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ANADIGICS, Inc. (NASDAQ:ANAD)

Credit Suisse Technology Conference Call

November 29, 2012 12:00 pm ET

Executives

Ron Michels – Chief Executive Officer

Terry Gallagher – Chief Financial Officer

Unidentified Analyst

For this segment, we are pleased to welcome ANADIGICS to the stage. I have Ron Michels, CEO and Terry Gallagher, CFO and they will be giving a presentation. Right now, I will yield the floor to Ron.

Ron Michels

Great. Thank you very much. Good morning everybody. Welcome to the ANADIGICS presentation at the Credit Suisse Annual Technology Conference. We'll be making some forward-looking statements vis-à-vis but we have here in certainly some risk of the any statements we make that are forward-looking, so be aware of that.

So ANADIGICS is in the $2 billion market. And if you look at the pie chart we have here, it's pretty much separated into three different business areas, and we've actually reorganized the company around these three business areas. So each business area gets its own special attention, its own product development. We start with on the upper left hand corner, which is the WiFi segment.

So when we get into to why ANADIGICS revenue has been jumping up so quickly. Actually, WiFi is not a piece of it yet. WiFi is something we can look forward to as being very – a big force for us in 2013 and we’ll get to that in a minute. The other two segments are traditionally areas that ANADIGICS has played in, and the yellow is our cellular business, highlighting here our ProEficient single band and dual power amplifiers. So we told everybody a year and half ago that we're revamping all of our products in wireless. We are going for higher efficiencies. We've tracked that, it's been a year and half, we now have products in the market and they are getting significant revenue.

The green piece is the infrastructure piece, formerly called the broadband piece. This has a brand new product line in it. It will start bringing significant revenue for us next year. That’s the small cell PA market. We'll talk about that in detail. And then the traditional CATV line amplifier market. We're adding new products there. We are adding new customers that will also exhibit growth next year. So there is our market opportunities, $2 billion. So where are we today?

Well, in 2012, as I mentioned, we had a 14% revenue growth in Q3 largely because of wireless, and largely because of these products that are driving growth that are already bringing revenue in that we started working on a year ago, so lets watch down; the ProEficient single-band PA; a highly integrated multi band products; the MMPA and then also the Penta-band PA; WiFi connectivity for mobile devices; small cell wireless infrastructure amplifiers; gallium nitride CATV line amplifiers. These are all products that were started about a year and a half ago, and they are all bringing revenue in today at existence proof of the product development that’s being done in ANADIGICS is clicking in and brining in revenue.

So let’s get a little more specific on the wireless handset design wins. We start with a couple here from Samsung. We announced the MMPA in the Samsung Galaxy Express and the Relay 4G. So this is important for a couple of reasons. First, the MMPA which is the first multimode power amplifier that ANADIGICS has undertaken has been a success. We developed it, rolled it out on time without any major issues, it’s designed into two phones here that we are mentioning at Samsung. There is others that we can’t talk about, but still in the press releases on them.

Why is this important? It means we can do multimode power amplifiers for one. The second reason is, both of these phones are in the WCDMA market. ANADIGICS traditionally has been a strong player in the CDMA market. WCDMA is two and half to three times bigger than the CDMA market. We're now entering that market. Next one down is HUAWEI, we’ve secured WCDMA positions in several phones there. We are listing a couple of the Ascend, the Honor, the Landfire. ZTE, our second Chinese customer along with HUAWEI many wins there too as well with V790, V889D, et cetera.

QUALCOMM, everything we design in QUALCOMM, everything we design as far as power amplifiers are compatible with QUALCOMM reference designs. It's part of our review system, and we review what engineers are working on the first question we ask is, how does it work with the QUALCOMM chipset? In most cases, QUALCOMM has looked at these parts and has basically confirmed that they work with their chipsets.

So what we have here is we’re highlighting the Gobi chipset, our part is the Penta-band 3G/4G multimode power amplifier. We are shipping in production volume today, data card applications and some hot spot applications. This market or this chipset is going to be used in a new market. We’ll start seeing revenue towards the end of 2013 and significant revenue in 2014, and that's the automotive market. We'll talk about that a little bit more as we go to the presentation.

Last one, is the NEC, again the MMPAs design wins for KDDI and docomo and again that's the MMPA. So a lot of traction with a multimode MMPA and ANADIGICS first time in the history of the company that we’ve taken on multimode powering amplifier and rolled it out very quickly and it's highly competitive.

So what makes ANADIGICS products different than anybody else’s? It's right here in the slide. It's quite simple. Battery life is the most important feature in a phone. Second most important feature is basically low pricing. We have a performance and a pricing advantage with our process that we have in ANADIGICS.

We have a larger than 30,000 square foot in-house fabrication facility using gallium arsenide that basically has been revamped with $100 million of capital equipment these investments were made a few years ago. And we developed a new BioSET process, it gives us better design rules, better CDs and higher efficiencies than other processes that are similar to it.

So this is unique proprietary process that you can’t get anywhere else. So if you look at this chart, basically you can see that we’ve done several iterations on our power amplifiers, we call them, HELP which is High-Efficiency-at-Low-Power something we packed at years back. So each iteration is with each blue bar. We started with a 31 milliamp power draw, this is how much current is pulled from the battery in the phone. And we got the 25 and then 21 today with ProEficient down to 15.9 milliamps.

So when you are on the phone, talking to somebody, you are basically pulling from the battery less than 16 milliamps of power. Most of the competitors are up around 25 milliamps. Then when you are running at high power levels, that’s the line up on top of the chart, that’s where the phone is putting out the highest power level to be able to handle high data rates. That’s where our hearts are doing today 48% efficiency. It was 40% just a few months back. This is all part of the new line of products we are developing that use this ProEficient process. This is our competitive advantage. This process is basically giving us advantages with cellular Pas, its giving us advantages in WiFi, which we haven't start to talk about yet, and it's giving us advantages in the small cell market that we're doing in the infrastructure area.

Staying with just ProEficient, little more information about this. Conservatively we said SAM is $1 billion, and we have two sets of products that we are developing, single-band products and dual-band products. On the single-band side, we've been very successful with our Band 1 part it's designed in at Samsung, HUAWEI and some others. And we next year will be shipping in excess of 1 million pasts per month with this Band 1 product. Again, this is a product that was in conception stage a year ago along with all the other new ones that we promised that we will do. We delivered on this, it's bringing revenue in. So this is just Band 1.

So if you look at the third bullet down under single-band there is Band 2, Band 4, Band 5 and Band 8 which are in customer evaluation. We expect lot of revenue from all the other bands as well. And they lag the Band 1 by about three months. Again this extends battery life, include talk time and data applications, because it's using this ProEficient process.

Next down is the dual band products. So we have bands 1/8, 4/5, 2/5 and 1/5 all sampling in customers. So these are just like the single-band products, but its two bands combined into one gallium arsenide guy in a module using the same high efficiency process or the same advantages, but two bands in one package. There is 3x4 size packages, which are 20% smaller than the next size up and there are reference-design compatible with QUALCOMM and many with Broadcom as well.

Again the world's best efficiency at both high power and low power, that’s what differentiates us.

On the multi-mode PA front, SAM there $200 million to $250 million, two pieces to this one. There is the MMPA we will talk about first. So how do we define the MMPA, its Quad-Band EDGE GSM plus Band 1, Band 5. So all of these design wins that we are getting at Samsung and other places is with this part. Shipping production in both Samsung and NEC are the two that we mentioned so far in press releases. Additional models are ramping currently.

For sampling the next generation of this part, the next generation of the part is the same GSM and EDGE capability although it’s done quite differently. And this one has Band 1, Band 2, Band 3, Band 4, Band 5 and Band 8 for 3G and 4G. So this is a very big undertaking. It’s a lot of technology chip and a lot more of some innovative design techniques. We have a mixture of silicon, the gallium arsenide in this part, it’s quite good. It will work with Envelope Tracking and without Envelope Tracking and has a lot of features. It’s currently being sampled. This ultimately will replace the Band 1 and Band 5 MMPA.

Next is the Penta-band 3G/4G PA. So this is 5 bands of 3G and 4G but without the GSM EDGE piece. Very popular in data card markets and this is the part that’s getting designed to 5 and more coming up design wins in the automotive market which will start to see revenue late in 2013, significant revenue in 2014.

I’m going to switch gears to our infrastructure business unit. So basically the infrastructure business unit is divided into two product line areas, one is CATV and the other is small cell wireless. Let’s talk about CATV.

The hybrid line amplifiers. These would make up the transmission system and the cable TV system. So what we are doing here is we are expanding a very mature line of products that we’ve had for years to include gallium nitride. Gallium nitride is a SAM of about $5 million. You can add that to $40 million SAM for the gallium arsenide amplifiers that we make today. So we are ramping some of these new products in Asia, some in North America. We have new products that are green because they draw a lot less current so they fall into that green category where they save power.

The CATV business is a stable very high margin business for the company and we see that growing towards the second half of next year. The growth rate won’t be as extreme as what you see in wireless, however it is growing. We also have a line of surface mount line amplifiers and we have varieties that are both gallium nitride and gallium arsenide. We are sampling new gallium nitride devices actually today and we have multiple technologies that we’ve developed for these opportunities. We are using MESFETs, pHEMTs, and GaN Technology. The MESFETs and the pHEMTs are both done internally in our Warren facility. These processes are very unique and you can’t find them anywhere else.

Again, a very big advantage for us. High area – very hard for other companies to break into those if they don’t have these processes. We have 60% or larger market share in this area. The other piece of what we do in this infrastructure business unit is the Wireless Infrastructure, Small Cell. SAM $200 million, today 0.25 watts to 5 watts products are being developed they use both gallium arsenide and gallium nitride technologies, just as the CATV line amplifiers. As a matter of fact, there is a lot of similarities between these two.

Small Cell Linear Power Amplifiers they support major reference designs, so we're very proud of the reference-designs that we are designed in for Small Cell. They include QUALCOMM and MINDSPEED. We have design wins in the lots of places and HUAWEI, Alcatel-Lucent, Dongwon, ubiquitous. The list goes on and on we just have a few list of here.

So basically if this market takes off, ANADIGICS takes off with it. Almost all of the products that are in production or in preproduction today have at least one ANADIGICS power amp in them primarily its Korea and Japan and then North America after that. So we had a tremendous penetration.

Already we are seeing in Q4 this business is starting to hit, it’s in the order of hundreds of thousands were in the quarter, before that it was close to zero. So we think that next year is the year were Small Cell start to take off and it's another area of business that will layer on top of what we are doing today.

Also we're doing pre-distortable Power Amplifiers. Those are the higher power amplifiers, and we have a whole roadmap of higher power amplifiers that will be getting into towards the end of next year. We will be talking more about that in the future.

WiFi. So ANADIGICS stock prices have been jumping up, because press release two weeks ago it's very exciting. We announced to the world about six months ago, we are getting back into the WiFi business. Today we are on multiple reference designs at key players. We have parts that are 11n and we have parts that are 11ac. These parts use a lot of the technology that ANADIGICS have when we are designed into 12 years ago. It’s a business that we dominated and decided to get out of that we are getting back into with all of the (inaudible) that we’ve already had and we’ve redesigned all of these components to work in the brand new process which gives us these higher efficiencies and smaller die sizes, very, very effective combination.

We secured multiple references and as I mentioned in top-tier WiFi chipsets. Production shipments to major OEMs worldwide begin in Q1 of next year. So normally the wireless business is a pretty seasonal business and it’s usually down quite a bit in Q1. Just bear in mind that we have this brand new business layering on top of the existing business. A market share that we almost have none today that will be significant in 2013. So we think that’s going to do good things for us next year that even includes Q1, its very close.

So in WiFi, it’s a compelling intersection. We got this new 802.11ac standard that now everybody is designing to cell phones more towards the second half of next year or the connectivity devices now. This is a wonderful time for ANADIGICS to get back into this market. AC requires gallium arsenide. The old inspects, you could make an argument that still looking at gallium arsenide are equivalent not for AC. So that’s perfect. We have this brand new process which gives higher efficiencies. We are entering a market where gallium arsenide is the requirement and it’s really working for us. It’s taking off very, very quickly. I’m very pleased with our penetration in WiFi.

So what do we have, we have RF front ends on a single monolithic die. Most of our competitors have multiple die solutions, because if the process we have everything has done on one substrate, this means we can do things smaller, cheaper and with the less of the side effects that you get from – wiring from one die to another. You get better 5 gigahertz performance, because of the process and because of the fact that it single die.

We have excellent exceptional linearity and very, very good power consumption all because that what I've mentioned previously in that ILD BiFET process. So our performance gives us very low current consumption, it significantly lower than our competitors.

And then lastly, before I turn it over to Terry, let me talk just a minute about the process. So as I mentioned it's a 30 thousand plus square foot facility in our Warren plants, its gallium arsenide 6-inch wafers that has undergone a very, very big change in the last year.

If you take a look at a picture here, you can see a 35% reduction and how large or how much area the average die takes, so the old average process is the big one on the left hand side and the arrow points to what we do today. Much smaller and has much better performance is a faster process, a cheaper process, it is exactly what we need for ANADIGICS to come back and have much, much better profitability in revenue going forward.

So let me turn it over to Terry who’ll summarize little bit and talk a little about the financials.

Terry Gallagher

Thanks Ron and good morning everyone. Just kind of Ron laid out the larger picture and the macro trends that we're looking. So in the short term what is ANADIGICS story? Where a turnaround in process? We feel as though we made that turn and now it’s about execution. So the two goals that were in front of us was to grow revenues, okay. We’ve got a production engine that’s very solid, but costly because you got a fab and we got an R&D organization that again is costly to a lesser revenues than it should be.

Ron laid out all the pieces of revenue that are in place that came out of that research engine and now transfers over and rise that production engine forward. So in terms of this revenue growth, there was an expansion at SAM that reflects back on the early slide of the pie chart. WiFi is really new to the company. We are back into it. If we were doing sort of million-dollars of revenue per quarter in WiFi, we see that growing substantially. It can be $5 million to $10 million by end of next year. That’s a very big driver as ANADIGICS goes forward.

Wireless infrastructure another, the Small Cell application that Ron was talking about. That’s layering on top of this attractive infrastructure business that gives growth. It’s just an efficient use; it allows the carriers to use their network better. So again you are supporting these trends towards greater data use and ANADIGICS is participating in that be a WiFi as well as wireless infrastructure, new to the company’s via SAM. We are also talking about growing share on the wireless side. But we are now in WCDMA where pretty much prior have been on the CDMA side.

WCDMA much bigger market and we are also participating in the LTE market as well. And then multiband products is another extension ANADIGICS primarily played in the single-band and dual-band PAs, but now we’ve got this more integrated part tailored a bit more to the high end of the market, be a multiband item.

Stepping down then on this leveraging the production in R&D engine we get the ProEficient PAs that are highly efficient across the power range whether you are in data mode or talk mode, and as well as the WiFi these are outputs of our research engine this redirected research engine in the last two years, okay. Then on the production side, what have been and up to Ron was just referring to the ILD process. We're packing all that functionality into a smaller die and then we would also going to get some cost advantages by way of precious metal reductions as we march forward.

How does that all play into then the financials? The ANADIGICS and what I’m comparing here is Q2 a low point really a $25 million of quarterly revenue and then what do we do in Q3? And now we finally got the existence proof of this revenue engine and this renewed product line, we’re able to add $3.6 million or roughly 15% to the revenue, okay. That growth is going to continue out in the right column we got our break-even model. That circle $45 million of revenue. The mix will change were ANADIGICS has been historically 75% on the wireless side and 25% on the infrastructure side was that small piece of WiFi participation that I had mentioned earlier.

As we step out and let's call it Q4 of '13 or something, we're going to have wireless at a rate of $30 million plus from its prior rate of $18 million or $21 million in quarters two and three. Infrastructure is going to grow, its going to grow about with the company, up from roughly $6 million up to about $8 million or $10 million. As we come through breakeven and forward, the WiFi is sort of a large driver that Ron was talking about. A lovely opportunity for us and that’s by way of AC and all these reference design that were solid in.

So it’s not a big gross profit percentage that we need to be EBITDA breakeven. It’s roughly 25%, but it’s a highly leveraged model and we want to help to point that out. So along that $3.6 million Q3 from Q2 revenue change, we were able to bring $2.5 million to the EBITDA line. That’s going to continue when we hit a surplus $45 million which we anticipate in back half lets call it and 2013, we will hit breakeven. And then as we blast through there, we will be creating or printing cash.

So I want to bring you back to that slide which showed earlier. Where the ground work was laid in 2012 or 2011 and 2012 quite frankly that in 2013, the growth is going to ride on ProEficient single band. ProEficient dual bands, if we expand that family, we are also going to have those more integrated products, the multimode, MMPA as well as Penta-band. The WiFi is a big driver and we’ve had press releases out there and I think the financial community is picking up on the leverage that’s coming just from that application. We’ve got wireless infrastructure parts that are solid when accounting on a whole heck of the lot more second half of 2013 and continue to fuel that gain, but these are attractive margin parts, and then it's the CATV line and we are adding to that family of that core strength.

So with that, closes a loop around our presentation. And if there are questions, we'd glad to honor those. Thank you.

Question-and-Answer Session

Unidentified Analyst

You guys mentioned on the last earnings call you sort of (inaudible) potential for you to look at the line of credit, if you guys is that something that in the works can maybe give some color around that?

Ron Michels

Sure, Ryan, and it's a good fair question, I should have mentioned that earlier and then we talked about this in the Q3 call. We feel as though there is adequate cash on the company’s balance sheet they carry through this the turn around and complete and reach EBITDA break-even and beyond. But just to a late year as we've been talking with the couple of bankers and were down selecting currently and that's broadly I got $15 million working capital line. There is also some vendors that are talking about capital spending, financing as well.

But that's how the company would finance this growth, there is no anticipation just to address any fear of the dilutive equity raise that's not in the cards, we can do it. Number one with the cash on the balance sheet and then just supplemented on working capital or capital side through these lending arrangements it's rent the money, don't go out and dilute the shareholders.

Unidentified Analyst

One last quick one if I may. You talked about ILD shrinking your die size about 35%, maybe talk about that relative to the utilization rates, I mean they were up sequentially, so there’s down on a year-on-year basis that's been a pressure on the gross margin side, I mean how does this die shrink certainly going way to bring utilizations of ultimately, but how does that ILD die shrink change the past [alluding] within your fab and I mean does that mean you be able to have equipment you won't necessarily need because of the die shrink, I mean maybe talk about how that effects your utilization made sort of going on time as you shrink that?

Ron Michels

Yeah, basically with the new process die is significantly smaller as you imagine. When we think the cash break-even at $45 million, because of the die shrinking, but of course ASPs are lower this year than they were last year in wireless they drop with every quarter, but we more than offset that from the margin standpoint by this new ILD process and how much smaller we can make the die. But when we talk about capacity, we've already figured in that the new process is smaller and in today we’re running at about 50% capacity. We don't think we have any capacity issues for the next four quarters. And certainly we have a very scalable fab that allows us for just a few million dollars to increase our capacity probably by 30%, 40% beyond what it is today.

Unidentified Analyst

Okay.

Terry Gallagher

Thanks so much Ryan and thanks everyone.

Ron Michels

Thank you.

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