Hittite Microwave Q1 2010 Earnings Call Transcript

Apr.22.10 | About: Hittite Microwave (HITT)

Hittite Microwave Corporation (NASDAQ:HITT)

Q1 2010 Earnings Call

April 22, 2010 5:00 p.m. ET

Executives

Stephen G. Daly - Chairman of the Board, President, Chief Executive Officer, Director

William W. Boecke - Chief Financial Officer, Vice President, Treasurer

Analyst

Aalok Shah - DA Davidson

Jiwon Lee - Sidoti & Company

Tore Svanberg - Thomas Weisel Partners

Gus Richard - Piper Jaffray

John Haller - HHR Asset Management

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Hittite Microwave Corporation first quarter 2010 conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator instructions) This conference is being recorded today, Thursday, April 22, 2010. I would now like to turn the conference over to Mr. Stephen Daly, Chairman and CEO. Please go ahead.

Stephen Daly

Thank you. Ladies and gentlemen, good afternoon and welcome to Hittite Microwave Corporation's first quarter 2010 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 provisions 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 refer you to the earnings release that we issued earlier today into our 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 first quarter results. Following my comments, Bill will review in detail our financial performance. After that, I will provide revenue and earnings guidance for the second quarter of 2010. I will then invite listeners to ask questions. Following the question period I'll make some brief closing remarks.

In reviewing the first quarter, our revenue was $54.2 million, an increase of 24% over the fourth quarter of 2009 and 42% year-over-year. Net income was $16.1 million, a 20% sequential increase and 58% year-over-year.

Our revenue was above our plan our net income also exceeded our plan due to higher revenues and stronger gross profit margins. We are satisfied with our Q1 performance. It was a strong start to the year and the growth momentum we have established is great to have as we begin 2010.

On a geographic basis, 44% of our first quarter revenue was from domestic customers and 56% from international customers, which is similar to 2009's full-year split. In the near term we expect both international and domestic markets to gain strength. This trend is driven by international telecomm equipment manufacturers gaining worldwide market share as well as a variety of US end markets continuing to recover.

In the first quarter, three of our eight markets accounted for approximately 81% of our total revenue. These markets are cellular infrastructure, microwave and millimeter wave communications and military. The remaining target markets, automotive, broadband, fiberoptic, space and tested measurement, accounted for 19% of our revenue.

Seven of our eight markets experienced double-digit sequential growth in Q1. The strong growth was broad-based with sequential growth rates ranging from 17% to 116%. Q1 was our fourth consecutive quarter of sequential revenue growth and was driven by a combination of old and new customer programs.

We are pleased with the current strengths in our target eight markets, however, we are cautious and believe that growth levels will moderate in the coming quarters. As expected, our space business declined sequentially due to normal timing of orders.

Our engineering and product development team introduced 32 new products in the first quarter bringing the standard product portfolio size to 834 at the end of Q1. In addition, we launched our 25th product line, a tunable filter IC product line. Competition in this product area is typically non-IC based technology.

Products we have launched have been well received by customers because they have programmable cutoff and pass band features making them extremely versatile. For example, our customers are able to tune the filters and frequency and bandwidth, which essentially allows them to customize the filter's performance for their application.

These innovative filters will be sold into all eight of our target markets and are ideally suited for preselection and multiband communication systems, wideband radios and test and measurement equipment and back plane environments.

Our product line is currently comprised of two low-pass and two band-pass filters and our plan is to expand the product line in both frequency and functionality.

A few other technical highlights occurred in the quarter. First, we expanded our frequency mixer and converter product line. These products are used on LTE and 4G applications. Hittites mixers and converters continue to set the industry benchmark for high performance with superior isolation and intermod distortion.

The 4G radio is moving to more complex modulations such as 256 QAM. Customers are compelled to utilize Hittite's mixer products to improve system performance.

Second, we launched our fourth signal generator product, the T2100B. This product is portable and battery powered. It is the first portable, high-performance, 20 gig signal generator in the market. Our product delivers over 20 dBm of power and operates for four hours before needing a recharge.

We are targeting the portable market with this affordable and unique instrument which relied exclusively on Hittite's RF microwave and analog ICs. The portable instrument market is one of the fastest growing segments of the TNM space.

Third, we introduced a direct quadrature modulator with integrated variable gain amplifier. This type of modulator is ideal for digital microwave radio applications and our products offer wideband with performance, exceptionally low carrier feed-through and very high levels of integration.

These products serve our traditional microwave communications and military customers as they are ideal for next generation transceivers and 4G systems.

Our Silicone based product revenues grew by over 50% in 2009 and strong growth continued in Q1. The growth comes from market share gains on our high speed logic, interface, data converter, down converter, power detector and PLL VCO product lines. We expect continued strong growth from these newer product lines.

I'll note that over the past three years we have launched 12 product lines and these product lines are just beginning to ramp in revenues. Our growing product portfolio has and will broaden our overall addressable market and allow us to expand our customer base in existing and new markets.

In addition to releasing a wide range of standard products, our engineering team supported other long-term projects and they continue to work with a variety of government agencies on advanced technology development projects.

In Q1 our operating expenses increased by 14.6%. In absolute dollars, R&D spending increased the most due to expansion activities in our design centers. This trend will continue throughout 2010.

This year, our goal is to both expand and broaden our engineering disciplines. We have been adding business development staff and scientists that are experts in a variety of end market and product areas. We will continue to manage our R&D spending to ensure it is inline with our strategic and financial goals.

Our sale sand marketing and business development team continue to effectively expand our customer base. During 2009 we serviced over 3000 customers worldwide and we expect that number to increase in 2010.

Through customer visits and publication of selection guides, news letters and print and web-based advertising we are accessing more customers than ever before. Our new product lines are also allowing us to enter new sub markets and allowing us to compete with new competitors.

In Q1, our top 10 customers represented 33% of our total revenue and no one customer exceeded 10% of our total revenue. In Q1 we saw a decrease in customer concentration in our top 10 customers with a quarter-over-quarter decrease of seven points.

We have a very active top 10 and top 20 customer list and we often see customers move in and out of these top 10 spots. Fiscally these customers represent industry leaders in the markets we serve.

Capital spending for the quarter was $4.7 million, which includes a $3.5 million purchase of a 105,000 square foot building to support the expansion of our business. In addition to expansion space, capital spending was focused on test and assembly equipment for production, test equipment for engineering as well as other factors for production. I am confident these new investments will enable us to achieve our future goals.

We are also pleased that our return on capital employed this quarter was over 100% on an annualized basis. Our manufacturing operation continues to plan and execute well to support our business. Inventory increased by approximately $1.1 million or 5.7% compared to last quarter, in line with our plan.

Our inventory is considered low-risk and high-quality and it supports our long-term contracts and growing business.

In summary, in Q1 we achieved $54.2 million of revenue and net income of $16.1 million or $0.54 per diluted share. These results represent record revenues and earnings for the company and validates our growth strategies.

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

William W. Boecke

Thank you, Steve, and good afternoon. The key highlights of our financial performance for the first quarter are sequential quarter revenue growth of 24.1%, gross profit margin of 73.4%, operating profit margin of 46.3%, an 85 basis point sequential improvement, free cash flow of $17.5 million and a return on capital employed of 106% annualized, an improvement of approximately 17 percentage points from the previous quarter.

Our business continued to grow in the first quarter as a result of improvements in the markets, increased market penetration and new product introductions. Revenue for the quarter was $54.2 million, a 41.9% increase over the prior year, Q1 2009, and a 24.1% increase from the prior sequential quarter, Q4 2009.

Gross profit and margin for the quarter was $39.8 million and 73.4% respectively compared with 71.5% in the prior year and 74.8% in the prior sequential quarter. The sequential change in the gross margin was attributable to a number of factors including mix and costs.

R&D expense for the quarter was $7 million or 12.8% of revenue compared with $6 million in the prior year and $6.1 million in the prior quarter. The sequential increase in R&D spending was primarily attributable to personnel costs associated with the growth in our engineering organization.

We expect R&D expenses will increase in the future as we continue to invest in the development of new products.

Sales and marketing expense in the quarter was $4.6 million or 8.5% of revenue compared with $3.5 million in the prior year and $2.4 million sequentially. Sequential increase in sales and marketing expense is attributable primarily to third party representative commissions and personnel costs.

We will continue to manage sales and marketing costs to support the expansion of our customer base in new and existing markets.

General and administrative expense in the quarter was $3.1 million or 5.7% of revenue compared with $2.2 million in the prior year and $2.6 million sequentially. The sequential increase in G&A expense is attributable to personnel costs and third party professional expenses. We will manage future G&A spending in line with our operational and financial goals.

The resulting operating income and margin for the first quarter improved to $25.1 million or 46.3% compared to 41.1% in the prior year and 45.5% sequentially. Operating income for this quarter includes equity compensation expense of approximately $2.2 million or $1.4 million after tax.

The provision for income tax in the quarter was $9 million, an effective rate of 35.7% and an increase of 130 basis points compared with the effective rate in the prior year 2009.

Net income in the first quarter was $16.1 million or $0.54 per diluted share compared with $10.2 million or $0.34 in the prior year and represents a 20.1% increase compared to $13.4 million or $0.45 in the prior sequential quarter.

Our earnings in the quarter exceeded our guidance due to higher revenues and favorable gross margins, each equating to approximately $0.03 per share respectively.

In review of our financial position at March 31, 2010, our total assets were $323 million, a net increase of approximately $30 million over December 31, 2009. The increase in total assets in the quarter was primarily cash and, to a lesser degree, fixed and working capital associated with our revenue growth.

Total asset turns in Q1 was 0.7 times annualized and net operating assets or capital employed turned approximately 3.6 times compared with 2.9 in the fourth quarter of 2009. In further analysis of our financial position, total cash and short-term investments at March 31 was $238.2 million. Total free cash flow in the quarter was positive $17.5 million.

We currently maintain our investments primarily in highly diversified portfolio funds of short-term US government paper with shortened average maturities to increase our liquidity.

Total accounts receivables increased to $25.4 million and represents approximately 42 days sales outstanding. Net inventory was $20.7 million, an increase of $1.1 million from the prior quarter. The increase in inventory is due primarily to the growth in customer demand for our products as well as the introduction of new products.

From the perspective of financial returns, our return on assets this quarter annualized was 20% and our return on equity was 22%, both up approximately 200 basis points from the prior quarter. Our return on capital employed was 106%, a 17 percentage point improvement from the fourth quarter.

I'll now return the discussion back to Steve.

Stephen G. Daly

Thank you, Bill. Hittite Microwave Corporation expects net revenue in the second quarter ending June 30, 2010 to be in the range of $58 million to $60 million and net income to be between $17 million and $18 million or $0.57 to $0.60 per diluted share.

Our Q2 revenue guidance at the high end of the range represents a 51% year-over-year revenue increase and an 11% sequential increase. Our Q2 forecasted net income is based on a few important factors.

First, an estimated gross profit margin of approximately 71% to 72%; Q1 gross profits were exceptionally high due to product mix and these conditions are not expected to be repeated in Q2.

Second, in Q2 we expect operating expenses to increase by approximately 5% to 6% primarily due to expansion activities and third, a tax rate range of approximately 35% to 35.5%.

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

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator instructions) Our first question comes from the line of Aalok Shah - DA Davidson.

Aalok Shah - DA Davidson

A couple of quick questions, if I could, specifically on cellular infrastructure space; can you give us a sense maybe on a geographic basis what you're seeing and maybe a little bit more qualitative on kind of what you see are the demand trends out there right now?

Stephen G. Daly

Certainly we have very active customers in Asia. We've been very busy over the past couple of years supporting a number of different Chinese OEMs as they build out their product for domestic as well as international delivery, so very active in China.

We're also extremely active in Europe right now. In fact, this past quarter our European sales grew tremendously, so I would say that most of our focus is on China and Europe.

Aalok Shah - DA Davidson

Steve, if I could, on the distribution kind of overseas, have you guys started to think a little bit more about your distribution? I know you do direct sales but it's starting to move into some of these other geographic markets like Europe and further into Asia.

Have you thought about maybe going to some kind of a distribution model that would include some kind of distributors or something or are you going to continue to do direct sales?

Stephen G. Daly

So we're always trying to optimize the channel to make sure that we're servicing the customers at the level that they want, so to the extent of augmenting what we currently have with either a broader direct channel or utilizing distribution would certainly be considered. To this point it has not been an inhibitor in our growth.

Aalok Shah - DA Davidson

Lastly, it seems like you've introduced a couple new products this quarter. The filters seem pretty interesting. Can those products - have you thought about maybe moving those into - I know you don't typically service consumer markets but maybe into the handset market or something along those lines. Are those products scalable to that end?

Stephen G. Daly

Not necessarily, no. The filters that we're putting out are operating at higher frequencies than handset frequencies. We're not targeting that handset space at all in terms of the R&D pipeline and the focus of the company. I really don't see us wandering into that area.

Operator

Your next question comes from the line of Jiwon Lee - Sidoti & Company.

Jiwon Lee - Sidoti & Company

I was wondering whether you could comment on percent of sales from the new products introduced over the last year.

Stephen G. Daly

Typically, it takes about one to three years for the products to start to ramp to meaningful revenue, so generally products that are less than a year are generating less than single-digit percentages of our total revenue.

Jiwon Lee - Sidoti & Company

Can you comment on some pricing environments?

Stephen G. Daly

Yes, the pricing environment is always very difficult and we're under tremendous pressure from all of our competitors across the eight markets and now the 25 different product lines that we service. So I would say that that environment has always been there. I wouldn't say it's getting stronger or weaker in the component business.

It's fiercely competitive, so our strategy is to bring innovative best-in-class products to market so that we can provide the customer with the highest value we can and certainly that results in the company being able to maintain the profitability it has.

Jiwon Lee - Sidoti & Company

That's helpful but, Stephen, could you sort of define the difference between your custom versus standard products?

Stephen G. Daly

So in terms of the profitability or the revenue?

Jiwon Lee - Sidoti & Company

Correct.

Stephen G. Daly

Yes, so we don't typically break that out. We have now 834 standard products. We do a tremendous amount of custom design work. We do strategic selling where if we have a product set or a function that we believe is strategic we will sell that in stealth mode for as many as three or four, even five years before we launch it into the market.

So we use a wide range of different tactics to win market share. We don't typically break out the revenues by the product lines or custom or standard because that needle's constantly moving.

Jiwon Lee - Sidoti & Company

As you have thought on the cellular infrastructure side, could you give us some market color on the microwave in millimeter as well as the fiberoptics?

Stephen G. Daly

Certainly. I would say in the past couple of quarters, the microwave end market has been extremely active for Hittite, not only in the design in area but also in the production area. So the microwave market is extremely important to Hittite and it's performing quite well right now and we expect that will continue in Q2.

On the fiberoptics side also one of our smaller - it is our smallest or second smallest market and we look at that market as being in hyper growth right now. In Q1 that was actually the one market that grew by over 100%.

So certainly we run a very diversified business. All of the different markets have very different dynamics, so our strategy is to basically provide products for each and every one of those markets so that we can capture whatever dynamic is at play.

Jiwon Lee - Sidoti & Company

So if you rank your top three markets in terms of the sequential revenue growth, which of the three grew the fastest?

Stephen G. Daly

So we haven't been actually ranking or putting out the specific growth rates by market by quarter and that's mainly because these markets on a quarterly view are constantly going up and down. We look at the eight core markets with more of a long-term perspective.

Jiwon Lee - Sidoti & Company

Lastly, with some of the expansions that you're taking on is there a CapEx goal for this year?

Stephen G. Daly

Yes, there is and that would be in the range of $10 million to $13 million for the full year.

Operator

Your next question comes from the line of Tore Svanberg - Thomas Weisel Partners.

Tore Svanberg - Thomas Weisel Partners

A few question, first of all, did you give the turns percentage in the quarter?

William W. Boecke

No, we did not, but it typically is approximately 50% plus or minus.

Tore Svanberg - Thomas Weisel Partners

Again, is that what you're assuming for the midpoint of your guidance in Q2?

William W. Boecke

Yes. That's a typical quarter for us.

Tore Svanberg - Thomas Weisel Partners

If you look at Q2, I mean, obviously you had one end market that was down sequentially this quarter but do you expect all eight to be up sequentially in Q2?

Stephen G. Daly

So our model allows for having some markets go down and some markets go up. Let me break out as we do every quarter which markets are strong and then neutral and weak. So we're thinking that the microwave, the military, test and measurement and fiberoptic markets will be quite strong in Q2.

The automotive and cellular will be neutral and then the broadband and space end markets will be on the weak side. No whether weak, in this case, means sequentially down, we'll have to wait and see.

Tore Svanberg - Thomas Weisel Partners

You have a lot of exposure, at least reasonable exposure to wireless infrastructure, especially on the microwave side. So can you just update us, at least from your perspective, what's happening here in 2010?

There's been a lot of chatter about China having fits and stops; US still very slow to rollout. Just based on your own opinion, can you share that with us please?

Stephen G. Daly

Are you talking about the microwave backhaul or the cellular infrastructure?

Tore Svanberg - Thomas Weisel Partners

Both.

Stephen G. Daly

Both. So very different dynamics, I would say in terms of the China 3G rolling out more TD-SCDMA systems, we are believing that that will happen for Hittite sometime. It'll be new business sometime in late Q2 or even Q3. We also see that those customers are continuing to win worldwide market share and that is a positive trend for Hittite.

Looking at the backhaul environment, we see that there is certainly a transition to Ethernet connected radios and these are generally very high capacity radios, which means the requirements on the components inside the radio are extremely stringent and that plays to Hittite's product line.

So the trends that we see in the backhaul space are very favorable to Hittite and certainly the penetration that we've had in Asia in the cellular space has also been very beneficial to Hittite.

Tore Svanberg - Thomas Weisel Partners

You I think indicated that your Silicon revenue was up 50% sequentially but how big is that business now? Is it still less than 5% of revenue?

Stephen G. Daly

So we mentioned that it was 50% last year and it was strong this quarter. I didn't specifically say 50% in Q1 in terms of that growth rate, so I just want to clarify that. We haven't disclosed the percentage. It is still less than 10% but growing.

Tore Svanberg - Thomas Weisel Partners

As far as your growth strategy to grow through vertical integration can you give us an update there? Any new programs or systems that could potentially be meaningful?

Stephen G. Daly

Well, certainly when we think about system level products in our growth strategy of going vertical there's two areas. First, there's the commercial efforts and second there would be the military system effort.

On the commercial side the product that we talked about earlier in our script, the T2100B is on the commercial side. It's a battery operated portable signal generator. So we're very excited about that. That's about a $14,000 product that will service an area that we think will be meaningful for Hittite.

On the military side, we constantly have a variety of programs in play either at the bid and proposal stage or the prototyping stage or ramping to production, so very active in both areas. We don't typically break out the details of the military programs but we are very active with a variety of large programs.

Operator

(Operator instructions) Your next question comes from the line of Gus Richard - Piper Jaffray.

Gus Richard - Piper Jaffray

Could you talk a little bit about gross margins in the quarter? I know it's always a set of various factors but was it just better volume and mix? Was that the primary factors driving up gross margin?

Stephen G. Daly

I'll make a few comments and then Bill can add to that. We're achieving gross margins in the low to mid 70s because of the uniqueness of the product line and the very strong pricing based on performance. The variation that you see on a quarterly basis has been to do with mix. It has to do with yields. It has to do with general costs associated with those products.

At the end of the day, we were able to improve the gross margin profile in 2009 for the company because we're launching more complicated products that are more sophisticated than our competitors. We're gaining strength in the market at our core customers. Do you want to add to that Bill?

William W. Boecke

Yes, I can give a little more detail. In the quarter itself the margins were relatively on the strong side, not quite as strong as they were in Q4 but still strong. What we saw was a little bit of deterioration from mix. We had a very favorable mix in the fourth quarter and a relatively good mix in this quarter.

We also see some impact from costs. On the one hand, certain costs were very favorable because of the increase in the volume but other costs were unfavorable. So that was a bit of a mixed story.

Gus Richard - Piper Jaffray

Then I believe in the opening comments, you made a comment about things slowing going forward. I would assume that that was just in reference to the torrid pace in Q1 and that you would see just a more moderated growth rate just after a very strong sequential increase. The question is, or is this something else? What do you expect the trajectory to be going forward?

Stephen G. Daly

Are you referring to our expense?

Gus Richard - Piper Jaffray

No. I'm sorry. Top line, revenue growth.

Stephen G. Daly

Right. So I'm not sure I completely understood the question but what we said in the script was that we're forecasting 11% at the high end of the range for Q2. We're coming off of a Q1 where we had seven of our eight markets up.

We think that Q2 will bring us reasonably strong markets but we are cautious for the full year. We really have very limited visibility in Q3 and Q4. So we want to just pass on that caution to our listeners.

Gus Richard - Piper Jaffray

Then could you talk about your normal seasonality. What do you typically see in the year in terms of sequentials? What are your strongest quarters?

Stephen G. Daly

We typically have very little seasonality but we think as we get bigger every year that will change a little bit. It certainly will be affected the regional holiday period and shut downs but today generally we have very little seasonality. We don't have a lot of customers that are in the consumer electronic space. We don't see strong Q4s and then weak Q1s and things like that.

We have more of a very broad 3000 and growing customer base and each one of these customers has a completely different dynamic. So I would generally say we don't have a lot of seasonality but as we get bigger that may change.

Operator

Your next question comes from the line of John Haller with HHR Asset Management.

John Haller - HHR Asset Management

I was sort of wondering the typical ramp up period of one to three years, how much if any did that lengthen during the recession, meaning, for the products that you introduced in late 2007 and 2008?

Stephen G. Daly

It certainly had an effect. Depending on the customer, it would either accelerate the design cycle or it might delay it permanently. So we saw a wide range of effects. We had many customers that, if they were running five or six design programs, they cut that in half and went forward with half the products.

So very difficult to say what the 2009 recession did to our overall adoption because it's very situational. In fact, I would argue that in some customers we came out in the stronger position because we were constantly there. We were in front of our competitors. We were continuing to get design ins because we were continuing to launch products.

So it's a bit too early to tell. I would say over the long run it really won't matter but I wouldn't necessarily get too hung up on that. In other words, I don't think that 2009 is going to create an air bubble or a problem in the out years. I think there's too many other moving parts and too much momentum here for that to take root.

John Haller - HHR Asset Management

Given your always impressive return on capital employed, why can't you invest even more? Or why wouldn't that be a natural question to ask? Why not ramp up R&D spending, hire more sales people, hire more engineers? What's the bottle neck there?

Stephen G. Daly

That's a great question and that's exactly what we want to do. That needs to come with control and if we look at our history and what we're successful doing as an organization, we're very capable of every year growing our R&D from 20% to 30% to 40%. If you exclude last year, that's what we had been doing in prior years.

In doing that to create valuable products and then also bringing up other functions in the company like sales and marketing and product development to support the launching of those products, you have to bring everything up in balance or else there'll be waste.

So what we focus on is just that. We want to make sure that we have ample capacity across the business, across the different departments, so that we're not creating waste and inefficiency. That’s what we're very good at doing.

At the end of the day, it comes down to finding very good people, best in class people, bringing them into the company in a culture where we promote innovation and collaboration on very interesting projects. We give these people two to three to four years to develop their success. Then when we do that, we're able to bring the returns back to the investors that we can.

So that's our philosophy. It takes time. You can't go out and hire 100 people and expect the same things. We have to do it in a moderated and controlled way.

John Haller - HR Asset Management

Then, assuming that you've always been the best at what you do, has this been pure in terms of pure performance of modules and of ICs? Has that gap widened as competitors get weakened in the recession? Or is the competition more or less the same it was before?

Stephen G. Daly

In some areas the recession slowed down some competitors. I think the reality is the recession wasn't long enough to kill off a lot of competitors. So I wouldn't say it necessarily changed the landscape. Had it continued for another year or two, I think we would have seen more companies fail.

So, generally speaking, it may have slowed down a few of the weaker competitors. The strong companies remain strong.

John Haller - HHR Asset Management

Then finally, it seems like broadband has been kind of weak for a while. Is this an area that you're de-emphasizing these days? Or could we expect at some point in the future broadband to be sort of strong as it used to be, vis-à-vis the other areas that is?

Stephen G. Daly

I think over the long term you'll see that broadband will continue to be the fourth or fifth largest market for the company. Some of the work we're doing in Silicon with our integrated synthesizers and VCOs, with PLLs are directly applicable to very interesting high end pockets inside of that space.

So I wouldn't necessarily agree that we're de-emphasizing our focus on broadband. We do expect that market segment to continue to grow.

With that said, it is one of the eight market segments that comes under tremendous price pressure and we're very sensitive to that. We will not be shy on exiting opportunities if they don’t meet our financial goals.

Operator

(Operator instructions) Your next question is a follow up from the line of Aalok Shah - DA Davidson.

Aalok Shah - DA Davidson

I was wondering if we could get a quick update on that military program that was supposed to launch at this point. Can you give us kind of a sense of how that's tracking? Can you give us just an update on that?

Stephen G. Daly

Yes, the program is on track, on schedule and our team is performing with excellent results. We plan on having some revenues this year. Just to remind everybody, it was a $35 million contract which we received at the end of 2008. In 2009 we built out some production lines here internally at Hittite.

Then shipments were planned to begin in 2010 and that has happened. So we are now in a mode where we are shipping to customer. Those shipments will continue this year and into next year.

Aalok Shah - DA Davidson

One more follow-up question, in terms of manufacture, I know you do your assembly and testing inhouse. Can you give us a sense of how much you're doing inhouse and how much you're outsourcing? Is it 100% now inhouse? Or is still some of it being outsourced?

Stephen G. Daly

It depends on the product format. So in terms of our high volume test facility, I would say 98% of the work is done here in Chelmsford. In terms of tests, all of that assembly is done overseas in countries like Singapore, Malaysia and what not. All of our hybrid assembly and module builds are done here at the factory in Chelmsford, so it's 100% in that area.

Aalok Shah - DA Davidson

Then one more quick one. We hear about foundry supply typically on the Silicon side but on the (inaudible) side are you guys anticipating any issues with foundry capacity at this point?

Stephen G. Daly

No, we're not.

Operator

I'm not showing any further questions. I would now like to turn it back over to management for any closing remarks. Please go ahead.

Stephen G. Daly

Thank you. In closing, I would like to acknowledge the hard work of all of our employees during the quarter which made these results possible. Thank you very much.

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