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Linear Technology (Nasdaq:LLTC) has long suffered from a decided lack of analyst support and enthusiasm. Despite an extensive record of strong financial performance, the company has never put to rest the doubts that its high margins will be whittled away by the likes of Analog Devices (NYSE:ADI), Texas Instruments (NYSE:TXN), Maxim (Nasdaq:MXIM) and a host of foreign and smaller competitors.

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Now, another worry comes into play - whether or not Linear can maintain its business, and whether customers over-ordered during the early stages of this economic recovery. With Linear looking for a sequential drop in revenue into the last calendar quarter of this year, the question is whether Linear is the canary in the coal mine for broad-based analog chip demand, or simply an odd duck with its own unique ship-ahead problems.

The Quarter That Was
All in all, Linear did more or less as expected in its fiscal first quarter. Revenue rose 6% on a sequential basis, and 65% on an annual basis. Gross margins ticked up sequentially by about 60 basis points, and while reported operating margin fell a bit, adjusted operating margin (excluding a legal charge) would have increased sequentially.

The big bad news of the quarter was management's commentary on bookings. Although the book-to-bill stayed above 1 for the quarter, bookings did fall on a sequential basis and they got worse as the quarter went along. According to the company, the shortfalls were pretty even across the company's many customer categories, though it seems that Apple-related (Nasdaq:AAPL) demand for products like the iPhone and iPad were incrementally positive.

The Road Ahead
The biggest question is just what exactly is going on in the end-user markets. Are companies pulling back on orders because their end-user demand is weak? Did these customers over-order because they feared that companies could not fulfill their needs on a timely basis? It is difficult to say with certainty, but it looks like customers are having no problem finding suppliers. Moreover, with Linear's own lead times continuing to fall, that shrinks the gap between order and delivery and reduces the need for customers to over-order. Long term, that is not necessarily a problem, but the adjustment process can be unpleasant. (For related reading, check out KLIC Goes Clunk.)

The Bottom Line
It is an open question, whether Linear will get the respect that its fundamentals would suggest it deserves. If an investor assumes that the company will gradually bleed away a little margin every year (and not regain it elsewhere in the free cash flow generation process), the shares probably are not undervalued enough to be interesting. If investors believe in a return to prior free cash flow margins, however, that would put the shares down almost 30% to fair value - a level that may be much more enticing to investors who can tolerate the volatility and skepticism that goes with this name.

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