Linear Technology Corporation (LTC) has completed the re-focusing of the company, begun in 2006, which saw LTC de-emphasise cellphone and consumer ICs, and put its efforts into industrial, automotive and military/aerospace ICs.
"We made the decision in 2006 because we said we don't like the way the future looks", Bob Swanson, founder and executive chairman of LTC, told Electronics Weekly, "we recognized there was no pot of gold at the end of the cellphone rainbow, just red ink."
The problem was commoditization of cellphone ICs. "By 2006, things we had been selling for $1 would be going for 25c", said Swanson, "it was not defensible so we got out of it."
Swanson had his critics both inside and outside the company. "We knew there'd be a bunch of people in Wall St who would get nervous about this. The initial argument from these guys in Wall Street was: 'How can you possibly grow if you're not in consumer products and cellphones'."
Received wisdom at the time was that consumer, including cellphones, would represent 50 per cent of the semiconductor market.
"When cellphones came in we had no involvement in the phones though we were involved with Nokia and Ericsson in base-stations", recounts Swanson, "then people like Samsung decided the world needed full-featured Internet etc. They discovered that their competitors were locked into ASICs."
"Samsung was not handcuffed with ASIC, and would take the standard building blocks, and we had the best ones", said Swanson, "so the ride up the mountain was exciting. During 2003, 2004 and 2005, it was all growth and joy. In 2005, one third of our revenues came from cell-phones and consumer applications like MP3, cameras and personal navigation systems."
Then came the realization that the situation was not sustainable and the business was not defensible. "By the time the competition had figured out how to make this product which we'd been selling for $1, they were all chasing market share and, although we had better products, the others were selling theirs for 25c to 40c and that was more aligned with the customers' strategy", said Swanson.
Though he realized he had to reduce LTC's exposure to consumer and cellphones, while staying in high-end cellphones where LTC can add unique value, Swanson realised this would cause grief to some people.
"Analysts on Wall Street said you've got to be in celllphones and consumer, and that we were too much into standard analogue products where there's too much competition", added Swanson, "but the competition wasn't in standard analogue, and standard analogue is the fastest growing area between 2006 and 2011, and is also the biggest area. So being in standard analogue is a good place to be. Communications is going to be a smaller market in 2011 than it was in 2006, and consumer will also be a smaller market in 2011."
The Wall Street analysts, miffed by Swanson's disinclination to follow their advice on how to run the company, declined to recommend LTC's shares. These stayed flat despite a $3bn share buy-back scheme which saw LTC buy one third of its own equity.
Now, however, even the analysts have seen that Swanson was right and LTC's shares saw growth until the credit crisis hit all shares.
"Even a number of cell phone manufacturers are struggling and, all of a sudden, we're beginning to see companies getting out, spinning off their wireless businesses", said Swanson, "I was more correct two and a half years ago than I ever knew."
LTC has done this kind of re-focusing before. In 1986 it had $22m revenues coming mostly from the military and aerospace market; in 1991 it had $94m revenues coming mostly from industrial markets; in 1996 it had $378m revenues driven by PC; in 2001, it had $973m in revenues coming mainly from communications, and in 2007 had $1083m coming mostly form industrial, automotive, and high-end consumer.
Now, with the re-focusing complete, handset chips which were 28 per cent of LTC's business in 2005, now represent 11.5 per cent; the industrial, automotive and military/aerospace business, which represented 41.9 per cent of LTC's business in 2005, now represents 55.3 per cent; and the computer and other communications chip business which was 30.1 per cent of the business in 2005 will represent 33.2 per cent of the business this year.
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