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Anadigics, Inc. (NASDAQ:ANAD)

Q4 2008 Earnings Call

February 26, 2009 5:00 p.m. ET

Executives

Thomas Shields – Chief Financial Officer

Mario Rivas – President and Chief Executive Officer

Gilles Delfassy – Chairman of the Board

[Unidentified Company Representative]

Analysts

Mike Alexander – Charter Research

George Iwanyc – Oppenheimer

Mike Burton – Think Equity

Anthony Stoss – Craig Hallum

Neil Waggoner – Stephens, Inc.

Operator

Good afternoon. My name is Chris and I will be your conference operator today. At this time I would like to welcome everyone to the Anadigics’s fourth quarter and full year 2008 earnings conference call. (Operator instructions) At this time I would like to turn the call over to Thomas Shields, CFO. Sir, you may begin your conference.

Thomas Shields

Thank you, operator. Good evening everyone and welcome to Anadigics fourth quarter and full year 2008 earnings conference call. Before we get started, please remember any comments made in this call by management as part of prepared remarks or in response to your questions may contain forward-looking information. Such information is subject to risks and uncertainties as described in this evening’s press release and in the company’s various filings with the SEC. I would like now to turn the call over to Mario for his opening remarks.

Mario Rivas

Thank you, Tom, and good evening everyone. This is the first time I’m talking to you on behalf of Anadigics, and since I am the new CEO I thought I will start with a few words about me and why I came to the company. I have 30 years of experience in the semiconductor industry and during that time I lead the wireless semiconductor business at both Motorola and Philips Semiconductors and was also responsible for operations at Philips Semiconductors overseeing all the foundries, the purchasing, the assembly and testing, and their information technology department. When I was made aware of the CEO search of Anadigics, I was intrigued. I saw innovative technology, great products, talented employees, and a focus on high growth markets. However, the company seemed to run into capacity issues when trying to satisfy an unprecedented demand for its products. Gill and the team have done a great job over the past six months to increase the operational capacity and efficiency of the fab and they have made a lot of progress. I feel confident today that based on our new-design winds and improved efficiencies in the manufacturing operations, Anadigics has a high probability of achieving that next level of growth. Since I have been the CEO only for the last 26 days, I feel it is prudent at this time to turn the call over to Gill for an update on the company’s progress. Gill?

Gilles Delfassy

Thank you, Mario. And by the way before we start, let me just say that we are so pleased to have you here on board at Anadigics. And as the Chairman of the Board, which as you know I’ll remain, I need to tell you I look forward to sharing view, to supporting you, and also check on you, but that’s another story. I knew you were expecting that from me. But turning to our results (ph) if you recall during the third quarter call, I outlined several specifications to address some of the issues that Anadigics was facing at that time. And now I would like to give you an update on our progress.

First of all, on the very, very major issue that we had at that time, if you remember: our operations. Since we have overhauled the leadership in operations and have made operation excellence our number one goal, we have great progress to report. We have significantly reduced our fab cycle time which is really important to focus on our satisfaction. We have improved our (inaudible) training efficiencies and we have reduced our cap (ph) level to industry benchmark, best in class in the world, basically. Of course, the slowing demand in the global economy coupled with the customer inventory adjustments have resulted in lower utilization of our factory during this time. But actually this has almost been a mixed blessing for the company. That weakness in demand that we regret, of course, has given us time to slow down the production line, identify and implement additional changes, and then allow us to increase the efficiency of our fab and enhance our capability. Also, during this time of low demand, we want to be ready to resume goals when the market comes back. So to achieve that, we are constantly simulating high demand situations that stressed the fab to make sure that we’d be able to scale up our operations when needed.

In addition, we continue to prepare for future growth by diversifying our sources of supply. If you noticed in our press release, we mentioned that we decided to pull the plug in our China fab project. Actually, the reason we did that and that’s one I would like to be very clear, is that we believe we have much better plans now and that the most effective and efficient way to augment our existing capacity is actually with foundry suppliers with what we call the hybrid manufacturing model which of course you know that I was very familiar. I think that’s infamous during the 20 years that I spent there because that’s the way we were working. That model is clearly, in our opinion, the best way to provide customer with search capacity, flexible capacity, and also it has a significant advantage which needs not spend any CapEx.

Even more importantly on the customer’s front, I most would gladly talk that we are reestablishing ourselves as a reliable and credible supplier. Mario and I just had the privilege to spend last week in Barcelona at the Mobile World Congress which is the new name for 3GSM. And we have had a lot of good time there to probably to any (inaudible) but more importantly we met all of our key customers, almost all. And we discovered that, well between Mario and I, we know particularly all the major players in the industry since we spent so many more decades in the industry than we care to admit. But very importantly, we were pleased that, first of all, of course they continued to tell us that they believe that our products are best in class because of their performance, but now they believe that we can deliver predictably their volume requirements, which was their concern as you recall six or seven months ago. So therefore, and that even better, we are being designed into new circuits very constantly, very regularly. We had very good meetings there and of course we cannot share many of the specifics, but I believe we have met significant headwind with some of our customers for ramping again for the 2009 (inaudible) this season this year, second half of this year. Mario, do you want to share your impressions?

Mario Rivas

Sure, Gill. I found our conversations with customers and potential customers in Barcelona to be very constructive. I was encouraged by the level of engagement and their interest in doing business with Anadigics. Our technology allows us to deliver differentiated products to them with higher levels of integration. And they like that. Their design engineers loved it.

Honestly, when I walked through the dozens of booths for the show, I felt pride to see how many 3G and 4G platforms and different OEMs, how our products inside enabled them to bring to market demonstrators. As Gill said, we are seeing traction and it feels good but we don’t take it for granted. We are all staying focused right on our customer’s business and (inaudible) everyday. With that, I would like now to turn the call over to Tom for our financial discussion.

Thomas Shields

Thank you, Mario. Our reported net sales for the fourth quarter of 2008 were 45.2 million reflecting a decrease of 22% sequentially and a decrease of 33% compared with the year-ago period. Net sales for the full year 2008 were 258.2 million reflecting an increase of 12% from the year-end of 2007. Wireless net sales for the fourth quarter and full year 2008 were 24.8 million and 154.7 million, respectively. For the fourth quarter 2008, wireless net sales declined 15% sequentially and 41% from the year ago period. For the full year 2008, wireless net sales were up 19.9% from 2007. Broadband net sales for the fourth quarter and full year 2008 were 20.3 million and 103.5 million, respectively. For the fourth quarter 2008, broadband net sales declined 29% sequentially. For the full year 2008, broadband net sales were up 2% from 2007.

Our top customers in the fourth quarter of 2008 consisted of LG Electronics, Motorola, and Cisco. Net loss for the fourth quarter of 2008 was 36.4 million or $0.60 per share. We reported charges in the fourth quarter of 2008 totaling 31.4 million or $0.52 per share as reported in our 8-K this evening, which have been excluded to derive the non-GAAP net loss of 4.9 million or $0.08 per share. The recorded non-GAAP charges include 3.5 million of non-cash stock based compensation, 13 million of non-cash for the impairment and termination of the China project, 6.2 million of non-cash for the impairment of goodwill and intangibles related to previous acquisition, 2.9 million in inventory reserves, 3.7 million impairment of auction rate securities, and 2.1 million related to a reduction in workforce.

Net loss for the year-end of 2008 was 41.9 million or $0.70 per share. We achieved non-GAAP income for the full year ended 2008 of 15.8 million or $0.26 per share when excluding non-GAAP charges. On November 5, 2008 per our 8-K filing, we announced the reduction in workforce of approximately 100 jobs or 15% of the company’s total worldwide workforce and the implementation of other cost reduction initiatives. These actions are expected to realize benefits between 15 million and 20 million and internalize cost savings over $0.25 to $0.30 in earnings per share.

Additionally, during the current first quarter of 2009, we have taken additional measures to contain cost and conserve cash including the implementation of voluntary separation and voluntary retirement arrangement with employees, mandatory furlough arrangements with all U.S. company employees, and the suspension of certain employee benefit programs. The cash savings from these actions for the first quarter of 2009 are estimated at approximately 1.2 million. While the one-time cash charge for the voluntary employee arrangements is estimated at 1.0 million. We believe these actions are prudent in light of the change in quarterly revenue while preserving our capabilities to meet future customer demand and maintain a strong balance sheet. We will continue to evaluate our cost structure relative to demand.

Non-GAAP net income for the year ended 2008 was 15.8 million or 26% compared with 23.1 million or $0.39 per diluted share for the year ended 2007. The non-GAAP gross profit was 12.4 million or 27.4% in the fourth quarter 2008 and non-GAAP operating expenses were 17.7 million in the fourth quarter reflecting a decline sequentially of 1 million. The reconciliation of the fourth quarter 2008 non-GAAP net loss of $0.08 per share compared with our previous non-GAAP net loss estimate of $0.12 to $0.14 per share includes higher gross margins and lower operating expenses resulting from a stronger product mix favoring cable products and the impact from the cost saving initiatives announced in November 5th. At yearend 2008 our cash, cash equivalents in both short and long-term marketable securities totaled 145.7 million and our CapEx were 4.4 million the fourth quarter and our depreciation was 4.6 million.

Now, turning to our first quarter of 2009 outlook, we are estimating a decline in net sales of approximately 35% sequentially and a net loss of approximately $0.33 per share. Non-GAAP loss per share excluding non-cash stock based compensation expense is expected to approximate $0.28. The first quarter 2009 non-GAAP net loss includes an adverse impact to gross margins due to decline in net sales and a considerable reduction of fab utilization. Thank you and I would like to now turn the call back over to Mario.

Mario Rivas

Thank you, Tom. As I mentioned, Gilles has done an outstanding job leading Anadigics through this important transition and putting the company on the path to successful rebound and growth. The management team of Anadigics and I are going to continue on this path. We are positioning ourselves to resume growth on a solid foundation and become a better company that we have ever been. I am happy to be joining the company at this time and I am looking forward to leading it to the next level of growth. Back to Tom.

Thomas Shields

Alright. Now, operator, I’d like to open the call for questions.

Question-And-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Edward Snyder.

Mike Alexander – Charter Research

This is Mike Alexander in for Ed Snyder. I wondered if you could talk about what’s going on with the China factory. I know you’re terminating it. Last call you said you were on the hook for the register cost which I think was around 16.7 million. Is that money still has to be paid out or is this whole account in for with the impairment charge this quarter? Thanks.

Thomas Shields

Yes, regarding the China facility, you are correct. The termination of the contract, the total incurred obligations were 13 million which we have completely written off during the fourth quarter and that’s all our remaining obligations.

Mike Alexander – Charter Research

Great, and then what about cash going forward? I know your convertible notes are due in October. Do you anticipate cash flow being negative next quarter or do you think with inventory burn-up you will be able to keep it at breakeven or better?

Thomas Shields

We certainly should see some benefit relative to working capital as result of the declining net sales. We do expect as result of the loss position that we would see decline in our gross cash position by the end of Q1. However, as a company, we are looking at and have looked at several options relative to sustaining a cash balance of not less than 80 million but with a high-end target of anywhere between 90 and 100 million exiting fourth quarter 2009.

Mike Alexander – Charter Research

And is it fair to look at gross margins below 10% for the next quarter?

Thomas Shields

That is correct.

Mike Alexander – Charter Research

Great. Thank you very much.

Operator

Your next question comes from the line of George Iwanyc.

George Iwanyc – Oppenheimer

Thank you for taking my question. With the balance that you see for the rest of this year, how do you anticipate or what type of breakeven level are you trying to work towards and at what gross margin do you anticipate being there?

Mario Rivas

Well, with today’s cost structure, our breakeven point on EBITDA basis is 45 million.

George Iwanyc – Oppenheimer

Okay, and –

Gilles Delfassy

It’d be safe to say that it will probably not stay there than we would like to; find ways to reduce it, Mario, right?

Mario Rivas

Yeah, that is correct. As we say, we continue to look at our cost structure to reduce our breakeven point. For today, the number is 45.

George Iwanyc – Oppenheimer

Okay. And Tom, when you look at – what rough OpEx are you looking at for the first quarter?

Thomas Shields

When you say OpEx you’re referring to of course R&D and SG&A.

George Iwanyc – Oppenheimer

Yeah.

Thomas Shields

Under 17 million combined.

George Iwanyc – Oppenheimer

Okay. And just following up on your comments about some of the positive traction that you saw at the world congress, from a top customer standpoint, let’s say from LG and Samsung, what type of traction are you seeing?

Mario Rivas

Yeah. This is Mario. Definitely, customers are engaged. Some customers are more optimistic than others on the number of units they’re going to sell in this coming cycle starting the second half of this year. So the encouraging part is the ability to be in the sockets and having the opportunity to sell. The questionable part from the customers’ part is that nobody can really predict the microeconomics of the second half and therefore that is what calls us to caution.

George Iwanyc – Oppenheimer

Okay.

Mario Rivas

But our customers are very engaged, very interested in our products; definitely think a differentiation in the quality of the devices that we’re shipping them.

Gilles Delfassy

And it’s great Mario said it but I’m so proud and certainly I hope you will allow me to repeat it, we are winning new circuits at both these customers that you mentioned. And that’s a new situation because, you know, they were a little upset at us in the past. So it seems that we have restored confidence in them and that we are able to be a great partner for them, and the fact that we are winning new designs in their platforms that will run later this year is a very encouraging sign. Of course as Mario mentioned, then these platforms need to be successful in terms of volume but there’s no way around it.

George Iwanyc – Oppenheimer

Thank you very much.

Operator

Your next question comes from the line of Mike Burton.

Mike Burton – Think Equity

Okay, thanks. Once upon a time there was some discussion about actually winding down the fab and moving to a more fabulous model. Could you talk a little bit about what would be some of the steps that you would have to go through to make that sort of transition and what kind of timeframe that could possibly happen if indeed those discussions are being approached right now?

Mario Rivas

Even though I’ve only been here 26 days, I have not heard that remark, not even historically. What we have embarked on is a hybrid model of fab where we will maintain our fab on the competitive advantage that our producers (ph) give us that AN16 gives us the ability to produce things that our competitors cannot do, and at the same time have some flex in the capacity that we will have by engaging with foundry partners. So that’s the mode going forward and it takes some time to qualify devices in a different factory with a different process but we’re well on our way, and we should start seeing outputs and revenue in the second half of this year.

Mike Burton – Think Equity

Okay. So would it be fair to say that the process though it would take by the second half of this year you can actually see some of those third parties up and running.

Mario Rivas

Yeah. And you know today, we do sell a few products already that are not built in our factory but it will be more concrete that you will see it the second half of the year.

Mike Burton – Think Equity

Okay. And then just moving on a little bit, could you talk a little bit about some of the dynamics within the Set-Top Box market and perhaps some of the inventory that perhaps you’re seeing there, and when you expect to see a rebound in that market, is it going to be in the Q2 before we start seeing a turnaround, and likewise also on the wireless side. Thanks.

Mario Rivas

Yeah. I will speak in general terms because it’s difficult to be precise and I will recommend you connect with the respective customers. I will not comment on their plans, on their business plans. I will say in general there is limited visibility in both markets, right, and in both cases there is a large amount of inventory that they are burning through and therefore they’re placing orders in much shorter cycles. So my visibility going forward is limited and we expect obviously the microeconomics to improve in the second half and we have always said we’re the second-half company.

Mike Burton – Think Equity

Okay, and then lastly, did you say that you expect inventories to come down in Q1 and is there a target for it on a turns (ph) basis?

Thomas Shields

Yeah, this is Tom. Yes, certainly with the very underutilized fab, we’re not starting a lot of wafers because of the inventory position at the end of Q4. So, you know, clearly we’re looking for turns over five.

Operator

(Operator instructions) Your next question comes from the line of Anthony Stoss.

Anthony Stoss – Craig Hallum

Hi, guys. Tom, if you wouldn’t mind giving us a breakout on the broadband side, the (inaudible) infrastructure, Wi-Fi, then I’ve got a couple of follow-ups.

Thomas Shields

Hi, Tony. It’s Tom. As I stated, the wireless revenue was roughly 24.8 and clearly that’s all 3G revenue. Regarding broadband, clearly the cable business did pretty well. In fact, our cable business was up 2.4 million and so the degradation in our revenue for broadband from Q3 sequentially was largely driven by wireless LAN which directly nourished what’s happening with the macroeconomic situation.

Anthony Stoss – Craig Hallum

Okay. And then Mario if you wouldn’t mind, or Gill, quantifying some of the design activity. You mentioned that customers are coming back. Can you help us understand number models, also kind of a rollup plan, is there something packed for Q2 (inaudible).

Gilles Delfassy

Sure, I’ll be happy, in general, to give you a rundown without getting into specific products to not violate the customers’ confidence in this case. But the immediate place is, the season will start in the second half because the cycle of handsets goes from Christmas-to-Christmas per se, right? So ramp will start as early as July and August. There are models today that are doing very well where we are designing and we are gaining share within those customers, and I will point out because you can go to the web and look at analysis of different devices that the latest models of Blackberry’s do have our product and they are doing very well on placements of smart phones. So for the most part, if you look at a smart phone with a touch screen, we have a good possibility to be there in this market. So good production, some customers are sequentially going to be on quarter-on-quarter but, again, a caution that I have to give you is the microeconomic climate has limited their visibility and therefore I cannot tell you with great confidence it’s going to be a tremendous ramp. I would love to see a ramp but I must be cautious.

Anthony Stoss – Craig Hallum

Okay, then two last follow-ups. One of you guys, if you won’t mind commenting about kind of your market share with your biggest wireless LAN customer, what you expect, maybe even exiting 2009 with new platforms.

Gilles Delfassy

Sure, you know, the interest in part again is not just the microeconomics but there is a changed on the market of our largest customer in that there’s a new category of devices called MedBooks (ph) that seem to have been growing very fast and they do not have that particular Wi-Fi model. That has caused a little bit of a traffic jam in the market, so to speak. We expect to have a majority share with this customer in 2009 and exiting the year.

Anthony Stoss – Craig Hallum

Okay, last question probably for Tom, if you wouldn’t mind just giving us your CapEx plans for 2009.

Thomas Shields

Well, in line with our cash conservation plan basically, 5 to 10 million is the max.

Anthony Stoss – Craig Hallum

Okay, thanks guys.

Thomas Shields

You’re welcome, Tony. Thank you.

Operator

Your next question comes from the line of Neil Waggoner.

Neil Waggoner – Stephens, Inc.

Hey, guys. This is Neil for Steve, you guys have talked about the decision to reduce headcount and other employee-related actions, are there any infrastructure or capacity or reduction initiatives that you might consider to generate even more cost savings going forward? Or any other plans to reduce cost?

Thomas Shields

This is Tom. Absolutely. We evaluate it every single day. So certainly in light of the current demand, we certainly have taken multiple of actions as you commented on. We will continue to look at all opportunities to further reduce cost on as-needed basis; particularly, we need to ensure we make R&D investments as much as we have the infrastructure in place for whatever size ramp we can achieve in the second half. So it’s being sized accordingly.

Neil Waggoner – Stephens, Inc.

Okay. And then on the announced cost savings, the 15 million we’ve already talked about and the 1.2 million dismount, (ph) are those all included in the current 1Q guidance?

Thomas Shields

That is correct.

Neil Waggoner – Stephens, Inc.

Okay, thanks guys.

Operator

Your next question comes from the line of (inaudible).

[Unidentified Company Representative]

Okay, thanks for taking my question. You guys talked about Atom-based netbooks, what about your thoughts on Snapdragon-based netbooks which Qualcomm has indicated are expected to rollout beginning the middle of 2009.

Gilles Delfassy

Yeah. It is interesting. Let me first say I’m glad I’m not in the middle of that particular market; nowhere the clash of titans between the PC market and the smart phone market. Nokia announcing that they might enter the market to beat should be giving more phones (ph). It would be hard for me to break it, but on the positive side it gives more opportunity for us to participate because that’s the market we serve. So I will definitely welcome a substantial Snapdragon platforms.

[Unidentified Company Representative]

Okay. And also I think yesterday, I think it was (inaudible) who said that they expect to share about 3G licensing agreement pretty soon from Intel-Zend so I’m wondering, do you guys see any opportunity there if Intel’s going to begin adding power amplifiers to all of its platforms?

Mario Rivas

It’s absolutely an opportunity. It’s a great customer and we would love to expand our relationship.

Gilles Delfassy

And we are in contact with them on a regular basis to discuss all of these opportunities but we have nothing to report more precisely at this time.

[Unidentified Company Representative]

Oh. And then one last question, could you just give us a little bit of color as to how fab utilizations have trended from the June quarter peak to what you’re expecting in March? I know that it has come down drastically but just to kind of get an idea and see how they might recover as stuff begins to improve hopefully in the second half of this year.

Thomas Shields

Absolutely. If you recall, we reported $80 million in the June quarter. So clearly we’re humming probably highest peak of capacity at that time. And as you saw the reported revenue in Q3, it was 58 million and 45 million in Q4, so certainly we’re taking some action to reduce utilization but also remember that we were still getting a lot of updated sales forecast from customers which initially following the Q3 were still very strong. And then we found out the fact that customers went and did designs to other competitors. So as a result the real test was Q4 when it started taking down the utilization. So basically we went from a 90-plus percent in June quarter, roughly at still 70% in the Q4 timeframe, and then we’re some-30% as we sit in Q1. So what you’re going to expect clearly is as result of the burn off in inventory in Q4, there would be a significant bump up in the utilization rates once we get pass Q1 obviously predicated on demand levels.

[Unidentified Company Representative]

Well, thanks a lot.

Thomas Shields

You’re welcome.

Operator

There are no further questions at this time, do you have any closing remarks?

Mario Rivas

No. Let’s give a couple of minutes more for questions since we are early.

Operator

(Operator instructions)

Mario Rivas

Okay –

Gilles Delfassy

So then now we set to work since this is my last probably intervention in this earnings call for some time. So I want to say that clearly, as said, in the difficult (inaudible) I want to say that, first of all, (inaudible) the supply because we had as we discussed last call, we had lost one full generation, one full cycle of customer platforms the whole of this season, and that train had left the station so there was no way we could recuperate and certainly not with (inaudible) sections like some of you are feeling, so the whole or the (inaudible) in which we are is not a surprise. The key question is, would we be able to restore credibility, restore relationship with customers, and renew designs to rebound with the next project (ph) cycle; and clearly, although of course we are not there yet, but I see enormous progress and then clearly it’s very promising to see customers coming back to us giving us new designs. It’s a great proof of confidence and of course Mario and the team, I’m sure, will do a great job to realize these opportunities moving forward. And it was fun to work with you. Thank you for your contacts, guys.

Mario Rivas

Yeah. And with that I think we will bid you good night and thank you for attending the call.

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