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Anadigics, Inc. (NASDAQ:ANAD)

Q1 2009 Earnings Call

April 28, 2009 5:00 p.m. ET

Executives

Tom Shields - CFO

Mario Rivas - President & CEO

Analysts

Anthony Stoss - Craig Hallum

Colin Denman - DA Davidson

Michael Alexander - Charter Equity Research

Cameron Reid

John Pitzer - Credit Suisse

Operator

Good afternoon. My name is Monica, and I will be your conference operator today. At this time I would like to welcome everyone to the Anadigics First Quarter 2009 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). I would now like to turn the call over to today's host President and CEO, Mario Rivas; as well our CFO, Tom Shields.

I would now like turn the call over to Mr. Tom Shields. Sir, you may begin your conference.

Tom Shields

Thank you, Monica. Good evening, everyone, and welcome to the Anadigics first quarter 2009 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 remarks.

Mario Rivas

Thank you, Tom, and good evening everyone. Let me begin by reviewing our financial results for the quarter, and then I will detail the business initiatives I have been addressing over the past two months since joining the company.

Our revenue for the first quarter was $30.5 million, which was slightly above our guidance. In terms of our gross margin, we were also slightly above our original estimate, due to moderate increase in our fab utilization rate. When combined with our cost reduction initiatives these led to a non-GAAP net loss of $0.21 per share compared to our guidance of $0.28 per share. We continue to evaluate our cost structure relative to demand in order to preserve cash.

Turning to our product lines, wireless declined sequentially at a rate consistent with historical seasonal trends. While broadband declined more significantly when compared with the fourth quarter and prior year period, which is a trend we expect to continue into the second quarter. The weakness in our broadband business is directly related to the economic downturn, which in turn impacts our wireless line and cable segments.

In WiFi, inventories are still being worked out in the channels. However, we don't expect to see an increase in revenue until our third quarter. I want to emphasize, this is not a result of a loss in market share, but rather lower volumes due to the decline in overall demand for consumer and cable products that utilize our technologies.

Tom will review our detailed financials and second quarter guidance with you in a minute. But let me now disclose my specific business initiatives and the progress of each. As we explained in our last earnings call, for the past several months, we have been focusing on our production excellence, rebuilding customer relationships, pursuing new design win opportunities and leveraging our technology.

First, in regard to our operations, I am committed to achieving unparalleled excellence in this area. It is critical for the future success of our business and an integral component, to securing and maintaining our customers. While the current economic downturn has resulted in lower volume due to recession, I am pleased to report that our fab cycle time is at an all-time low, and manufacturing yields remain high. We have leveraged this downtime by stimulating high demand situations in order to identify and implement additional changes so that when we increase the efficiency of our fab and enhance our capabilities.

We have been successfully responded to high volume orders from customers requiring fast turnaround times. I feel confident that our improvement and manufacturing capabilities are in place for a potential market recovery and strong holiday season in the second half of 2009.

Second, the global rebuilding of customer relationships is a top priority. As I continue my customer visits, one important key take away for my business was that our customers repeatedly cited their preference for our products based on our outstanding technological performance. In saying that, I am pleased to report that we have successfully engaged with all of our largest customers. In the case of LG Electronics, they remain a 10% customer.

We are actively engaged with Samsung and Huawei. We anticipate that they will contribute to revenue gains during the second half of 2009. Although the extent of their contribution to our revenues will be largely contingent on the overall market and the ramping of their own products we are encouraged by the orders and conversations that we are having with both of these key customers. Our relationship with Qualcomm and other (inaudible) design leaders remains strong.

It is my opinion that we have made significant progress in regaining the confidence of all of our customers, and our job now is to execute on our promises and rebuild volume by ensuring manufacturing support to meet their demand requirements. In general, while most customers continue to cite low visibility in their markets, many remain optimistic for a stronger second half.

Third, in pursuit of new design win opportunities, we are seeing positive indicators in wireless based on recent customer activity, such as backlog pooling requests and an increased level of customer engagements in design activity. As I just mentioned, we continue to win back business at Samsung and have further expanded our opportunities in the area of CDMA, EVDO and 3G with LG as well. As a proof point to our design win success with customers, in the first quarter, we secured over 50 wireless design wins that could go into production in the second half of 2009.

Although it is difficult to predict whether or not this design is going to production, how large the volume will be, and we must also account to a large degree on the influence of the macro economic environment. Our priority remains increasing our design wins so that we are well positioned to benefit from the market recovery and an increasing global demand. One other comment about our design win progress. We are currently being designed in third-generation smartphones with Samsung, LG, RIM and Palm and they are also well positioned in the rapidly growing 3G market.

I am seeing several of our wireless wideband CDMA, HSDA products now being specified by leading 3G, chipset reference designs companies and equipment manufacturers on 3G datacards, USB modems and embedded modules for high-speed mobile connectivity in PCs and netbooks. Including products from Qualcomm, [Ericsson], Samsung, Huawei, Sierra Wireless, ZTE and Novatel Wireless.

Now, turning to my final business initiative, which is leveraging our technology. We continue to create highly differentiated products in each of our targeted high-growth markets. I believe our technology leadership and best in class products has allowed us to weather through these difficult times and will also be the key component to our future success. Anadigics is viewed as one of the best innovative companies in our markets by our reference design partners and customers. Our InGaP-Plus and HELP technologies have enabled us to produce parts with higher levels of integration, smaller footprint and higher efficiencies with lower power consumption, all highly desirable traits for the next generation of consumer products.

Anadigics has been awarded a dominant share of Intel's current high-volume consumer targeted Centrino 802.11n business for the balance of 2009. Anadigics continues its engagement with Intel to develop advance power amplifiers and front end products for WiFi and WiMAX, for future WiMAX and WiFi convergent platforms. WiMAX continues to be rolled out led by Clearwire in the United States and UQ Communications in Japan.

Anadigics has designed products into a PC card and USB dongle for use with the UQ Communications WiMAX network. The first three cities where the network has billed out are Tokyo, Yokohama and Kawasaki. Anadigics has finally positioned in WiFi enabled smartphones by securing a key dual brand front end IC reference design win. Our InGaP-Plus technology enables highly integrated front end ICs for wireless on applications, integrating power amplifiers, power detector, switch, LNA and logic control.

We will be in a position to talk more about the adoption of these reference designs later in the year. As evidence of the strengths of the DOCSIS 3.0 market, Anadigics has shipped more than 1 million, DOCSIS 3.0 programmable gain optimized amplifiers into the worldwide DOCSIS and EuroDOCSIS 3.0 market. The market for DOCSIS 3.0 is expected to be a double digit percent of the total overall cable modem market for the year.

With that I would now like to turn the call over to Tom, for our financial discussion.

Tom Shields

Thank you, Mario. Our reported net sales for the first quarter of 2009 were $30.5 million, reflecting a decrease of 33% sequentially and a decrease of 59% compared with the year ago period. Our net loss per share on a non-GAAP basis was $0.21. Our prior revenue guidance for the first quarter 2009 was for 35% decline and a non-GAAP loss of $0.28. The upside in sequential revenue, compared with prior guidance was generated through stronger revenue in our wireless 3G product line.

Wireless revenue was 21.4 million which declined only 13.9% sequentially, much less than expected. However, broadband revenue declined 55%, to 9.1 million, resulting from lower revenues from our wireless LAN and cable products, which directly reflects, the softness being experienced by our customers from the current economy. Wireless LAN revenue totaled 1.0 million in the first quarter of 2009 reflecting the impact of high inventory levels at our customers that we reported during our last earnings call.

We expect wireless LAN revenues in the second quarter to be flat to the first quarter as customer inventory levels continue to be worked down. On a more optimistic note, we are expecting wireless LAN revenues to resume growth in the third quarter as we remain positive in regard to our expected market share with key wireless LAN customers in the assumption that inventory levels at our customers are being worked down during the second quarter. My disclaimer would be that we also need the economy to strengthen.

Separate from wireless LAN, cable revenue declined to $8.1 million. While we continue to maintain a dominant market share position with each of our cable customers, demand by our customers is down. This is believed to be the combination of high inventory levels at our customers resulting from the softness created by the current economy. We are expecting that the softness in demand will continue throughout the second quarter. While today, visibility into the third quarter is light. We are optimistic for resumption in our cable revenue in the third quarter, under the assumption that markets will improve and that the inventory levels are also worked down.

Our customers, representing above 10% of first quarter revenue includes both LG Electronics and Research In Motion. Our better than expected non-GAAP net loss per share in the first quarter versus prior guidance was largely due to better gross margins and lower than expected operating expenses. Gross margins were $3.4 million or 11.1% of revenues, and operating expenses were $16.2 million, which is split between R&D of $10.2 million and SG&A of $6 million.

We continue to control costs where possible. During the first quarter, we reduced our work force by approximately 110 positions through both voluntary and involuntary programs to further reduce our cost structure. Over the past few quarters, in addition to layoffs, we have substantially reduced variable compensation benefits and have taken other actions to reduce labor costs.

We greatly appreciate the sacrifices our employees have made in this regard to limit further workforce reductions. These tight expense controls, we expect, will allow the company to reduce our quarterly burn rate and conserve cash in these uncertain times. We will be a much stronger company when our revenue growth resumes. As of April 4th, our cash and cash equivalents totaled $132.5 million, compared with the $145.7 million reported at December 31st, 2008. In the first quarter of 2009, our capital expenditures and depreciation expense were $3.1 million and $4.6 million respectively.

Looking ahead to the June quarter, there is continued uncertainty in the marketplace and our customers continue to be cautious with their ordering patterns. Forecasting operating results in this current environment is difficult, particularly since lead times are shorter than usual as customers tend to order only what they need urgently. Accordingly, our current estimate anticipates that our second quarter revenues will be down 8% to 10% from the first quarter.

Current bookings are at the low end of revenue guidance, both broadband and wireless are expected to decline equally. However, the primary reason for the projected decline in wireless revenue stems from one of our customers reporting to us that they have high inventory levels that need to be worked down. However, we believe there's greater opportunity for an increase in turns business in the second quarter from our other wireless customers, given their short lead times, which have not been forecasted due to the continued uncertainty in the markets.

However this could have a positive impact on Q2 revenue guidance. Non-GAAP loss per share, excluding non-cash stock compensation expense for the second quarter is expected to approximate $0.24. The GAAP net loss is expected to approximate $0.29. Gross margins will decline naturally in the lower forecasted revenue and lower fab utilization, as expected. Operating expenses are expected to also decline another 4.5%, to approximately $15.5 million, due to the previously mentioned cost savings initiatives.

Thank you. And I would like now to turn the call back over to Mario.

Mario Rivas

Thank you, Tom. So operator if you could open up the doors for Q&A.

In summary, although I am not satisfied with our current financial results and second quarter guidance, I believe we are taking all the necessary steps to manage costs and strengthen our business from both the manufacturing and customer perspectives. Our differentiated products are a key factor in driving a higher level of engagement in design activity, to position the company for a stronger second half of the year as the economy improves.

We are confident that we have the leading technologies to service our end market, and are focus on execution, both strategically and operationally, with the goal of restoring customer confidence and returning the company to growth in the most expeditious manner possible. I believe we have made significant progress over the last six to eight months in terms of improving operational excellence, and are well positioned to regain market share in the second half of 2009.

Thank you for your time today, and your continued support of Anadigics. We are ready for questions now.

Question-And-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Anthony Stoss.

Anthony Stoss - Craig Hallum

Hi, guys. If you wouldn't mind quantifying the high level of design win activity. You mentioned 50 different wins. Is that across all your customer base, or is that Samsung, and maybe you can help give us more detail on Samsung coming back as well as Huawei? Thanks.

Mario Rivas

The 50 is a combination of all of our customers. Obviously we are engaged with what I would consider three top-tier customers, being LG, Samsung and RIM, and a host of others. So at this moment, I will not get any more granular than that on the design wins. On Samsung, I would go as far as to say that the second quarter will have a higher level of business than first quarter and that is my expectation that when all the design wins turn into sales and the economy helps, we should be between one-third and one-half of our prior Samsung peak.

Anthony Stoss - Craig Hallum

Refresh my memory and Tom, maybe step in. I think at the prior peak, wasn't Samsung about 20 million per quarter?

Tom Shields

At our peak, Samsung was above a 10% customer.

Anthony Stoss - Craig Hallum

Tom, what's your current head count?

Tom Shields

It's approximately 550.

Anthony Stoss - Craig Hallum

No additional light you can shed in terms of significance on this WiFi handset reference design that's coming in later in the year. Is it going to be bookable revenue this year, or is it something in '10?

Mario Rivas

There's a possibility that it can be bookable revenue in the second half of the year, probably the fourth quarter. Like I said, we're going to speak on detail later when we reach a higher level of confidence.

Tom Shields

Tony, this is Tom. Certainly the products are there, ready. They've been sampled and qualified. So the markets willing we would expect some opportunities in the second half.

Operator

There is a question from the line of Aalok Shah.

Colin Denman - DA Davidson

This is Colin Denman calling in for Aalok. I was just wondering, looking at some of your recent competitor's results and guidance, it seems fair to say that they're continuing to gain share. I was just wondering, given that, what has given you the most confidence that you'll be able to resume revenue growth in the back half of '09?

Mario Rivas

Are you speaking in the wireless strengths, or any particular market?

Colin Denman - DA Davidson

If you could give me a bit of idea, in each of the spaces, where that confidence is coming from?

Mario Rivas

I was going to quantify your remark, because as you can imagine I read very carefully the reports of my competitors. Without telling you anything else, I think that their decline in the wireless space is comparable to ours. I do not accept the premise that we have lost market share in the first quarter. So just let me say that on the broadband side, we have stated that our drop in revenue, are not the result of market share, but rather a reduction of the overall market. So, I feel confident that in an increase of market share in the second half because we are now entering a new design cycle, where we have better opportunities to regain part of our position. On the fab cycle orders that we've been getting in the first quarter where customers are reengaging with us and requesting our support.

Colin Denman - DA Davidson

Another question. I know you guys are moving more towards the hybrid manufacturing model, and I was just wondering, how is progress coming along with qualifying your devices with the new foundry partners?

Mario Rivas

We have received parts back, and we are very pleased with the results. So we continue to move forward. You will understand this is not an event that will only take a month. It takes several months to get to qualify the part and then to get customers to qualify them in turn. So, it's a long-term project.

Colin Denman - DA Davidson

Do you still expect to see some outputs in revenue from that in the second half of the year?

Mario Rivas

It's possible, yes.

Colin Denman - DA Davidson

Now just a follow-up to that, could you give me any idea of what your production mix might look like between New Jersey and these new foundry partners in the second half of '09 and into '10?

Mario Rivas

I can tell you, with a great degree of confidence that a large majority of our production will come from New Jersey, in 2009. It will not be into 2010 that you're going to start seeing the mix and our long-term goals stated has been 80/20.

Operator

There is a question from the line of Michael Alexander.

Michael Alexander - Charter Equity Research

This is Mike Alexander in for Ed Snyder. You mentioned that Palm was a customer. I wondered if you could give some color on whether that was a product that's already out on the market or is something that's coming.

Mario Rivas

It is the new product coming out that is getting quite rave reviews. It is a smartphone 3G device with our PA onboard. So, so far, everything I have read in the literature,, it's very enthusiastic about their introduction. So we are hoping for them to do well.

Michael Alexander - Charter Equity Research

Is this your first product with Palm?

Mario Rivas

No, not at all. We had other products with Palm. Going forward, this is a significant design win for us. Anytime a customer gives us a flagship product, we are very proud of it.

Michael Alexander - Charter Equity Research

Congratulations. You mentioned Huawei. I wondered, is that on the handset side, or is that on the infrastructure side? If it is on the infrastructure side, if some of your competitors have talked about 3G build out in China being upside. I wondered if you're involved in that.

Mario Rivas

Our involvement with Huawei is in the handset side, and as well as plug-in cards and USB dongles.

Michael Alexander - Charter Equity Research

Are you involved at all on the infrastructure side?

Mario Rivas

No, we're not. We are available to them for conversations, but so far, that is not what we are stating.

Michael Alexander - Charter Equity Research

I just wondered if you could clarify the design win at Intel.

Mario Rivas

This is the same design, the same platform that continues to ship. So, there has been a correction of inventories. That is, it's lasting from the better part of two quarters and there is a second source, and we confirmed we are the first source, and the other company is the second source. The platform will remain active until the end of the first quarter in 2010.

Operator

There is a question from the line of Cameron Reid.

Cameron Reid

One question back on those design wins. As a reference point, can you clarify how many design wins you've had in Q1 '08? I have another question too.

Tom Shields

This is Tom. Clearly, in 2008, as you remember, we had 13 straight quarters revenue growth all the way through Q2 and in fact, at least from a customer standpoint, had numerous design win opportunities that we thought we had for the second half of '08. Then we discovered that they didn't come our way. So, I believe that the design wins today exceed perhaps what we had even back the same time period a year ago?

Cameron Reid

These design wins, are they all cellular PAs, or are some of them WiFi on the 3G phones? There was a specific phone last year, there was a potential for a WiFi PA. I was wondering if you're going after those as well, and if so why?

Mario Rivas

It's a mix. It's a mix of both 3G and WiMAX, and different customers addressing differently. I did not understand the second part of your question.

Cameron Reid

Just going back to the Palm products, for example, is it a cellular PA for that product, because I believe it has WiFi on it as well.

Mario Rivas

In the palm case specifically, it is the cellular PA.

Operator

There is a question from the line of John Pitzer.

John Pitzer - Credit Suisse

Mario, I think in your prepared comments, you talked about the possibility that turns business could be better than expected and hope you exceed sort of the official revenue guidance. One, what gets you confident that turns business could come in better? I guess I'm trying to get a sense of the magnitude potential there.

Mario Rivas

Tom was the one who made the remark, but, you know, I'm responsible, so I cannot raise the question and let him fill it in. We are taking a very cautious approach to giving you guidance, because we have experienced quite a bit of short-term orders from our customers, and in some cases we were fortunate enough to be able to respond. In some others, we had to push them out, or not bid the business. So I expect them to continue, because the overall macro economic environment is making everybody very cautious on their order behavior. What would be the magnitude of that? It's hard to be precise, but, if we're telling you that we are saying its sequential now and we have upside to potentially having a flat quarter.

John Pitzer - Credit Suisse

I guess, as a follow on to that, you also talked about a specific customer having too much inventory in the June quarter. Again, is it is combination of, I guess, I'm trying to get a sense of how big that issue might be in the June quarter?

Mario Rivas

The customer is very substantial in the market. That's what I can tell you. So I think it's just a matter of caution on their part of managing their inventory, but incredibly successful products and company.

John Pitzer - Credit Suisse

Is that a couple millions dollars hit, Mario? Is it something greater than that, something less than that?

Mario Rivas

You're in the ballpark.

John Pitzer - Credit Suisse

Quick question just relative to the netbook market. When do you think you might have a product available to address the netbook market? I guess help me understand what the pricing and margin profile of the netbook versus the notebook market might look like for you guys?

Mario Rivas

The (inaudible) platform is targeted for netbooks and we have that design. We are very proud of that, for two reasons. One, the netbook market that you just presented, and the second one, because it's the first introduction of new platforms, it always comes out in that format. So it confirms my confidence that we have technology leadership. So, frankly speaking we are ready today. It would be a matter of the OEMs selecting the (inaudible) module.

John Pitzer - Credit Suisse

One other question from me. As unit volumes ramp expectedly in the back half of the year, kind of curious as to what the pricing environment might look like?

Tom Shields

This is Tom. Typically at the start of the year, we always model a 10% to 15% annual reduction in prices, so that's the way we would determine relative to the full year, so it's, essentially a couple points on a quarterly basis.

Operator

(Operator Instructions). There are no further questions at this time.

Mario Rivas

In this case, we are thanking you for your time today, and your continued attention and support for Anadigics. We will be talking to you guys later. Thank you very much.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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Source: Anadigics, Inc. Q1 2009 Earnings Call Transcript

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