ANADIGICS, Inc. Q3 2009 Earnings Call Transcript

Oct.27.09 | About: ANADIGICS, Inc. (ANAD)

ANADIGICS, Inc. (NASDAQ:ANAD)

Q3 2009 Earnings Call Transcript

October 27, 2009 5:00 pm ET

Executives

Tom Shields – EVP and CFO

Mario Rivas – President and CEO

Analysts

Anthony Stoss – Craig-Hallum

Colin Denman – D.A. Davidson

Neil Wagner – Stephens, Inc.

John Pitzer – Credit Suisse

Michael Alexander – Charter Equity

Operator

Good afternoon. My name is Lu Ann [ph] and I will be your conference operator today. At this time, I would like to welcome everyone to the ANADIGICS third 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 conference over to Mr. Tom Shields, Executive Vice President and CFO. Please go ahead, sir.

Tom Shields

Thank you, operator. Good evening, everyone, and welcome to the ANADIGICS third 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 now like to turn the call over to Mario for his remarks.

Mario Rivas

Thank you, Tom. And good evening, everyone. Let me begin with a brief overview of the financial results for the third quarter and then I’ll provide an update on our strategic business initiatives and future growth opportunities. I am pleased to report that revenue increased approximately 17% sequentially to $36.7 million, soundly beating our guidance of a 5% to 10% increase.

We exceeded our guidance primarily due to an early than expected recovery in broadband with renewed strength in set-top boxes and in wireless LAN, contributing to a 24% sequential increase in our broadband products. Also contributing to our revenue growth in the quarter was a continued increase in our 3G wireless business, growing 14% over the second quarter. In addition to LG and Samsung remaining in our list of 10% or greater customers, they were notably joined this quarter by RIM. Revenue for RIM experienced strong growth in the quarter primarily due to additional new products such as the Blackberry 2, Bold 2 and Storm 2.

Our non-GAAP EPS was a loss of $0.10 compared with our private guidance of a loss of $0.15 to $0.16 per share. The improvement in our net loss resulted from our higher than expected revenue combined with our increased utilization of our Warren, New Jersey fab. As such, I am pleased to report that we actually exceeded our scheduled targeted utilization rate by 50% in the quarter, as we reached 55%, which contributed to better than expected gross margins.

I will also like to take a moment on introducing the new member of my management team, Greg White. Greg joined us as the Senior Vice President, RF Products Group, replacing Dr. Ali Khatibzadeh, who has resigned from the company effective November 6. Greg joined us from AMD, where he was Corporate Vice President and General Manager for the Desktop and Embedded Division.

Greg brings a wealth of technology and general management experience to ANADIGICS. He has a strong track record, driving business growth, technology innovation, and executive leadership, having managed successful projects and multi-billion dollar businesses for large technology companies, including AMD, Freescale Semiconductors, and Motorola.

Turning to manufacturing operations, I am proud to report that in addition to increasing utilization during the quarter, our manufacturing team excelled by simultaneously achieving high yields and lower cycle times. We also recently announced a strategic relationship with WIN Semiconductors, the largest pure-play gallium arsenide foundry. This foundry relationship forms the cornerstone of our hybrid manufacturing strategy, which provides for a mix of internal and external manufacturing capabilities.

The core purpose of forming this relationship with WIN was to position ANADIGICS to meet future demand growth. Since this engagement requires time to qualify processes and prepare for the next ramp of growth, I believe that now is the best time to initiate this process. In fact, we have already received favorable responses from key customers stating that the relationship with WIN helps to reinforce their confidence in our future production capabilities, a key step in further expanding market share of our customers.

Now, let me talk a little about pursuing new design win opportunities and the new products we will be launching in Q4 2009 and Q1 2010. Through 2009, we have been accelerating our product development activities in all of our target market areas, such as wireless, WiFi, WiMAX and cable TV. ANADIGICS has always expanded market share through differentiated products based on compelling performance, and we currently have an unprecedented pipeline of new products with advanced feature sets that are scheduled for market release over the next six months. These products set the stage for our growth in 2010 and beyond.

In wireless, we are rolling our new families of power amplifiers for wideband CDMA, HSPA and LTE for cellular handsets with the lead products covering the dominant cellular frequencies in use worldwide. I am very enthusiastic about our new family of dual-band PAs, which are the smallest dual-band PAs with integrated couplers in the industry, and have seen great deal of excitement from our customers.

These PAs are an enhanced version of our 3 x 5 HELP3 family of wideband CDMA, HSPA and CDMA/EVDO Rev A products and offer great features such as integrated RF coupler and improve efficiency at low power levels. These are the kind of products mobile phone manufacturers need to design high performance handsets that require compact phone board layouts.

Supporting both linear and polar modulation schemes, our new EDGE products incorporate such advanced features as battery voltage striking and integrated power control in order to assure spectral emissions, mid-system requirements at low-battery voltage conditions. One of these devices also uses a novel architecture, which brings HELP performance advantages to our EDGE product family, maximizing power efficiency at low power levels.

Early customer feedback on out LTE power amplifiers has been extremely positive. As the market develops and handset manufacturers begin to release LTE handsets, we are confident in the success of our products. With devices available for all the leading cellular frequency bands, ANADIGICS 3G and 4G power amplifiers set the standard for wireless performance.

We are expanding our new family of cable TV line amplifiers in industry standard hybrid packages, multiple products to support both 870 megahertz and 1 gigahertz bandwidth systems. This family of amplifiers provides the highest levels of linearity and reliability and enable the highest quality video.

The hybrid packaging allows manufacturers to rapidly assimilate ANADIGICS solutions into existing cable TV distribution nodes and line extenders. We will also be offering new cable TV splitter products for advanced set-top box, DOCSIS 3.0 cable modem and home gateway applications.

ANADIGICS cable TV splitters address a challenge of delivering high quality signals to multiple tuners and cable TV subscriber equipment and support consumer demand for high data rate, multimedia entertainment and connectivity. Continuing our leadership in the growing WiMAX market, we will also be releasing new power amplifiers for mobile WiMAX applications, expanding our coverage of the WiMAX frequency bands. These new broadband designs provide industry-leading linearity and power efficiency, supporting the full 2.5 and 3.5 gigahertz bands used by WiMAX networks worldwide.

And then in WiFi, we will be offering new highly integrated, high performance front-end module and front-end IC products designed for the notebook, netbook, PCs and wireless handset market segments. These designs incorporate such features as transmit power amplifiers, receive LNAs, transmit/receive RF switches with Bluetooth path, and 2.4 and 5 gigahertz multi-band support into single, low profile packages.

The unparalleled combination of features and performance is ideal for size constrained, performance-driven WiFi and WiMAX/WiFi convergent solutions. This aggressive expansion of our product portfolio is an indicator of the growing business opportunities for ANADIGICS’ highly differentiated best-in-class products. We are hopeful that the large number of new products being introduced in each of our target markets through Q4 ’09 and Q1 ’10 will lead to significant design wins, resulting in increased growth opportunities for 2010 and beyond.

I will now like to turn it over to Tom for an update on our financials.

Tom Shields

Thank you, Mario. As Mario indicated, we reported third quarter revenue of $36.7 million, an increase of approximately 17%. The sequential percentage improvement versus our prior revenue guidance of 5% to 10% for the third quarter resulted from stronger than anticipated revenue in our cable set-top box products, which increased 33% to $3.9 million, and higher revenue in wireless LAN products, which increased 65% to $3 million.

Total broadband revenue in the third quarter was $10.3 million and increased 24% sequentially. Wireless revenue in the third quarter increased to $26.4 million or 14%. The GAAP loss per share for the third quarter was $0.21, which included charges related to a settlement of a customer dispute effective October 26th, resulting in a charge of $3.9 million and non-cash stock compensation of $2.9 million. And we also recorded in the third quarter a tax refund in the amount of $300,000.

The settlement mentioned earlier includes an upfront cash payment of $1.1 million, followed by six equal cash payments of $500,000 over the next six quarters commencing March 31, 2010 and ending June 30, 2010. When excluding the settlement charge and non-cash stock compensation, the non-GAAP loss per share for the third quarter was $0.10 compared with our prior guidance of $0.15 to $0.16.

Our non-GAAP gross margin for the third quarter was $9 million or 24.4%, which improved significantly over the 10.7% reported last quarter, primarily due to the increased revenue, higher factory utilization, and improved yields. Operating expenses increased by $600,000 to $15 million from last quarter on higher R&D cost attributable to new products.

Our cash balance at October 3rd was $123.4 million, down $5 million from the last quarter. The $5 million used in the quarter was $2 million for capital expenditures, approximately $1.2 million from the net P&L loss, and the remainder in working capital.

Turning to the business outlook for the fourth quarter of 2009, we are guiding to an expected sequential increase in revenue 5% to 8% and a non-GAAP loss per share of $0.08 to $0.10. We are currently booked to the low end of guidance, and on a GAAP basis, we are expecting a loss per share of $0.16 to $0.18, which includes non-cash stock compensation and a management separation charge.

Due to two-week shutdown currently planned for year-end, we anticipate factory utilization to be lower than that achieved in the third quarter, which will negatively impact gross margins on a sequential basis in the quarter.

Operator, I’d like to now open the lines for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Your first question is from the line of Anthony Stoss with Craig-Hallum.

Anthony Stoss – Craig-Hallum

Hi, guys, good quarter, good guide. If you wouldn’t mind talking about what kind of visibility you may have going into Q1, Tom or Mario. Also, has anything changed in terms of your expectations on your quarterly revenue number for breakeven, you may want to update us on that? Also, would you expect the cable strength and the broadband strength continue into Q4?

Mario Rivas

Yes, let’s talk Q4. Yes, we think that the strength in the cable and WiFi side of the business will continue into Q4. And good try on the Q1 guidance, we will not give any. It’s very difficult to be precise in this particular case. And you also asked – what was the other question?

Anthony Stoss – Craig-Hallum

Breakeven.

Mario Rivas

Breakeven point, yes. Our target continues to be the low 40s to be breakeven on cash indeed.

Anthony Stoss – Craig-Hallum

Okay. I wasn’t looking for numerical guidance for Q1, just any thought – early glimpse of it looking better than seasonal and such. Also, if you wouldn’t mind, one of your competitors talked about order cuts recently at Samsung, love to hear. Have you seen something similar for Q4?

Mario Rivas

Are we seeing some inventory adjustment? The answer is yes, we have. And we are quite proud of our management team performance that in spite of that, we’re guiding up for the quarter. So – yes, we have, and we are still guiding up.

Anthony Stoss – Craig-Hallum

Okay, thanks.

Operator

Your next question is from the line of Aalok Shah with D.A. Davidson.

Colin Denman – D.A. Davidson

Hi, guys. This is Colin Denman for Aalok. I just had a question around the broadband strength you saw. It looks like that was principally driven by the WiFi business, and I was wondering if you could give us any type of granularity into what you’re seeing for the different segments and what the cable set-top box would look like next quarter. Some customers have noted that it’s been picking up a little bit. I was wondering if you had been seeing that as well.

Mario Rivas

Yes. I would say that your remark is not entirely accurate. We said we saw strength in the cable set-top box and the WiFi market, not just WiFi. And we foresee continued growth and strength in Q4 in both segments.

Colin Denman – D.A. Davidson

Okay, thank you. And I just have a couple follow-ups. Cash position, I think you mentioned on the last call that your goal was to exit Q4 with at least $80 million, given the converts coming during the quarter. Do you think that is still an achievable goal?

Tom Shields

That’s correct. The next cash for Q3 was $85.4 million after the pay-down of the notes. So we still remain optimistic relative to $80 million and above for Q4. That is correct.

Colin Denman – D.A. Davidson

Okay, thank you. And just one question on handset side, with the WCDMA Palm Pre shipping in Europe and coming to the UK, how do you see that relationship going forward? And I was wondering – do you think it’s possible they could become a 10% customer next year?

Mario Rivas

No, I will not predict 2010 at all. We are excited about the Palm Pre introduction and the continued enthusiasm that generates from the field. So we are excited, and we are ready to support Palm as they ramp up their volumes.

Colin Denman – D.A. Davidson

All right, guys. That’s all for me. Thank you.

Operator

Your next question is from the line of Neil Wagner [ph] with Stephens Inc.

Neil Wagner – Stephens, Inc.

Hey, guys. How should we be thinking about the sustainability of operating expenses at current levels, given the cautious taking out of the business and the potential for future revenue growth at current levels?

Mario Rivas

Yes. I will say no. When we first spoke after Q1, both Tom and I stated we wanted to size the business to a cash breakeven in the low-40s. We said low-40s. And we were not going to do it at the expense of our future growth. And we protected the R&D line to the best of our abilities. So while an introduction of new products might have a slight increase on operational expenses, we are perfectly capable in producing almost three complete families of new products at the present level of operational expense. So we feel very confident that we can continue to do that going forward.

Neil Wagner – Stephens, Inc.

Okay. And then we’ve heard a lot of your competitors talking about opportunities in the smart (inaudible) market. Is this a space you guys are targeting at all at this point?

Mario Rivas

Yes. We are working with several of the system providers. And it’s a large opportunity that you stated everybody seems to have identified at the same time. So, as long as it uses a path and uses the mobile spectrum, we are interested.

Neil Wagner – Stephens, Inc.

Okay. And I guess one last question. A lot has been made about the importance of suppliers being designed and the Qualcomm reference design. And your opinion – how important is being on the Qualcomm reference design in the eyes of handset OEMs today?

Mario Rivas

I think it’s very important. And I will even state the claim that we have leadership in performance in that platform. So, for me, it’s doubly important. You still have to make a sale with each OEM. But if I could just certify [ph] and given the bill of materials, it’s key. It’s how you get in the door.

Tom Shields

This is Tom. And as you know, we’ve held a longstanding relationship with Qualcomm, and we are very proud of the fact that looking out to 2010 and beyond, we have a very high significant level of new designs that we are going to be in. So we are very strong related to the relationship.

Neil Wagner – Stephens, Inc.

Okay. Thanks, guys. Good luck on the quarter.

Mario Rivas

Thank you.

Operator

Your next question is from the line of John Pitzer with Credit Suisse.

John Pitzer – Credit Suisse

Yes, guys, thanks for taking the question. Mario, you mentioned that the cable and WiFi strength should continue into Q4. You also mentioned that you’ve seen some inventory adjustment with three handset vendors. I guess when you look at the wireless business sequentially into Q4, are we still likely to see sequential growth? And I guess if you exclude what’s going on with RIM, would that still be true?

Mario Rivas

You ended up making a very confusing question. So let me answer it in general. I will say Q3 to Q4 we will see flat wireless sales, perhaps a slight tick-up. Based on the adjustments that we have seen in some of the inventories, we consider that a very good proof that having a diversified set of customers that’s helping us here. So overall, I feel very good about the direction the business is taking and we hope to enter 2010 with new products into new families or new sockets to continue our growth.

John Pitzer – Credit Suisse

And then, Mario, when you look at the growth in Q3 and then the expected continued growth in Q4, can you help me understand what’s the market versus you guys regaining some share?

Mario Rivas

Well, I will say that it’s – there is a segment that it’s us regaining confidence and customers rewarding us with incremental share and in some cases like in the broadband, set-top boxes that the market is coming back because we never lost share there. So it’s a combination of both. I’m pretty upbeat about the relationship with customers. It is much better than what it was six months ago. The projections going forward in their long-term planning makes me very confident that we are part of their platforms in the long run. And as we have performed well over the last six months and we continued to gain their business, they will trust us with more of their business and we will get more market share. So it’s a combination of both.

John Pitzer – Credit Suisse

And then guys, my last question maybe for Tom. Can you help us start to think about where the quarterly breakeven revenue level is and gross margin level is, and sort of what kind of utilization rates you think you would be needing to run at to hit those targets?

Tom Shields

For breakeven EBITDA, we have commented that low-40s is our target, and mid-to-high 40s is our breakeven EPS.

John Pitzer – Credit Suisse

And Tom, would that be – assuming sort of like a 30% type gross margin for the breakeven EPS?

Tom Shields

Well, historically, we’ve been able to achieve roughly about 50% dropdown to gross margin based upon the revenue increase. So when you look at the revenue we were at for Q3 and the guidance for Q4, and if you were to model the midpoint of mid-40 to high-40s, you can self-calculate what the gross margin would look like.

John Pitzer – Credit Suisse

All right. That’s helpful. Thanks, guys.

Mario Rivas

All right.

Operator

(Operator instructions) Your next question is from the line of Michael Alexander with Charter Equity.

Michael Alexander – Charter Equity

Hi, thanks for taking my question. When you talk about the foundry arrangement that you have with WIN, what revenue level are you going to start outsourcing, or is it more product dependent?

Mario Rivas

I think it’s both. It’s – I feel that we have the opportunity to shift at the level of $80 million a quarter from our present facility depending on mix. And we expect that we’re going to continue to build market share and growth. So to get additional capacity, we will use WIN to flex our availability of wafers. So I have estimated it will take us 12 months to do a good job of moving some of our designs into their process and getting customer to approve the products. That will foresee Q3 next year will be when we leverage them more. And it doesn’t necessarily mean that I’m predicting a 100% capacity utilization for us, because when you enter in this kind of relationships, you might have to be flexible and maintain a certain number of your designs with the foundry.

Michael Alexander – Charter Equity

Do you have a commitment to use the foundry for a certain amount or –?

Mario Rivas

No, we don’t. We do not. They have a commitment on the number of wafers that they will make available to us, but we don’t have a commitment to use any of them.

Michael Alexander – Charter Equity

And then I wondered if you could also talk about the geographical breakdown in your sales? And maybe especially China, last quarter you mentioned ZTE was in the high-single digits to customer. Has that stayed the same? Have there been any other trends in China?

Tom Shields

This is Tom. It’s been pretty consistent on a quarterly basis. Basically we have over 60% of our revenue that’s achieved are shipped into Asia.

Mario Rivas

And we’ll emphasize, of the four main mobile handset customers, three of them are in Asia with RIM being in North America. When you are shipping to the Korea January manufacturers, you are shipping a lot into China. Interestingly enough, on ZTE, you’re also shipping quite a bit into Europe, even though our delivery is in Asia.

Michael Alexander – Charter Equity

Got you. And then on this customer dispute, can you give anymore detail than what you have? Is this related to the events happened in mid-2008?

Mario Rivas

We will not comment on the settlement.

Michael Alexander – Charter Equity

Okay. Thank you very much.

Operator

There are no further questions at this time.

Mario Rivas

Very well. Then, thank you very much for your questions and your attendance. In summary, our third quarter results and our guidance for the fourth quarter are evidence of our successful execution of our stated business initiatives. And they bring us closer to our goal of achieving profitable growth. With an unprecedented number of new products scheduled for release over the next two quarters, we believe this stage is actively being set for continued growth in the coming year. Once again, thank you for your time today and your continued support for ANADIGICS. Good night.

Operator

Thank you all for participating in today’s conference call. You may now disconnect.

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