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Executives

Terry Gallagher - Vice President and CFO

Ron Michels - Chairman and CEO

Analysts

Quinn Bolton - Needham

Paul McWilliams - Next Inning Technology Research

Jason Smith - Craig-Hallum

ANADIGICS, Inc. (ANAD) Q2 2013 Results Earnings Call July 30, 2013 5:00 PM ET

Operator

Good afternoon. My name is Christine, and I will be your conference operator today. At this time, I would like to welcome everyone to the ANADIGICS Second Quarter Earnings Conference 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)

Thank you. I would now like to turn the call over to Terry Gallagher, Vice President and CFO. Please go ahead.

Terry Gallagher

Thank you, Christine. Good afternoon, everyone. And welcome to ANADIGICS’ second quarter 2013 conference call. With me today is Ron Michels, our Chairman and CEO. First, I will take you through our adjusted financial results and then Ron will review the business performance of our products, as well as growth strategy.

Before I begin, I would like to remind you, that in light of the SECs fair disclosure rule, we are limited in responding to enquiries in a non-public forum. We therefore encourage you to ask all questions of a material nature on this call.

Some of the information we present today maybe forward-looking in nature. I must remind you that the forward-looking statements are subject to a number of important factors that may cause the actual results to differ materially from our projections based on various risk factors, including those described in the press release issued earlier today and our reports on Forms 10-K, 10-Q and other filings with the Securities and Exchange Commission.

All numbers during the call will be presented on a non-GAAP basis. Non-GAAP financial measures exclude equity compensation charges, marketable auction rate, securities movements, restructuring charges and other specifically identified non-routine item, including the second quarter cost of sales charges of $0.4 million from power interruption and $0.8 million for customer cost reimbursements referenced in our release.

These non-GAAP measures are provided to enhance the understanding of our core operating performance and a full reconciliation of these non-GAAP measures to our GAAP results was presented in our press release.

I’ll now begin with our financial discussion, which focuses on sequential changes. For the second quarter of 2013, our revenue totaled $34.6 million, comprised of $11.4 million in WiFi, $18.1 million in Cellular and $5.3 million in Infrastructure, that represents an overall sequential increase of 31% driven by WiFi’s extraordinary growth of 138%. We are very pleased with WiFi’s outstanding penetration.

Cellular sales grew by 10.9% and some of that growth in Cellular driven by an increase in certain legacy business. Infrastructure sales declined slightly by 3.5%. For the quarter, we had greater than 10% customers in Samsung, Murata and Huawei.

Gross profit was $1.9 million, resulting in a gross margin for the quarter of 5.2%, a 450 basis point sequential improvement and remarkable 1,270 basis point improvement from 12 months ago. 450 basis point sequential margin improvement was driven by WiFi’s growth, despite a GP headwind from growth in Cellular legacy and a small decrease in infrastructure sale. As we migrate from legacy Cellular to new ILD products, we expect gross margin will improve with better incremental rates.

It is important to recognize that our focus on operational cost reduction and efficiency is resulted in lower cost production and inventory. The sell-through of higher cost inventory produced in Q1 burden the second quarter with roughly $650,000, representing another 180 basis points. However that accounting headwind should lessen as we move forward. We should gain further efficiencies as we optimize our ILD technology and we move newer products to larger volumes with improved deal, in short, we are still ramping.

Second quarter, research and development expenses declined 13.1% -- 13.1% sequentially to $8.6 million, reflecting cost improvements we previously put in place, as well as more efficient development activities.

Selling and administrative expenses increased modestly by 2% to $5.3 million, as we fueled Wi-Fi’s sales growth.

Since the first quarter, operating expenses as a percent of revenues had shrink considerably from over 57% to approximately 40% as evidence of our substantial operating leverage. We expect this trend to continue as we grow the topline.

The net loss for the quarter was $12 million or $0.14 per share, a sequential improvement of $0.06.

Our EBITDA loss was $8.4 million, a sequential improvement of $2.7 million or approximately 25%. We expect further progress as revenues and margins expand.

We finished the quarter with a solid balance sheet, including cash and marketable securities of $41 million, accounts receivable grew by $5 million, $12 million to $17.7 million as sales accelerated during the quarter. Quarter end receivables approximated 46 days. Inventories decreased slightly by $0.8 million to $19.5 million and at quarter end approximated 54 days.

Depreciation expense was $3.7 million and capacity utilization in the quarter approximated 75%.

Capital investment was $2 million and is helping expand our more efficient ILD capacity. Capital investment combined with an increasing mix of ILD and production efficiencies being implemented should result in an increased in available capacity. While we anticipate higher sales volume in the third quarter, we expect that the capacity improvements will results in a lower utilization metric to the upcoming quarter.

I’m pleased with the commercial and operational progress we made in the quarter, specifically with WiFi’s impressive revenue growth, lower cost production and the improved efficiency in OpEx. With an improvement in bookings and revenue visibility as indicated in our press release, we expect continued sales growth for Q3 in a range of 4% to 8%.

I’d now like to turn the call over to Ron for more on our products and growth strategy.

Ron Michels

Great. Thank you, Terry, and good afternoon, everyone. I’m very proud of the outstanding 31% sequential and 38% year-over-year growth we’ve achieved in the second quarter. We believe that this level of performance is a direct result of our aggressive business strategy.

Specifically, we remained sharply focused on expanding our share at leading customers by introducing new innovative products that target three main growth drivers. One, the rapid adoption of WiFi connectivity across an expanding array of applications, two, the acceleration of data consumption and adoption of 3G and 4G connectivity in wireless mobile devices, and the third, the expansion of infrastructure networks to support greater data use.

By successfully executing to this strategy, we’ve accelerated customer demand for our differentiated solutions moving into the third quarter and establishing a strong foundation for long-term revenue growth. I would like to now share with your some highlights from the second quarter and discuss our forward momentum.

Our WiFi group achieved unprecedented sales growth in the second quarter as we secured additional design wins, aggressively ramped production with our front-end ICs. This outstanding level of traction is exemplified by our strong position at loading -- leading OEMs.

Not only are we powering the flagship Samsung Galaxy S4 smartphone and Galaxy Tab 3 7.0, 8.0 and 10.1 tablets, but we also enable WiFi in a variety of exciting mobile and infrastructure devices by LG, Sharp and NEC.

We believe that the exceptional demand for our 802.11n/ac FEICs grew both modules and OEM chip-on-board application. It’s being driven by the tremendous performance and integration benefits that they provide. Specifically they offer an outstanding combination of linearity, efficiency and thermal characteristics.

This ensures stable, high throughput connectivity at extended range. It also maximizes battery life and power hungry mobile devices and improves thermal management in MIMO infrastructure devices that use multiple FEICs.

Our strong position on the industry’s most popular WiFi reference designs, including the first 802.11ac 4x4 solution. It’s helping to fuel additional demand across a broad array of customers.

During the second quarter, we also launched a new family of discreet 802.11ac WiFi power amplifiers, specifically targeting infrastructure and multimedia applications. These devices augment our existing portfolio of WiFi power apps and FEICs that continue to penetrate the WiFi infrastructure segment and OEMs such as Aruba, that’s Aruba Networks and Ubiquiti Networks.

By delivering an industry-leading combination of high gain, amplifier and linearity, our new power amplifiers maximize data throughput and ensure reliable transmission of HD video. Customer interests for these new power amps are very strong and we expect to ramp in production later this year.

With products that set the standard for performance and integration, specification on leading reference design and robust customer interest, we believe that our WiFi group is well-positioned to contribute growth throughout 2013 and beyond.

Moving to Cellular, as Terry noted, we saw a higher than expected demand for legacy products at Samsung in the final month of the second quarter and entering the third quarter. While this higher demand fueled some of our topline growth during the quarter, it created some headwind in our portfolio of transition with the new ILD-based product.

We believe our rapid response to these unplanned upside helps strengthen our overall relationship with Samsung and we’re pleased to support their strategic needs in this very dynamic market.

Looking ahead, we continue to make excellent progress on design wins at our latest ILD-based 3G WCDMA solution, including ProEfficient and ProEfficient plus. These innovative new products leverage our patented power saving BiFET technology to deliver the world’s highest level of overall efficiency for longer battery life.

Customer demand has been very strong evidence by our positions on the Samsung Galaxy S4 and the S4 Mini, as well as the Huawei Ascend P6. Additional design wins for ProEfficient and ProEfficient plus PAs are now ramping into production this quarter. We believe these battery life maximizing power amplifiers will drive continued revenue growth for our Cellular group throughout 2013.

Turning our attention to the Penta-band, multi-mode power amplifier, we have ramped production shipments for data cards and Hotspots, while building solid sales momentum for automotive and M2M application.

Our Penta-band PAs feature five independent amplifier change that enable operation in 21 different 3G and 4G frequency bands and band classes. This level of space saving integration has been validated by several OEMs. This includes Sierra Wireless and Huawei, which selected Penta-band PA for its new CPE and Hotspot solution.

By delivering differentiated performance and integration advantages, our ProEfficient and Penta-band product families continue to gain traction at top tier OEM customers. We believe that solid design win momentum that we have achieved will fuel Cellular growth sales in the third and fourth quarters.

Our Infrastructure group is laying the foundation for growth by developing new CATV and small-cell solutions to support greater broadband and wireless data use. In the second quarter, we introduced new 12 volt surface mount amplifiers that provide higher gain and output power level, while minimizing overall current consumption. Customer interest is strong as MSOs continue to implement greener systems with lower energy usage that reduces operating expense.

We have also launched our innovative GaN that’s gallium nitride power doubler. This product is the industries first 1.2 gigahertz surface mount line amplifier and the initial member of our new family of solutions optimized for DOCSIS 3.1.

With significantly higher upstream and downstream data rates DOCSIS 3.1 enables next generation video and connectivity services. This leaping capability is expected to drive system upgrades as MSOs challenged fiber-to-home installation.

By helping manufacturers achieve industry-leading performance and reliability in new 1.2 gig equipment, we are enabling MSOs to take full advantage of DOCSIS 3.1. Customer interests for our new DOCSIS 3.1 solutions have been very strong and we believe that we are very well-positioned for this industries transition.

Turning our attention to small-cell, we continue to work closely with leading OEMs and chipset developers. We believe this relationships and our position on top tier reference design position us for growth when that market expand.

As we continue to grow the company, we are committed to pursuing new opportunities that can leverage our competitive advantages and drive long-term revenue growth. For instance, in addition to the products and development for the CATV and small-cell markets, we are investing an innovation new process technology that will enable differentiated products and expand our [SAN] in this higher profitability segment of the business. We look forward to sharing our progress in this exiting area in future earnings calls.

In summary, solid execution of our growth strategy is being demonstrated across all three businesses and we look forward to continue financial improvements in the second half of 2013.

Our WiFi group has achieved exceptional growth and is positioned for continue success, broad penetration of multiple reference designs. Our Cellular group has solid sales momentum with multiple design wins for ProEfficient and Penta-band solution, expanding our WCDMA market share and our Infrastructure group is leading the industry to support the transition to DOCSIS 3.1.

The technology and product innovation that we believe is now outpacing the competition, specification on leading reference designs and deep customer relationships. We expect solid growth into the second half of 2013.

Thank you. And we’ll now open the floor for questions. Christine?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Quinn Bolton from Needham.

Quinn Bolton - Needham

Hi, Ron. Hi, Terry. I apologize I missed couple of the opening comments but was wondering if you could just sort of give us the splits again for wireless and then the buckets within infrastructure and then specifically within the wireless group. How big was the WiFi product?

Terry Gallagher

Okay. So we gave you three separate components, Quinn and WiFi is its own component that was $11.4 million and cellular which excludes WiFi was $18.1 million and then we were $5.1 million in infrastructure.

Quinn Bolton - Needham

Okay. Great. And then obviously that the WiFi has been on a very big ramp, I think predominantly driven by the Samsung Galaxy S4 and Murata business, can you -- as you look in the second half of the year talk about how you see that business diversifying. You talked about some of the 4x4 reference designs, the single -- sorry the single PA products that are getting designed in. Can you just give us some sense of how that revenue stream diversifies into second half?

Ron Michels

Yeah. Hi Quinn, this is Ron. Of course, we see the S4 continuing well into next year. We are winning lots of different opportunities with what we refer to as chip on board which is non-module WiFi business. As I mentioned earlier, we are in the several of the Samsung tablets. So we are gaining market share in the tablet area, some that we can’t mention, but we will see -- we will be hearing more about that in the near future.

I also mentioned that we’re designed into -- we are on a reference design, which we haven’t mentioned previously who it is, but it’s the 4x4 reference design with Marvell. We are -- so those -- that reference design is being sampled to many, many different potential customers. We already have some wins in that area, some of which actually will bring revenue pretty short term.

So basically, the infrastructure side of WiFi, which we’re on basically several of their Broadcom reference designs, we have lots of business there, that hasn’t even yet or come in yet and that will start in Q4 and run very heavily into next year. Any other questions on Wi-Fi?

Quinn Bolton - Needham

No. I think that’s good. I think one just other question on the Cellular and then a couple for Terry. On the Cellular, Ron you talked in the past calls about seeing an opportunity in the low cost or 3G entry market with a ProEfficient line. Just wondering if you could give us an update on that opportunity?

Ron Michels

Yeah. So, we had mentioned that we’re -- and have done a press release earlier on the Samsung Mini. So we are in, I think all of those models but one. And of course, this is significant for ANADIGICS because this is WCDMA business. So we had made a decision a year ago to refocus our R&D activities not giving up CDMA but refocus on WCDMA as well.

So we’ve done that and that’s where these design wins are coming from because these are -- we have multiple design wins. We call the part actually internally one-in two-out, it’s actually is a switch with dual-band power app incorporated. So that’s in the Mini. And there is others that we’ll be announcing shortly, that we can’t talk about just yet but we’re very happy with the penetration that we’re getting there.

Quinn Bolton - Needham

So it sounds like, that’s part of the design win momentum you talked about for ProEfficient?

Ron Michels

Yeah. It’s part of it.

Quinn Bolton - Needham

Okay. Great. And then just for Terry, you talked about the gross margin headwind from higher cost production into Q1, I think it was 600 and changed thousand sort of headwind in the second quarter. I know you haven’t given formal guidance for Q3 but can you -- do you think you get back to sort of an incremental 50% fall through or how -- can you give you give us any more guidance on gross margin? And then my last question just you guys have targeted previously EBITDA breakeven by year end, are you still on track? Thank you.

Terry Gallagher

Got you. So Quinn, 50% fall through, that’s a bit more over an extended period of time. You can have quarters like the one we’ve just put behind us. That’s below that and then commonly that’s whether it’s following a better -- an above average performance or leads to an above average performance.

So I think the 50% drop through is a reasoned placed to be it for a long-term incremental drop through. Looking forward, I think we can -- we’re positioned right now to do better than that going forward. And then in terms of the EBITDA breakeven Q4 with some of infrastructures drivers’ kind of pushing out a little bit and in spite of the progress we’ve made, it’s looking less likely and we would no long expect necessarily to reach Q4 EBITDA breakeven. The important thing however is that the loss shrinks significantly as we’re stepping out there. It’s much lesser concern.

Quinn Bolton - Needham

Okay. Thank you.

Terry Gallagher

Thanks.

Operator

Your next question comes from the line of Paul McWilliams with Next Inning Technology Research.

Paul McWilliams - Next Inning Technology Research

Hi guys. Congratulations on the growth and thank you for taking my question. The most critical one was just answered. How much revenue do you think is going to take, given the mix that you envision to hit that EBITDA breakeven?

Terry Gallagher

Paul, this is Terry and thank you for the call and the question. So with EBITDA breakeven there is a monetary level and when we reach there on a time scale is subject to debate. I certainly expect the cost over to be happening at least some would say first half of next year.

But and we had talked last quarter about kind of $45 million revenue level and a gross profit 20 plus percent. We made the improvements on the OpEx line that’s enabling those numbers to still work.

If infrastructure pushes out, you need a little bit more revenue. If we get gains a little sooner, then we’re short of that $45 million and we can still do it. But I think $45 million with -- maybe a little bit more if infrastructures are up, it continues to push out. That’s less at our command as well as the command of the folks putting that capital into place to kind of build out the networks and ready up for getting those pipes a little bit bigger, so that the data can flow. It’s not an if, it’s a win. But I hope that’s some help to you in terms of monetary level as well as the primary moving pieces.

Paul McWilliams - Next Inning Technology Research

It is. On the infrastructure, I’m fairly familiar with those small cells and the CCAP deployment. Are those the two primary moving pieces in there that you are referring to?

Ron Michels

The primary pieces that we are referring to Paul are CATV and infrastructure yes and wireless infrastructure.

Paul McWilliams - Next Inning Technology Research

So the small cell side of the wireless.

Ron Michels

Yeah. So we -- that’s correct, when we -- when Terry refers to infrastructure, he is referring to those two product areas.

Paul McWilliams - Next Inning Technology Research

Okay. Now in the CATV, is the transition to the converged cable access platform or CCAP one of the gating factors there that you are looking at, that’s where we get the DOCSIS 3.1, I believe.

Ron Michels

Yeah and no. Certainly, yeah from the standpoint of, as part of the technology transfer. No from the standpoint that systems need to get ready before they do anything. And so we expect that they will start installing amplifiers in the transmission system sometime in either late Q1 or early Q2.

So within the cable industry, this is regarded as a very big deal. There hasn’t been a change in DOCSIS that is required in the transmission system to make a change in a long time. So this is very good for cable TV infrastructure equipment suppliers. So I think one of the things that’s happening is things are a little slower this year because the outlay of capital equipment next year is going to have to be larger.

Paul McWilliams - Next Inning Technology Research

Agreed. I’ve been tracking the CCAP, which is connected to that. Absolutely agree with your perception there and the small cell, so both understandable. Can you help me a little bit on Q3 gross profit, non-GAAP gross profit, what can I envision there, even if you have to bracket it fairly wide?

Terry Gallagher

Right. So we gave revenue guidance, but we’re not given bottom line guidance or profit guidance. But I think in answering Quinn’s call about the drop down or incremental GP, I think you can piece that together and I would anticipate it being north of a 50% drop through and where we just improved by 450 basis points, that’s kind of the steps along the line that we’d see taken.

Paul McWilliams - Next Inning Technology Research

So maybe I envision something in low double-digits?

Terry Gallagher

You’re smart guy. I wouldn’t necessarily -- fight to the death on that one at all.

Paul McWilliams - Next Inning Technology Research

Okay. Very good. Again, congratulations and I just want to sort of look at that Tail 3, nice little product and actually got reception in the best buying network when I was outside the building. So, pretty good Wi-Fi in that. Good bye.

Terry Gallagher

Thank you, Paul.

Operator

Your next question comes from the line of Jason Smith with Craig-Hallum.

Jason Smith - Craig-Hallum

Hey, guys. Thanks for taking my question and congratulations on the solid results. Most of my questions have been answered. But given that this is uttering for you guys given quarterly guidance. I am wondering what kind of backlog coverage you would need to kind of hit the midpoint of that range?

Terry Gallagher

Right, Jason. So, thanks for your call and your question. We’re ahead of historical fill rates to the mid point or to the guidance we gave.

Jason Smith - Craig-Hallum

Okay. And given you prepared remarks, are we to take it that most of the growth sequentially will be driven by the WiFi segment?

Terry Gallagher

No. It’s -- cellular is going to be the large kicker this quarter really all of it.

Jason Smith - Craig-Hallum

Okay. And then finally, Ron if you could talk about what you guys are doing on the M2M side and some of the opportunities both in the back half of this year and then looking out to 2014?

Ron Michels

Yeah. Most of the work we are doing with M2M is with our Penta-band power amplifier. That’s a five band amplifier that’s got 3G and 4G. So we are getting -- that part is being designed into a several automotive 3G, 4G automotive radio manufacturer. That’s probably the biggest piece of business that we are going to see.

I think we are probably modeling this to be a bit 5% or 10% of our cellular. If we include it in the cellular, the work is done in the cellular business unit. If I just -- to simplify things say its part of that business, it could be 5% or 10% of the size of that business today.

We have by the way extremely high profitability. So, we are looking forward to that happening and we’re getting lots of design wins from that part. There is others as well with some of our ProEfficient power amplifiers, also there will be some WiFi opportunities there as well with those quantities are kind of small compared to other opportunities in WiFi.

Jason Smith - Craig-Hallum

Okay. That helps. Thanks guys.

Ron Michels

You’re welcome.

Terry Gallagher

Thanks, Jason.

Operator

There are no further questions.

Ron Michels

Great. Thank you very much everybody.

Terry Gallagher

Look forward to speaking with you in three months.

Ron Michels

Bye-bye.

Operator

This concludes today’s conference call. You may now disconnect.

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