2013: opportunity in times of uncertainty

As 2012 comes to a close, general pessimism abounds around global economies. Given the challenging financial conditions in the United States, the ongoing European debt crisis and a slowing Chinese economy, there’s an inclination to slow down or pause until there is a clearer market picture. But as a technology company with a single-minded determination to be first to market with innovative products, Linear has no choice but to forge ahead or run the risk of being left behind. Many of the decisions that we make this year will have long-term implications, since technology is never static and the product development that we do today will be designed into end products by our customers 2 to 4 years in the future. So in spite of any potential hazards in 2013, too many to name, Linear Technology will continue to develop compelling new analog products focusing on the automotive and industrial market segments. This market focus has allowed Linear in the last three years to outgrow the overall analog market, as well as its competitors. The overall analog market registered a 5.4% compound annual growth rate in the past 3 years compared to Linear Technology’s 9.8% compound annual growth over that period. This outsized growth occurred because Linear recognized nearly 7 years ago that the automotive and the industrial markets were entering an innovation cycle. This strategy was validated by the fact that these were among the fastest growing segments of the analog market during this period. Although the past 3 years have been a period economic turmoil, the industrial and automotive segments of the global analog markets have grown nearly twice as fast as the overall analog market. In the last 3 years Linear Technology sales into the industrial and automotive markets showed compound annual growth of 15.9% and 40.6%, respectively and represent nearly 60% of total sales. The decision several years ago to focus on the industrial and automotive markets was not universally embraced, with some employees, investors and analysts questioning the wisdom of forgoing the very visible consumer markets for the relatively obscure industrial and automotive markets. However, time has validated our decision, and most of the prior skeptics are now solidly on board. Once the decision was made, new product development and sales efforts were redirected to these focused end markets. The success of this redirection to the automotive and industrial markets was the result of keeping close to the right customers, understanding their future needs, and developing products and technologies that allowed Linear products to be both an enabler and a differentiator for our customers’ end products. Linear Technology’s automotive sales have grown significantly faster than the overall sales growth of the company. It is remarkable that this growth came during a period of nearly unprecedented economic uncertainty, where the number of vehicles sold annually has been highly volatile. So the success in this market has been less about the actual number of vehicles sold, but is more closely connected to the ever-expanding electronic content in cars. This proliferation of vehicle electronics has enabled increased fuel efficiency, improvements in safety and comfort, and helped meet emission guidelines and mandates. In parallel, automakers are searching for ways to reduce vehicle weight, and one way to meet this objective is by replacing mechanical functions with electrical/electronic control, furthering the proliferation of vehicle electronics. This has been a positive success story, and with the continued shift to more fuel efficient hybrid and electric vehicles this trend is likely to continue and possible accelerate. Linear’s automotive products have benefited from the company’s long-term industrial business, gaining experience designing and manufacturing products with the quality and reliability to operate over wide and demanding operating conditions. This experience was crucial in meeting the stringent automotive quality standards and requirements for operation in harsh environments. Linear has been equally successful in the industrial market. This is the result of decades of product and sales focus into this market and having the right products. The industrial market presently represents 41% of total sales and is dominated by thousands of small and medium size customers. These customers develop products for a highly diverse end market, but the need for innovation in this market is ubiquitous. The industrial market is divided into many submarkets, each with unique requirements for product performance.

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These submarkets include, just to name a few, factory automation, test and measurement, medical, security and green technology. We’ve found that the industrial market is the common denominator for all markets. Growth, for example, in the consumer, computing or telecom markets in turn drives increased demand for more equipment and infrastructure, which ultimately benefits the industrial market. Thus growth in any market accelerates our industrial business, driving it to be our largest end market, with anticipated faster growth than the overall analog market into the future. We always have an eye to the more distant future, which markets will drive future growth, and what products we should design today to capture this growth. Linear has concentrated efforts in several emerging innovation-rich new markets. These includes the micromodule family of products, digital power products, energy harvesting products and low power wireless sensor network products through the acquisition of Dust Networks. The areas of smart low power wireless networks and energy harvesting are emerging markets with boundless opportunities. Imagine millions of smart connected devices powered autonomously by energy harvesting devices, which offer staggering opportunities for Linear products. Our SmartMesh wireless technology offers complete wireless sensor network solutions using low power electronic components that can be powered by our energy harvesting products. We are confident that we have the products now or in development that will enable new markets and support future growth. All we need now is for the U.S. Congress to act and create a business friendly tax structure and develop a plan for a balanced budget. Europe must find a way to contain its debt crisis, and China needs to regain its momentum. These are big challenges, but when solved will drive a surge in the technology business worldwide, and future growth in which we have the products, technology and expertise to participate