go ahead. Your line is open.
Doug Freedman, RBC Capital Markets
Hi, guys. Thanks so much for taking my question. If I could ask one, a little bit on the strategic front. You were asked briefly about if there was an impact from China and if they are interested investing in the semiconductor industry. Is there a way for Linear to take advantage of the interests of the Chinese to invest in the industry? We are seeing them invest in things such as assembly and test as well as subsidizing wafers and R&D projects over there. Is there anything that you have done to take a look at a way in which you could benefit from their interest in investing in the industry?
Paul Coghlan
I will take a first crack at it. Particularly a couple years ago, it was invoked at move your assembly or test to China. We didn’t do it and then for a while that it was a lot of employee turnover in China. And also wage rates were starting to pick up in China. So that major difference between China in, say, places like what Penang for example where we are, those differences were starting to narrow. Then given the stableness of the workforce kept us saying we would rather stay where we are, but is that what you meant would we be more likely to open up assembly or test in China?
Doug Freedman
Or just find a way to tap into the capital that they are basically making available for the industry in an effort to increase their onshore semiconductor content.
Paul Coghlan
Probably fab would be the only thing, where we are very capital-intensive where someone helps you but I do not know if we would go there for another fab. Not this time.
Doug Freedman
Great, thanks.
Rob Swanson
No. Linear Technology’s strength is its engineering IP, so that is what separates us from everybody. I guess that is what they like to acquire, that would be the last thing that we would give away.
Doug Freedman
Alright, great. Thanks so much.
Paul Coghlan
You’re welcome.
Operator
We will take our next question from Gilbert Alexander. Go ahead. Your line is open.
Gilbert Alexander, Darfil Associates
Thanks for taking my question. I assume all your overseas sales are in dollars?
Paul Coghlan
Yes.
Gilbert Alexander
Thank you. Could you just, for housekeeping, give us your capital expenditures depreciation for this year?
Paul Coghlan
We estimate for this fiscal year it will be $80 million for CapEx and $50 million for depreciation.
Gilbert Alexander
Thank you.
Paul Coghlan
You’re welcome.
Gilbert Alexander
May I just ask one thing and maybe this goes back 15 years, and I am basically a consumer analyst and I do not have much growth in the food industry. Why do you have to do sequential sales and earnings when you could just do the quarter last year to the quarter this year? I know the industry likes it, but is it necessary?
Paul Coghlan
You have opened that question. We might argue that any quarterly data to spend so much time on given the long-term nature of our business isn’t as necessary as the attention it gets, but it is just the only way I can answer it for you as it has been that way historically. People have been in our industry, electronics – investors look more at quarter-to-quarter.
Gilbert Alexander
Thank you very much.
Paul Coghlan
You’re welcome.
Gilbert Alexander
Congratulations.
Paul Coghlan
Thank you.
Operator
It appears we have no further questions at this time.
Paul Coghlan
Okay, well thank you very much for your attention. We wish you all a happy and successful new year and have a good day. Bye bye.
Operator
That concludes today’s conference. Have a great day.
