For first-quarter 2014, Hittite Microwave Corp of Chelmsford, MA, USA (which designs and supplies analog, digital and mixed-signal RF, microwave and millimeter-wave ICs, modules and subsystems as well as instrumentation) has reported record revenue of $70.6m, up 2.7% on $68.8m last quarter and 4.3% on $67.7m a year ago, and above the guidance of $67.5-69.5m.
Three of the firm's eight markets (military, microwave and millimeter-wave communications, and cellular infrastructure) accounted for about 78% of total revenue. The remaining markets (test & measurement, automotive, broadband, fiber optic and space) accounted for the remaining 22%.
Cellular infrastructure, microwave communications, test & measurement and automotive revenues showed sequential growth. "We continue to see strong growth in the infrastructure market, driven by LTE spending in China and the USA," says CEO & president Richard D. Hess. "The microwave communications market was solid and the test & measurement market was stronger than in the previous quarter," he adds. Fiber optic, broadband and military were essentially flat. Space was down sequentially due to the cyclical nature of that business.
Of total Q1 revenue, 39.4% ($27.8m) came from customers in the USA (down for a fourth consecutive quarter, from 41.3% or $28.4m last quarter, and 44.7% or $30.2m a year ago) and 60.6% ($42.8m) came from customers outside the USA (up from 58.7% or $40.4m last quarter, and 55.3% or $37.5m a year ago). Specifically, domestic revenue was down 1.9% sequentially and 7.9% year-on-year, while international revenue was up 5.9% sequentially and 14.2% year-on-year.
After falling quarter-on-quarter from 73.7% a year ago, gross margin recovered slightly from 67.3% last quarter to 67.4%, remaining at the lower end of the firm's operating range (as forecasted), due to the product and market mix and, to a lesser extent, the impact of several lower-margin and primarily military development contracts. "These development contracts are new projects we choose to participate in," notes VP & chief financial officer William W. Boecke. "In the past these development programs have grown into production contracts, with greater revenues and higher margins. We expect similar results from these current programs."
Although down from $13.2m a year ago, R&D expense has risen slightly from $11.8m last quarter to $11.9m (16.8% of revenue). "The R&D costs represent a continued investment in the development of new products and product lines, which is the principle long-term growth driver of the company," says Boecke. Sales & marketing expenses have risen from $5.8m a year ago and $6.1m last quarter to $6.9m (9.8% of revenue) due to travel as well as other marketing costs related to the incrementally higher revenue. General & administrative expenses were $3.7m (5.3% of revenue), compared with $3.4m last quarter and $3.8m a year ago. Total operating expenses have risen from $21.3m last quarter to $22.6m (though still down on $22.8m a year ago).
Net income was $16.4m, down from $17.6m a year ago but up from $15.6m last quarter, and at the high end of the $15.3-16.5m guidance range.
Operating cash flow of $27.2m was offset by $1.8m of capital expenditures, $4.7m in dividends paid and $0.9m in net tax payments related to equity compensation. This hence yielded free cash flow of $19.8m, driving total cash and marketable securities up during the quarter from $472.5m to $492.4m.
Hittite also announced that its board of directors has declared a further of $0.15 per share dividend, payable on 27 June, to shareholders of record as of the close of business on 4 June.
During Q1, Hittite entered in a definitive agreement to buy substantially all of the assets of Keragis Corp of San Diego, CA, which provides high-power wideband amplifier modules. "This acquisition fits well with our strategy of leveraging our IC capability in both gallium arsenide and gallium nitride into a higher level of assemblies," says Hess. "Keragis has developed a unique power combining capability allowing them to build devices that replace tube amplifier technology with solid-state devices," he adds. "This offers customers the opportunity to both replace existing tube amplifiers as well as design solid-state amplifiers into new systems. These devices provide a substantial reliability and lifetime improvement to the existing technology used." Applications include military radar, weather radar, air-traffic radar, as well as other high-powered opportunities. "In addition, we delivered multi-channel up- and down-converter modules for ship or navy demonstrator program," notes Hess. "These devices achieve significant performance improvement and offer the possibility to be used across multiple future platforms on military programs."
Other highlights of Q1 include:
launching the HMC7056 Ka-band block up-converter with high-power amplifier, with internal local oscillators enabling conversion of an IF frequency range of 1-2GHz up to 29-31GHz for commercial or military satellite communications applications (the device's high-frequency and high-power performance set Hittite apart in this market, the firm reckons); launching the HMC6980 10MHz-20GHz power amplifier module, suitable for electronic warfare (EW)/electronic countermeasure (ECM) radar, fiber-optic and test equipment applications (demonstrating Hittite's strength in extremely wideband devices with excellent performance characteristics, the firm claims); receiving an initial production order from a Tier 1 customer for a new generation of E-band microwave radio chipsets (with performance that allows customers to offer substantially better solutions for wide-band backhaul applications - the E-band radio market has significant growth potential over the next few years, driven by the rollout of small cells in the mobile infrastructure market, says Hittite); introducing a highly integrated IF solution for microwave radio that is gaining traction at multiple Tier 1 customers (which will assist customers in decreasing size and cost of their radios and all of the microwave backhaul band); and releasing the HMC7271 multi-chip module solution with cellular repeater systems and ramping production volumes (providing a much-needed integrated solution for Tier 2 customers).
"The increase in our R&D spending over the last three years is starting to pay benefits that will drive our growth," says Hess. Based on new products and design-in status, coupled with record order bookings in Q1, for second-quarter 2014 Hittite expects revenue to rise to a new record of $74-76m, driven by continuing strength in cellular infrastructure business, a growing microwave backhaul market, and modest growth in test & measurement, as well as signs that the military business is starting to pick up. Net income should rise to $17.6-18.4m, based on (1) estimated gross margin rising to 68% (as margins start to move towards the firm's normal range of 68-73%); (2) operating expenses rising slightly due to continued R&D and sales & marketing investments; and (3) a tax rate of about 34%.
"We will continue to invest in our new product development and expanding our penetration into new products and markets," concludes Hess.
