Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Hittite Microwave Corporation (NASDAQ:HITT)

Q4 2012 Earnings Call

February 21, 2013, 5:00 p.m. ET

Executives

Stephen Daly – Chairman, President and CEO

Bill Boecke – Vice President and CFO

Analysts

Mark Delaney – Goldman Sachs

Tore Svanberg – Stifel Nicolaus

David Wong – Wells Fargo Securities

Jiwon Lee – Sidoti & Company

Amit Chanda – Wells Fargo

Tore Svanberg – Stifel Nicolaus

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Hittite Microwave Corporation's fourth quarter 2012 conference call. (Operator Instructions)

I would now like to turn the conference over to Mr. Steve Daly, Chairman, President, and CEO. Please go ahead, Sir.

Steve Daly

Thank you. Ladies and gentlemen, good afternoon and welcome to Hittite Microwave Corporation's fourth quarter, 2012 conference call. With me today is Bill Boecke, our Vice President and Chief Financial Officer.

Before I begin the discussion, I would like to review the Safe Harbor statement. Please note that statements made in this conference call about Hittite's future expectations, plans, and prospects constitute forward-looking statements for the purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors. For information about these factors, I reference you to the earnings release that we issued earlier today and to our quarterly report on form 10-Q and on our annual report on form 10-K filed with the Securities and Exchange Commission. The earnings release along with other financial and statistical data that we may discuss on the call and copies of our SEC reports are available in the investor relations section of our website at www.hittite.com. You may also obtain copies of our SEC reports and a copy of our press release furnished under form 8-K from the SEC's website at www.sec.gov.

Today's conference call will be structured as follows. I will begin by summarizing our fourth quarter and full-year results. Following my comments, Bill will review in detail our financial performance. After that, I will provide revenue and earnings guidance for the first quarter of 2013. I'll then invite listeners to ask questions. And following the question period, I'll make some brief closing remarks.

In reviewing the fourth quarter, our revenue was $68.5 million representing a 2% increase over the third quarter of 2012 and a 13.8% increase year-over-year. Net income was $17.7 million. Our Q4 revenue, margins, and net income were in line with our expectations. And overall, we are pleased to start 2013 by closing 2012 at company peak revenue levels and strong profitability.

On a geographic basis, 44% of our fourth quarter revenue was from domestic customers and 56% from international customers, a notable shift to international. The 10.9% increase in international revenue was driven primarily by the microwave communications market. And the 7.3% sequential decline in domestic revenue was primarily driven by the military and space markets. For the full year, 47% of our revenue was from domestic customers and 53% from international customers, which is similar to 2011's ratios. And for the full year, our domestic revenues increased 4.4% while our international revenues decreased 3.4% specifically by a decline in Europe.

In the fourth quarter, three of our eight markets accounted for approximately 75% of our total revenue, which is similar to last quarter. These markets are military, microwave and millimeterwave communications, and tested measurement. The remaining target markets, cellular infrastructure, automotive, broadband, fiber optic, and space accounted for 25% of our revenue.

In Q4, revenues increased sequentially in five of our eight markets. Specifically, broadband, cellular infrastructure, tested measurement, microwave communications, and space increased. While our military, fiber optic, and automotive markets decreased. On a full year revenue comparison, three markets grew and five declined. The year-over-year growth rate by market is space at 90%, tested measurement by 23%, and fiber optic by 8%. These gains were almost equally offset by declines specifically cellular infrastructure and broadband by 16% and 14%, and military, microwave communication, and automotive by 4%, 3%, and 2% respectively.

Looking at the 2013 at a macro level, we expect the worldwide demand for additional bandwidth and network capacity to continue with operator CapEx at similar or slightly increased levels in the U.S., Japan, and Korea mainly driven by the wireless infrastructure build outs. Western Europe infrastructure investment is expected to continue to be soft as well as in India. Regions with potential additional telecom equipment demands are South America, China, Eastern Europe, and Southeast Asia due to network modernization and the rollout of 4G infrastructure.

Due to these next generation wireless rollouts, we also expect additional back haul infrastructure builds driving demand in our microwave communication, fiber optic, and networking market in the long term. Hittite is well positioned in these markets to support customers with high performance solutions to address today's demanding complex spectrum environments and also to offer low distortion solutions to solve the high data rate challenges in the time demand.

During the quarter, our engineering teams introduced 16 new products for a total of 54 public releases for the full year, which brings our standard product portfolio to over 1,000 at year end. Notable recent trends include more Silicon products than GaAs products, more complex products, which target large SAMs and new product lines that target networking and data storage applications. We estimate the SAM added by our 2012 R&D efforts is in the range of $200 million. This figure includes two new product lines introduced in 2012 and the new products introduced across 15 of our 36 product lines. It also includes the products, which we sell using discreet sales tactics to maximize the elements of surprise to our competitors. The new products as well as our older products continue to perform well as evidenced by our year-over-year gross margin increasing to 73.7% for the full year.

Revenues from our Silicon based products grew throughout 2012. Growth came from market share gains in our high speed logic, interface, data converter, down converter, power detector, and PLL VCO product lines. Going forward, we expect continued growth from these product lines as well as our newer Silicon product lines such as equalizers, cross point switches, and clock and timing distribution products. Year-over-year, our Silicon based revenues grew by 8.3%.

Periodically, our Silicon products do cannibalize our existing GaAs products. However, generally they do not. And they are additive to our serviceable market or SAM. Our strategy is to use Silicon technology to add new product lines so we may penetrate our existing markets deeper as well as enter new markets.

In addition to releasing a wide range of standard products, our engineering teams support other long-term projects. Currently, we are working with a variety of U.S. government agencies on advanced technology development. Most recently, we've been funded to support a high power SAT COM application. Our engineering team continues to innovate at an impressive rate. The level of collaboration between our eight design centers is very effective. Our engineers and business management balanced near-term product plans with long-term R&D investment projects. As a reminder, in Q4, 2011, we made a significant investment in R&D. And we opened up two new design centers, one in Virginia and one in Egypt. And we are pleased with these design center's results to date.

Worldwide headcount at year end was 486, up from 469 one year ago. R&D was expanded by 21 employees while sales in G&A contracted slightly.

Our sales marketing and business development teams continue to effectively expand our customer base. Through customer visits and the publication of selection guides, newsletters, and printed web based advertising, we're accessing more customers than ever before. Our new product lines are also allowing us to enter and compete in new sub-markets. The customer interest in our technology and products continues to grow. With that said, the semiconductor industry is fiercely competitive. And we recognize that most of our competitors are larger than Hittite. We focused on careful non-commodity positioning of Hittite in the markets we serve.

In Q4, our top ten customers represented 35.7% of our total revenue. We have a very active and diverse top 20 customer list. And typically, these customers represent industry leaders in the markets we serve. Feedback from our customers remains positive. And during 2012, our sales, engineering, and operation employees have taken pride in receiving a variety of supply rewards from our customers. For the full year, our top ten customers represented 40.2% of total revenue, 3% less concentration than in 201 showing that our business is becoming more diversified. For the full year, one customer, Boeing, was over 10% of our total revenue.

Three notable recent sales in business highlights; first, we are strengthening our relationship with all of Tier One telecom OEM customers to include supporting their design of next generation gigabit data rate microwave backhaul platforms. We believe the depth and breadth of our engineering capability is enabling us to distance ourselves from our competitors in this market. We are able to offer customers complete [inaudible] to bit solutions including selling more highly integrated Silicon solutions throughout the microwave signal chains.

Second, the military market continues to perform well. Earlier this month, we received notice of an award, which has a value of approximately $18.5 million. This is a follow one award for modules we currently build in production. We are pleased that Hittite was selected as the majority and the preferred supplier for this product. This new order will support revenue shipments starting in late 2013 and finishing in 2014.

Additionally, earlier this month, our systems group received notice of an award from another Tier One defense OEM to design and build a high end sub-system, which is to be used in ship born electronics. We view this award as strategic because it sets the foundation of a new long-term relationship. These two awards, one production and one development confirm that we are taking market share in what is still a very large market.

Third, we achieved an important milestone with one of our newer product lines for the optical market. And in Q4, we began production shipments to support a new 100 gigabit per second optical transmission system for building-to-building applications. The high volume product we are shipping incorporates advanced ball [inaudible] array multi-chip module package technology as well as a variety of Hittite ICs. Our product allows the customer to reduce their product size in power consumption, which is critical for their application. This program will continue to ramp for 2013.

In review of 2012, we had multiple accomplishments. And I would like to highlight three, which I believe are strategic for our long-term success.

First, we strengthened our executive management team to support the increasing demands of our growing business. Development of current employees as well as hiring new talent is critical to our long-term success. Recent announcements include promoting tenured executives such as Gorkem Guven to Vice President of Engineering and Jason Lynch to Managing Director of Hittite International in Ireland. Additionally, we added new leadership to the company including Antonio Visconti who joined the company as a Vice President inside of engineering.

Second, our sales, finance, and operations teams successfully implemented a complex global expansion structure to improve our international customer service in supplier management. This program will also support reductions in our future corporate tax expenses.

And third, the transition away from a long time foundry supplier is almost complete. We will use the new knowledge we gained during this project to improve upon the leading performance we have already achieved with some of our legacy products. The sales and operations staff are also optimizing the inventory purchases to assure there are not disruptions to our existing customers.

In summary, in Q4, we achieved $68.5 million of revenue and net income of $17.7 million or $0.57 per diluted share. Further, 2012 was a year in which we achieved a company record $264.4 million of revenue and net income of $68.6 million or $2.22 per diluted share.

Notably, our net bookings for the year were $264.2 million. And at December 31st, 2012, our backlog was $67.2 million. Our book-to-bill ratio for the year was essentially one.

We maintain a long-term planning perspective. I am pleased that Hittite started 2013 as a stronger and more diversified company with significantly more IC design capabilities than ever before. We will continue to set the standard for engineering excellence in the markets we serve.

I will now turn the discussion over to Bill Boecke, our Chief Financial Officer.

Bill Boecke

Thank you, Steve, and good afternoon.

As Steve discussed, our business continued to improve in the fourth quarter. The key financial highlights for this quarter are revenue of $68.5 million, a growth of 2% sequentially and 13.8% year-over-year, a gross profit margin of 73.3%, an operating profit margin of 40.8%, net income of $17.7 million or $0.57 per diluted share, positive cash flow of $16.4 million with an ending cash balance including short term investments of $409 million, and a return on capital employed of 50.2%.

In the fourth quarter of 2012, our revenue was $68.5 million, a 2% increase over the prior quarter, Q3, 2012, and a 13.8% increase over the prior year, Q4, 2011. The quarterly revenue was slightly above our guidance.

Gross profit and margin for the quarter was $50.2 million and 73.3% respectively compared with 73.6% in the prior quarter and 74% in the prior year. The strong gross margin was above our guidance and continued to demonstrate the high performance nature of our products.

R&D expense for the quarter was $12.4 million or 18.2% of revenue compared with $12.5 million in the prior quarter and $11 million in the prior year. The increase in CAGR year-over-year is attributable to an increase in professional outside services, equipment, R&D materials, and personnel. The R&D costs represents our continued investment in the development of new products and product lines, the principal long-term growth driver of the company.

Sales and marketing expense in the quarter was $6.3 million or 9.2% of revenue compared with $6 million in the prior quarter and $5.7 million in the prior year.

General and administrative expense in the quarter was $3.5 million or 5.1% of revenue compared with $3.3 million in the prior quarter and $3.2 million in the prior year.

The resulting operating income in margin for the fourth quarter was $28 million and 40.8% respectively. That's compared to 41% in the prior quarter and 40.9% in the prior year.

Operating income for this quarter includes equity compensation expense of $3.5 million and intangible asset amortization expense of $800,000. The intangible assets arise from prior investments in R&D assets primarily related to the acquisition of ASD, our Silicon devices in 2011 and technology acquired from IBM in 2010.

The provision for income tax in the quarter was $10.3 million, an effective rate of 36.9%.

Net income in the fourth quarter was $17.7 million or $0.57 per diluted share compared with $17.7 million and $0.57 in the prior quarter and $21.2 million or $0.69 in the prior year. The net income in the fourth quarter of 2011 included a discreet benefit of $5.5 million or 18% for tax.

For the year 2012, revenue was $264.4 million, a 0.1% increase over the prior year, 2011.

Gross profit in margin was $195 million and 73.7% respectively compared with a gross margin of 73.5% in 2011. The change in gross margin year-over-year was primarily the result of favorable product mix and costs offset by unfavorable pricing.

Total operating expenses were $87.8 million or 33.2% of revenue, an increase of $14.8 million compared to $73 million in 2011. The increase in OpEx was primarily R&D. Total R&D expenses were $49.2 million or 18.6% of revenue compared with $38.9 million in the prior year.

Sales and marketing expenses were $24 million and 9.1% compared with $22 million in 2011. And general and administrative expenses were $14.6 million, 5.5% compared with $12.1 million in 2011.

The 2012 tax provision is 36.1%. The year's provision includes a discreet benefit of approximately 115 basis points primarily related to the settlement of an IRS audit. Excluding this benefit, our effective rate would be 37.2%.

Net income for the year was $68.6 million or $2.22 per diluted share compared with $84.7 million or $2.77 per diluted share in 2011.

In review of our financial position at December 31st, 2012, our total assets were $574 million, a net increase of $19 million from the prior quarter. The increase in total assets in the quarter was primarily cash and short-term investments.

A closer analysis of our financial position, total cash, and short-term investments at December 31st was $409.2 million, an increase of $16.4 million from the prior quarter. The increase in cash is comprised primarily of $19.9 million of positive cash flow from operations offset by $2.4 million of capital expenditures and $1.1 million of net tax payments related to equity compensation.

Total accounts receivable was $30.9 million, a decrease of $2.4 million from the prior quarter and represents approximately 41 day sales outstanding, down from 45 days in the third quarter.

Net inventory was $65.9 million, an increase of $5.9 million from the prior quarter. The increase in inventory is primarily attributable to the support of our FAB transition project.

Inventory turns for Q4 were 1.1 times annually comparable with prior quarters. Excluding the advanced buy inventory, our turns would be 2.2 times. And as we work this inventory level down, we expect to see our turns return to our model of plus three times annually.

Capital expenditures were $2.4 million in the quarter and $11.9 million for the year.

Net fixed assets as of December 31st, 2012 was $36.3 million.

From the perspective of financial returns, this quarter, our return on assets and our return on equity were approximately 13% on an annual basis. Our return on capital employed this quarter was 50.2% compared with 51.4% in the third quarter and below our corporate targets.

We maintain a long-term perspective of our business. Our recent three year revenue CAGR 2009 through 2012 is 17.5%. Our five year CAGR, 2007 through 2012 is 11.1%. And our CAGR since the IPO in 2005 is 18.5%. During these timeframes, we experienced periods of low growth, such as negative 9.6% in 2009 in the recession and 0.1% in 2012, followed by periods of high growth, 49.9% in the 2010 recovery.

We also measure our growth over our business cycles. Our most recent business cycle span, Q1, 2009, our previous low point through Q4, 2011, our last low point extending over 11 quarters. Our CAGR over this cycle is 17.9%. This growth rate is slightly below our target, which is a minimum of 20%. We believe that our continued development of innovative technology in products and our global expansion activities will allow us to achieve our future growth targets.

I'll now return the discussion back to Steve.

Steve Daly

Thank you, Bill.

Hittite Microwave Corporation expects net revenue in the first quarter ending March 31st, 2013, to be in the range of $66.5 to $68.5 million and net income to be between $16.7 million and $17.7 million or $0.54 or $0.57 per diluted share. This revenue guidance is essentially flat sequentially and up 8.2% year-over-year at the high end of the range.

We are taking a cautious view on our Q1 guidance because the revenues in our larger commercial cellular infrastructure and microwave communications and markets have grown consecutively throughout 2012. And given the current soft bookings quarter-to-date, we believe catalysts for continued growth in these markets will occur outside the Q1 timeframe.

Our Q1 forecasted net income is based on a few important factors. First, an estimated continued gross profit margin between 73% and 73.5%. Second, in Q1, we expect operating expenses to be flat to slightly up. And third, a tax rate of approximately 35%.

In Q1, we expect the following areas of strength and weakness. Three markets are expected to be strong, military, space, and tested measurement. Three markets are expected to be neutral, automotive, broadband, and fiber optic. And two markets are expected to be weak, cellular infrastructure and microwave communications.

Our goals for 2013 include expanding our market share to grow our revenues and profits, maintaining our high gross profit margin, and incrementally adding new technology and innovative products to our portfolio. While we do not give full year guidance, we believe our strategies will enable our 2013 performance to exceed our 2012 performance.

I would now like to invite our listeners to ask the questions.

Question-and-Answer Session

Operator

(Operator instructions). Our first question is from the line of Mark Delaney with Goldman Sachs. Please go ahead.

Mark Delaney – Goldman Sachs

Hi, thanks very much for taking the question, and congratulations on the strong fourth quarter. I was hoping you could start, Steve, I understand your expectation is for the military market to be strong in the first quarter and I certainly recognize where probably there’s a way to do that now. I’m wondering what your assumption is on sequestration, if you’ve seen any impact from that and what’s baked into your guidance?

Stephen Daly

So there’s nothing in our Q1 guidance that takes sequestration into effect and as you quickly point out, most of our backlog for this market is either in or on the way to being in shortly for shipment in the quarter.

As it relates to that market in general, we are very bullish about growing this business in this market segment. I cited two examples, one of an ongoing program that continues and we continue to win market share on that platform. And second, we continue to sign up large defense contractors that we’ve not done business with in the past and we think if we continue to do this we should be able to outgrow the inevitable cuts that are associated with the DOD budget. It’s absolutely a strategic market for the company. We spend a lot of time focusing on getting very close to not only our direct customer but also the user community so that we can understand their long-term thinking and we think that is the best way to grow the business as we go forward.

Mark Delaney – Goldman Sachs

Understood. So your comments on the cellular and microwave comments were that the bookings were relatively so according to date. I’m just wondering, I guess since it’s a new product launch is there [inaudible] prior products and if you’re conversations would lead you to believe that that could pick up in the Q2 timeframe or is that something that you think is going to take a little bit longer?

Stephen Daly

So we really – that’s a great question and we’re trying to work on that answer ourselves and because we have a high velocity turn it’s really difficult to say how Q2, 3 and 4 might shape up. So given our current posture, we can only be conservative with Q1. If we read the general tea leaves, we think that things will generally improve as we move into the year but we’re not specifically seeing those signs at the moment.

Mark Delaney – Goldman Sachs

Okay, and my last question, you know, I understand gross profit margin is down and a little bit above your guidance for the last couple of quarters, 73.3% in the fourth quarter and I think the mix has been a favorable impact and then pricing has been somewhat of a challenge. I’m just wondering as you’re starting in this year if there’s been any change in either the pricing dynamics with , you know, start impacting as you move through the year?

Stephen Daly

So I would say that there’s no seismic movement in the market as it relates to pricing and our product line and so it’s the typical competitive landscape that we face. We are very happy that our gross margins year over year ticked up just modestly and that really speaks to the fact that the products we’re launching are unique to the markets and to the customers that we’re serving. The genesis of that really resides inside of our business development units and the engineers that continue to create these innovative products.

This past year, as I mentioned on the call, we introduced about 54 standards products that you can see on our website and there’s more less an equivalent amount that we’re selling into the market or that we launched in the market directly to customer for strategic reasons. And so with all of these good things happening, we’re fairly confident that in the near-to midterm, or margins will stay where they’re at.

Bill Boecke

I agree with Steve and add to it that, although we might see some unfavorable pricing and that will continue, we still do expect to see favorable factors in mix as well as potentially in cost as well.

Mark Delaney – Goldman Sachs

Thanks, and good luck.

Operator

Our next question is from the line of Tore Svanberg with Stifel Nicolaus. Please go ahead.

Tore Svanberg – Stifel Nicolaus

Yes, thank you; a few questions. First of all, Steve, I know usually you record about 60% churns every quarter. Could you just talk about where you stand right now as far as the March quarter’s concerned?

Stephen Daly

Yes, so we’re right on that mark. We began the year, as you can see from our announcement, with essentially the same backlog as we started 2011, yet our revenue run rate is significantly higher this Q1. The reason for that is we have more commercial backlog, which is a higher velocity backlog and the trend is favorable in that area. So we’re able to hit the higher revenue run rate. But generally, we, you know, good solid backlog as we stand today. We are giving our earnings call this quarter a little bit later in the quarter so we have a more [inaudible].

Tore Svanberg – Stifel Nicolaus

Can you talk a little bit about how you expect that business to evolve this year and you know, could it potentially become as much as 20% of the business this year?

Stephen Daly

It’s possible that it could be as high as 20% in 2013, but we’ll have to wait and see on that. The general trend is that the product line continues to expand and if I reflect back on the work that we’ve done this year with adding more PLLs and integrated VCOs, more power detectors, the signal conditioner product line, which are equalizers, effectively advanced equalizers for the networking market are truly unique for that application and all of these are high-end silicon products that will have medium and high volume applications that carries strong profit profiles. So our engineers continue to find unique ways to use the silicon technology to move us into new areas. So yes, I do expect that the overall percentage of our silicon – of our revenue will be silicon but it’s slow moving, maybe a few points every year, nothing more dramatic than that.

Tore Svanberg – Stifel Nicolaus

Understood. And you also talked about some [inaudible] development in your optical business and it sounds like the [inaudible] products are going to ramp more meaning production in ’13. I was hoping maybe you could share some – I mean, I don’t know if you can share some numbers on, you know, how big the potential for this is and you know, is this something I could really move the needle in ’13?

Stephen Daly

So fiber is our second smallest market so it will move the needle in the right direction, but by only modestly at the top line level. Just to reflect back on that market, we’ve made a tremendous investment and it started with high-speed logic, then we branched out into transimpedance amplifiers and then Mod drivers, now we’re sweeping up different timing functions in clocks. So we’re very interested in this market. We feel like we have a lot to offer and as a result, in 2011, it grew by over 90%. In this past year it was almost double digits and we’re just getting started in that market. So we do expect strong growth from that market going forward. There’s no doubt that 100G is important. I actually think it’s slowing down a little bit at the moment but long-term we think it will recover and will be, you know, hopefully we exit 2013 with fiber being not the second from the bottom, but maybe the third from the bottom.

Tore Svanberg – Stifel Nicolaus

Very good. Last question for Bill and then I’ll go back in queue. So Bill, inventory is 65 million last quarter. It sounds like you’re sort of getting to the end of the translation program. Will inventories continue to go up here in Q1 or should we start to see the reversal now?

Bill Boecke

They will probably go up a little bit more. It’s hard to say or quantify it because there’s still a lot of decisions – there’s still a few decisions left to be made.

Tore Svanberg – Stifel Nicolaus

Very good. Thank you, guys.

Operator

Our next question is from the line of David Wong with Wells Fargo. Please go ahead.

David Wong – Wells Fargo Securities

Thanks very much. You talked about new products in 2012 increasing your salable market I think by 200 million. How much revenue do you expect from these new products in 2013? And similarly, what do you expect your new products for 2013 will do in terms of increasing [inaudible] the market?

Stephen Daly

Well, the amount of revenue that the class of 2012 will generate in 2013 will be quite modest It could be in aggregate, it will be measured in the low single millions of dollars of contribution and the reason for that is these products typically take one to three years to ramp up into meaningful amounts of revenue so our expectation for contribution this year is – will be quite small.

In terms of the amount of SAM that the work will do this year, it’s probably premature for me to make a comment on that, you know, overall we – the way we’re organized here is we have four verticales, each one of these verticales inside of engineering is focused on positioning the company in certain markets and with certain product lines and depending on the results of that effort and the timing of those product introductions, that really sets up the final number. So you know, I think 200 is a very good number, if we can equal that in 2013, I think we’ll be satisfied but every now and then that number will go up and down depending on the timing of engineering results.

David Wong – Wells Fargo Securities

Okay, thanks. And also, understanding that these go – silicon products go into a number of different segments, on average, how do the gross margins for your silicon products compare to your gallium arsenide products?

Stephen Daly

We have the same range actually on the silicon as we do the GaAs and a lot of that depends on the uniqueness of the product and so we have the regular continuum of products that are truly best in class where we have no competition and then we have a product that are just incrementally better than competitors, and then we have products where we have less differentiation so we have a normal distribution, whether it’s GaAs or silicon. Directionally, what you’ve seen is as our silicon revenues have increased the company’s gross margins have increased but I would say that that’s not a direct one-to-one correlation, there’s other moving parts still talked about. But our philosophy with silicon is to stay away from the commodity and application and we’re using, general speaking, we’re using high-end processes targeting high-end applications and if we do our work correctly we’ll generate very profitable results.

David Wong – Wells Fargo Securities

Great. Thanks very much.

Stephen Daly

Thank you.

Operator

Our next question is from the line of Jiwon Lee with Sidoti and Company. Please go ahead.

Jiwon Lee – Sidoti & Company

Thank you. First on the $67 million backlog, how much was military roughly?

Bill Boecke

So approximately half.

Jiwon Lee – Sidoti & Company

Excellent. And Stephen, the test and measurement in 2012 did very well whereas the cellular infrastructure not so good. So I wonder whether these directions take you by a little bit of surprise and how do you expect growth from these markets this year?

Stephen Daly

So you’re correct, we’ve been surprised with the performance of our test and measurement market over the last two years. In 2011, that market grew by about 45% and then in 2012 it grew by 23% and what’s driving that is our ability to get into a lot of different submarkets inside the test and measurement arena and some of that’s sales and marketing tactics and some of it’s engineering driven where we’re developing products specifically for these niche applications.

We think that will continue to do well, you know our goal would be to achieve strong double-digit growth again this year. As we roll up the numbers and we make models for 2013 we always talk ourselves down on the test and measurement that at some point it’s going to cool off so we don’t know really where it’s going to end the year, but we think we’re doing all the right things. We’ve actually started this year quite well, you know, with a strong activity in that market, so things are doing well right now.

On the cellular side, 2011 was effectively a bad year for us in that market and it was our – on a relative basis, the worse market for us in 2012. And we think some of that’s externally based due to the fact that there’s been limited expansion in some of the existing 2 1/2G platform and a switch over to 3G and even LTE is taking longer than one would want. However, our strategy in cellular is very clear and we think we have a winning strategy. We have PLLs, we are adding data convertors and we have a very sophisticated up and down converter modulators if you will and we’re packaging all of these in complex MCM, so when that market comes back, we think it will come back strong, we’re putting a lot of effort in that market and we are aware of some significant wins and we just have to be patient and let those wins run through to revenue.

So we think long term, cellular will actually jump back into the number three spot in terms of the overall size for the company and test and measurement would drop into the number four. That may happen this year, it may happen early next year, we’ll have to wait and see.

Jiwon Lee – Sidoti & Company

Okay. That’s very good. And I’m just wanting to see if I’m in the ballpark, looking at your revenue base a little bit differently, the silicon based product, and you expect that to be probably close to 20% of your revenue base and your custom products including modules and cell systems, maybe about 20% as well? Am I in the ballpark?

Stephen Daly

I think you’re a little rich on both numbers. We don’t specifically break up that but I would say you probably want to bring those numbers down a bit. I think at my last [inaudible] was probably in the low-to-mid teens and I think your module numbers are, again, a bit heavy.

Jiwon Lee – Sidoti & Company

Okay, that’s helpful. And just a couple questions for Bill. How much are you budgeting for R&D spending this year and what do the taxes look like on first quarter with your analyst strategy going on?

Bill Boecke

The spending on R&D as a percentage of revenue is going to be comparable to where it is at the moment, at the little bit of the higher end of our range. We expect that to come down as revenue growth begins to pick up again but at this pace, I would expect it to be somewhere about where it is now, about 18% of revenue.

Jiwon Lee – Sidoti & Company

And taxes, Bill?

Bill Boecke

Taxes should be between 36 and 37%. However, for the first quarter it will be approximately 35% because we have a discrete benefit that we’ll recognize in the first quarter related to the government’s renewal of the Federal R&D Credit.

Jiwon Lee – Sidoti & Company

Okay, that’s very helpful. Thank you very much.

Bill Boecke

Thank you.

Operator

Our next question is from the line of Amit Chanda with Wells Fargo. Please go ahead.

Amit Chanda – Wells Fargo

Thank you very much. Steve, what percent of your defense business could potentially be made up of module customers by the end of this year as you try to convert them from component customers?

Stephen Daly

I’d have to roll the numbers on that before I could give a specific answer. We have a lot of moving parts inside of the military business and I just don’t have the information in front of me. Recognize that most of our military business is component based and what we typically see is that most of the – and I would say that about 99% of our business in this military sector is U.S. based, and so what we typically do is sell a wide range of either standard product or custom-designed chips to all the different defense OEMs, you know, at all different levels whether they’re tier one OEMs or tier two or three OEMs. We actually prefer that business. Now if we find opportunities where we can really add value and do custom chip design to support a platform that requires very small size and very rugged environments, that’s where we get interested in developing modules. But our philosophy is basically it somebody else can design the module with our chips, we would rather sell them the chip. We like to engage customers that can’t find a solution, can’t do it themselves and they need somebody to develop a whole suite of chips and then build a module around it and that’s the business we focus on.

And so what the future will hold for this business, I guess we’ll have to wait and see. I do – I can say that the team has been very successful since March of last year winning business and getting engaged in programs we had never been engaged in before. So we’re quite bullish in this market.

Amit Chanda – Wells Fargo

Okay, thank you. And what percentage of your cellular infrastructure business is exposed to LTE at the moment versus 3G and 2 1/2G?

Stephen Daly

Maybe 10% LTE at the moment. I don’t have the specific numbers on 2 1/2 and 3, I’d have to come back to you on that. But I would say it may be – what we’ve seen is our 2 1/2 G and traditional G business really falling off dramatically and that actually started falling off in 2011 and the overlay of 3G is still in some of the gaps. The future in our mind will really be all the different flavors of LTE and that’s what our R&D efforts are focused on at the moment.

Amit Chanda – Wells Fargo

Okay, great. Thank you very much.

Operator

(Operator Instructions). Our next question if a follow up from the line of Tore Svanberg. Please go ahead.

Tore Svanberg – Stifel Nicolaus

Yeah, hi. Just a few follow-ups. First of all, Steve, just going back to the Q1 guidance and then the backlog, I mean, you sound a little bit more positive about the backlog and also what you’re seeing in the end markets yet obviously, you know, you’re being cautious in the near term. So is some of that backlog sort of for production in Q2 and beyond? I’m just trying to understand more what’s going on there.

Stephen Daly

Yeah, I think that – so number one, the year-over-year backlog is about the same and recognize that the revenue run rate is 2011 to 2012 has increased by about $5 million. So we’re able to support that because we have about 35% more commercial backlog right now than we did this time last year. I should say at the beginning of the year. So the reason why we’re able to give the guidance to the numbers we have is because we have some high velocity business in there. The balance of the backlog is stretched out over time. It could be military contracts, could be commercial contacts as well, not just military. So I’m not sure if that helps Tore?

Tore Svanberg – Stifel Nicolaus

Yeah. No, that’s helpful. I just want to make sure I got it. Also for maybe for both of you so you now have more than $13 in net cash per share, cash per share, so any further thoughts on what to do with all the cash?

Stephen Daly

I’ll start with that and maybe, Bill, you can add to it. So we look at that cash as a strategic asset and as we look at ways to put that to work we’re wanting to grow the business, we want to find technology that will give us tremendous competitive advantage and that ultimately will create value for the shareholders. We think those opportunities are out there. The fact that we have not announced an acquisition since January of ’11 should not make one think we’re not active but we are very selective and we’re very focused. We have a very detailed strategic plan which outlines what revenue our existing product lines will generate over the next seven years, what our new product lines that will develop organically will generate as well as what we need to go out and buy to make sure that we remain competitive in the markets we want to play in. And so as we focus on those requirements we’re actively pursuing an opportunity.

So the number one is strategic assets. The second we’ll look at being responsible with that cash and ensuring that we create shareholder value with it. Bill, do you want to add to that?

Bill Boecke

Yeah, just to follow up on Steve’s comments, this plan that he’s mentioned has been our plan all along. It’s been consistent and it carries forward into the future as well.

Tore Svanberg – Stifel Nicolaus

That’s very fair. My last question, Bill, so it sounds like your tax rate, 35 in Q1 and then you’ll go back up a little bit, when should we start thinking about the gross margin to reflect the international structure?

Bill Boecke

You mean the tax rate, not the gross margin, right?

Tore Svanberg – Stifel Nicolaus

Sorry, tax rate is correct.

Bill Boecke

It’s hard to say, there’s a lot of moving parts, it depends on how our business grows so it’s probably we won’t see anything change until early 2014 but it depends on how 2013 unravels.

Tore Svanberg – Stifel Nicolaus

Okay, that’s helpful. Thank you very much.

Operator

(Operator instructions). I’m showing no further questions in queue at this time. I’d like to turn the call back over to Mr. Daly for closing remarks.

Stephen Daly

Thank you. In closing, I would like to congratulate our team for delivering another solid year as well as setting the stage for additional future successes. Thank you very much.

Operator

Ladies and gentlemen, this concludes the Hittite Microwave’s Corporation’s first quarter 2012 conference call. You may now disconnect. Thank you for using AT&T Conferencing.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Hittite Microwave's CEO Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts