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ANADIGICS, Inc. (NASDAQ:ANAD)

Q1 2014 Earnings Call

April 30, 2014 05:00 PM ET

Executives

Terry Gallagher – VP and CFO

Ron Michels – Chairman and CEO

Analysts

Jeanette Omdalen – Craig Hallum Capital

Quinn Bolton – Needham & Company

Operator

Good afternoon, my name is Shyra and I'll be your conference operator today. At this time I would like to welcome everyone to the ANADIGICS' First Quarter 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. Mr. Terry Gallagher, Vice President and CFO. You may begin your conference.

Terry Gallagher

Thank you, Jeremy. Good afternoon, everyone. Welcome to ANADIGICS' first quarter 2014 conference call. With me on call 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 our growth strategy.

Before I begin I would like to remind you that in light of the SECs fair disclosure rules. We are limited in responding to enquiries in a non-public forum. Therefore we 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 option rate securities movements, restructuring charges and other specifically identified non-routine items referenced in our release. The 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 will now begin with our financial discussion for the impact of above seasonal decline in revenue was partly offset by lower expenses in improvements and mix resulting in our $0.11 non-GAAP law.

For the first quarter, our revenue totaled $23.3 million, a 35.9% or $13 million sequential decrease in line with prior guidance well down 11.8% on the year ago quarter. Q1 revenue for cellular was $12.8 million, a 23.4% decline. Wi-Fi revenues in Q1 were $5.1 million, a 64.9% sequential decrease and infrastructure revenues were $5.4 million, up 4.5% sequentially.

In the quarter, we had two greater than 10% customer Samsung and Huawei and another three in the 5% to 10% category. For the first quarter, gross profit was $2.55 million and gross margin was 10.9% in line with our expectation.

In spite of sequentially lower revenue in factor absorption, our improved product mix helped to enable the double-digit gross margin. Compared to a year ago quarter, gross margin improved by over 1,020 basis points.

We are improving our operating leverage as we continue our migration to the lower cost ILD process. The ILD process was used for approximately 60% applicable production in Q1 and we expect this percentage to rise during Q2.

We are pleased with the transition we are making and look forward to further operational leverage in 2014. Sequentially, first quarter research and development expenses decreased by 9% to $8.0 million.

Selling and administrative expenses declined by 17% to $4.1 million. The aggregate $12.1 million in operating expenses represents, a 12% improvement exceeding the goal we'd outlined in our Q4 call.

The net loss for the quarter was $9.6 million or $0.11 per share in line with consensus. Our EBITDA loss was $6.25 million against a year ago, this represents roughly $4.9 million improvement or 45% reduction on lower revenue.

We believe that we have the company well positioned, deliver leverage profit improvement as revenues rise. Moving to the balance sheet to finish the quarter with cash and marketable securities of $14.1 million.

During the quarter, in addition to the small CapEx and EBITDA losses. We funded a majority of the $1.4 million Q1 restructuring while other net working increased by $2 million. Principally related to annual insurance payments approximate $1 million increase in inventory.

Accounts receivable was $12.4 million or 47 days. Inventory stood at $22.5 million roughly three months COGS on the lower revenue rate. ANADIGICS is committed to responding to new product [order]. To responding as new products orders ramp.

Depreciation expense was $3.3 million and capacity utilization in the quarter was approximately 45% to 50%. Capital investment was $400,000 in the quarter and we expect it to be in significant over the balance of 2014. In our last earnings calls, we discussed our plans to reduce annualized expenses by more than $10 million.

With greater than $2 million savings captured in the first quarter of 2014, we believe are on track to exceed our goal this year. For the second quarter, we anticipate sequential revenue growth of approximately 8% to 12%. Our revenue growth and improved product mix should enable sequential gross margin expansion in the range of 250 basis to 550 basis points in the quarter.

Concurrent with this revenue in margin improvement, we continue to manage expenses carefully and expect to further reduction in operating expenses by over 5%. I'd now like to turn the call over to Ron for more on our products and overall strategy.

Ron Michels

Thank you, Terry and good afternoon everyone. 2014 represents a pivotal year for ANADIGICS. While we experience seasonality in the first quarter, primarily in our cellular and Wi-Fi businesses. We also leave the groundwork for future success. Specifically, we advanced new differentiated solutions to our product development pipeline continue to build and strengthen key OEM and chipset partner relationships and reduce our overall cost structure and improved efficiencies.

We believe that our business has moved past the turning point and is on a solid path to achieve EBITDA objectives later this year. I'd like now to highlight our performance and accomplishments during the quarter as well as outline the course for charting.

Turning our attention first to Wi-Fi while we experience sharp seasonality and inventory overhanging the first quarter. This market represents key growth driver as high speed Wi-Fi connectivity for [indiscernible] across an expanding array of applications.

Our Wi-Fi solution standout is critical enablers by providing performance and integration advantages to manufacturers. During the first quarter, we announced several new mobile devices that are powered by our front-end ICs including the Huawei P6S, Samsung Galaxy Tab Pro.

These compacts highly integrated solutions are ideal for smartphones and tablets. Our [Ao2.11ATFEI] series, not only save valuable board space but also extend battery life and extend high and extend high throughput connectivity.

These advantages have been validated by design wins and high volume production including a new flagship smartphone from a leading Chinese OEM that is expected to launch next month. Overall in the quarter, we won 10 new sockets across smartphones and tablets at three major OEMs that we expect would drive growth in the second half.

Complementing our portfolio over [FEI] series for mobile applications is our newest generations of power amplifiers for infrastructure products to 11 AT and N, which is helping to drive profitable growth in this space for ANADIGICS. Our high performance discrete PA's uniquely address challenges in Wi-Fi infrastructure and multimedia applications including access points, routers, modems, set top boxes and Smart TV's.

Specifically they offer exceptional linearity, gaming, output power. A combination of which enables ultra throughput at extended ranges. These solutions also deliver industry leading efficiency and durable performance. As our customers’ infrastructure products become more complex with additional screen from MIMO, dual band, dual concurrent operation, you're benefiting than two ways.

First, we add a complexity corresponds to increased power amplifier content in each box. Second, it creates a great opportunity for us to help our customer solve design challenges. As I seek to optimize electrical and [thermal] operation.

Recently, we expanded our power amplifier product family in response to customer demand. In fact, this quarter we are shipping production volumes of our latest infrastructure power amplifiers and support a four new platforms and have three additional design wins that we expect will ramp in the third quarter.

Furthermore, we are extremely pleased with the progress we've been making with next generation Wi-Fi infrastructure solutions that are in development and already receiving strong pull by customers in reference design partners alike.

Turning our attention to cellular, this also represents a key growth driver as the industry transitions to 3G and 4G data services especially China and emerging markets. The transition is being fueled by a rapid growth in wireless data use. They're leveraging this trend by segmenting the market, with differentiated solutions while closely collaborating with OEMs in a wide variety of reference designed partner.

First in the quarter, we achieved small design win traction with our ProFicient and ProVantage solutions. These product families allow us to target market segments based on performance and value ensuring that manufacturers are able to select the right product for their individual platform.

In fact, most of our customers are using products from both families and different models and variance. It amplifies Wi-Fi to Samsung Galaxy S5, which uses both ProFicient and ProVantage solutions. We now have more than 15 new design wins that variety of OEM's. These include Samsung, Huawei, [indiscernible] and Coolpad six of these design wins for our recently launched AWT6530 ProVantage quad-band power amplifier that is now shipping in production volume.

Multiple customers have selected this quad-band solution to enable wireless connectivity in a wide variety of application. This includes data cards, hotspots and smartphone. A personal quad-band product is compatible with leading chip sets acquirers including Mediatek, HiSilicon and Qualcomm.

Within our multiband power amplifier family, we continue to win new sockets with our Pentaband solution. Manufacturers are selecting this product for its high level of integration and we expect increased production volume to automotive and end-to-end applications.

Our strong traction with ProFicient, ProVantage and Pentaband solutions is helping us achieve our goal but re-establishing leadership in CDMA and increasing our WCDMA in LTE share especially in fast growing markets such as China.

Let's turn now to our infrastructure segment. On the wireline broadband side of this business. Our value proposition is simple, we offer a diverse portfolio with high performance, forward path, return path and heading solutions backed by [additional] application support. This enables our customers and partners to deliver industry leading products to the market faster.

As customers ramp to support MSO build outs and infrastructure upgrade. We are also securing new socket and gaining market share. In fact, we have more than 10 design wins moving into the second quarter and expect this demand to drive growth throughout the year. We also remain at the forefront of wireline broadband technology launching the industry's first fastest 3.1 line amplifier family and aggressively expanding this portfolio.

Our goal is to lead the transition to DOCSIS 3.1 which will MSO's expand their offering and is expected to be a catalyst for greater infrastructure spending later this year and into 2015. On the wireless infrastructure side of the business. The small-cell market continues to ramp. Our power amplifier is delivering industry leading combination of performance and integration.

This product family offers the highest output power linearity and efficiency in the class enabling compact, high throughput devices that provide and economical fact for carriers to expand broadband network coverage.

We continue to work closely with leading chip set developers announced classified on six reference designs and ramping productions and supportive more than 50 new platforms. Moving forward we expect to grow small-cell sales as adoption accelerates and we believe that our products will continue to leave this budding market.

In addition to our product development activities, we are also planning investing R&D resources in an wafer process technology that leverages our manufacturing capability and enable expansion into the new markets.

This process technology offered as a foundry service provides greater scalability, higher performance and increased value in the production of the VCSEL lasers. These lasers can enable motion capture and sensing capabilities in the broad set of high volume applications ranging from smartphones to gaming devices.

Initial customer engagements are strong and we look forward to expanding this exciting opportunity. Raising the top line is only part of our business strategy. This separates foundation for growth and profitability. We continue to focus on achieve greater efficiency across all aspects of our business.

We are managing our product portfolios to achieve a more balance across within our three business units. This is a more profitable balance across all three of the business groups. This includes focusing more refuel sources on growing our Wi-Fi infrastructure business and tuning two aggressively transition cellular products to our proven cost effective ILD process and expanding our footprint in wireless and small-cell infrastructure.

We also continue to streamline our operations from supply chain management and manufacturing efficiencies. Operational excellence is a critical component to ensure greater leverage as we grow our business. In summary, I'm very pleased with the progress we are making this year.

We have achieved strong design win traction with our Wi-Fi, cellular and infrastructure solutions which are starting to ramp in the current quarter and are anticipated to accelerate in the second half of the year and we've taken steps to continue improving our efficiencies enable us to focus on profitable growth. Thank you. We will now open up the floor for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Anthony Stoss with Craig Hallum Capital.

Jeanette Omdalen – Craig Hallum Capital

Hi, guys. Jeanette Omdalen for Anthony Stoss. Say on the Wi-Fi signal, in previous quarters I believe you talked about seeing more growths on the infrastructure side of your business versus the mobile side, could you talk a little bit more about product mix here? How do you see the split this quarter, plus going into 2014?

Ron Michels

Yes, that's a good question. So basically our split in Q2. We think is 28%-72% or 30%-70% between mobile and infrastructure. As we move forward, we see that split changing to 40%-60% split as we move further into the year. So that will be another 10% increase in the ratio between mobile and infrastructure.

Of course the infrastructure side of it is grown.

Jeanette Omdalen – Craig Hallum Capital

Great and then ASP is pulling on the Wi-Fi side both on the infrastructure and the mobile side?

Ron Michels

What was the question?

Jeanette Omdalen – Craig Hallum Capital

How do you see ASP's is holding up on the Wi-Fi products both infrastructure and mobile?

Ron Michels

I say that they're holding up well.

Jeanette Omdalen – Craig Hallum Capital

Well trending roughly flat, you would say?

Ron Michels

I would say, it's more of the usual reduction we see quarterly, but I would say it's well behaved.

Jeanette Omdalen – Craig Hallum Capital

Perfect and then on the infrastructure side. Any particular geographies in which you're seeing the fastest growth?

Ron Michels

No, actually there's no particular geography. It's pretty much worldwide.

Jeanette Omdalen – Craig Hallum Capital

Perfect, thanks for taking my question.

Ron Michels

You're welcome. Thank you.

Operator

Your next question comes from the line of Quinn Bolton with Needham & Company

Quinn Bolton – Needham & Company

Couple of questions. First wanted to talk on the cellular business, obviously lots going on in the China or emerging markets both the TD-LTE and then also kind of 2G converting up to 3G. You guys have a -- sounds like a number of design wins and products that sort of target that segment and kind of like you're in various stages of design wins.

I'm wondering, can you sort of quantify or give us some sense? How much is the China or emerging markets of your cellular business today and how healthy is that ramp into the second half the year because it seems like there is some good opportunity there?

Ron Michels

Yes, so today it's a little less than a half, I think of our business and I think that by the end of the year. We probably will see that to be more like 45% to 65%. So 45% today probably 65% by the end of the year.

Quinn Bolton – Needham & Company

Okay and then it was obviously emerging markets that include the business you're doing at Samsung and Huawei or is that?

Ron Michels

So the way I could find that is, the 45% is how much of the business is coming from vendors in China. Now that's not necessarily phones that are sold in China. I think about of the guys we are looking at in China, which is a pretty impressive list. You know guys like Huawei, ZTE, Coolpad, TCL a large list of customers example.

I think about half of those phones are not sold in China, they're sold worldwide but I'm referring the size of market in China itself, the people we sell to which will go 45% to 65%.

Quinn Bolton – Needham & Company

Got it. So the Chinese manufacturers regardless of in geography. Is it fairly well diversified between [QRD] and Mediatek. Are you more dependent on one day stand partnership or another in that segment?

Ron Michels

I would say at the moment, we're probably we have a mix. I'd say as we move forward with time. We will bringing on some chips that partners that we are not selling, that we are not influenced with today, but we are pretty working with Mediatek, HiSilicon and Spectrum and Qualcomm. We're working everybody.

Quinn Bolton – Needham & Company

Okay, great and then just shifting to the cash position. Terry, looks like you've got a fair amount of cash tied up in accounts receivable and particularly inventories. Can you give us some sense looks like you've got some room use the balance sheet over the next couple of quarters as a source of cash but can you give us some thoughts on that opportunity?

Terry Gallagher

Sure, Quinn and thanks for the question. Part of, I'd like to have seen a bit more on the margin expansion, but we are trying to balance inventories and absorption and those sorts of things. So in the second quarter, we are kind of trying to take inventories down and that's a bit of a headwind then to the margins.

Whereas during Q1, there was a little bit of health to build those inventories. So yes, we would like to take them down. There is some things that we are doing with the metallization that I'm also hopeful we can take them down, that's timing that's bit out of my control specifically.

There's time to adjust, with the precious metals. You've got kind of finite commitment there that weighs into the inventories but yes, we would like to take them down overtime but as the business is building closing out Q2 and then especially looking in to Q3. I don't want to take them down if we're going to put any our customers ramp at risk.

If balancing we've got the working capital line with PMC. They're very good partner, we recently we did some of the covenants on that loan just making things a little bit easier. So we feel that working capital line that's its name that's what it's for, if there is cash that's getting tied up in the inventories financing that through the line is quite reasonable.

Quinn Bolton – Needham & Company

That if using that line to finance some of the working cap is better from a margin perspective than trying to really ramp down inventories that sounds like, got it.

Terry Gallagher

Well we want to be managed about it all. Quinn, we are trying to be fair all the way round.

Quinn Bolton – Needham & Company

Understood. Lastly, I think on the last call, you sort of good job on the OpEx reductions by the way, but I think with those OpEx reductions do you take in the breakeven down to low 30's. It looks like you're coming in a little better than your target on OpEx was in Q2. Should we still be thinking something in lowish 30s as EBITDA breakeven or do you think you can achieve EBITDA breakeven lower revenue level now with the good work on OpEx?

Terry Gallagher

Yes, good question and I'm – I think where last quarter we said kind 33, 34. I'd like to for the time being leave it around that. We are continuing to push the model where looking at the mix. We are seeing some lights there, maybe even some improvement by way of the lower expenses towards saying that we can do it with a lower margin, but for now if you just stick with 33, 34 I'll look forward to maybe bringing you some better news, next quarter confirming that.

Quinn Bolton – Needham & Company

Great. Okay. Thank you.

Operator

(Operator Instructions) And at this time, there are no further question.

Ron Michels

Great. Thank you very much operator. Thank you everybody for listening to the call and we appreciate it. We will talk to you soon.

Operator

Thank you for joining today's conference call. You may now disconnect.

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