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Summary

  • EBITDA breakeven of $33 million will be achieved in second half of this year.
  • Over 10 design wins in current quarter will fuel second half growth.
  • Upside of 2-3x by achieving breakeven or likely acquisition.

Anadigics (NASDAQ:ANAD) has been on a free fall over the last month, dropping nearly 50% in value. Part of the drop can be attributed to the overall weakness in the small-cap technology sector. However, what appeared to spur the sell-off was an article at the end of March detailing the teardown of the new flagship Samsung Galaxy S5 by a Russian technology site that did not reveal any Anadigics power amplifiers (PA). A Barclays chip analyst reported that although phone content varies by region, this finding could possibly be a negative for Anadigics since it supplied the S4. The revelation by Anadigics a couple weeks later that its dual-band ProVantage PAs won the design not just in Verizon's (NYSE:VZ) Samsung S5 model but that its ProEficient-Plus PAs will also be in the S5 model offered by China Telecom (NYSE:CHA) was not enough to reverse the fall and went largely unnoticed by investors. Despite narrowing the loss to an amount not seen since 2010 and staying on schedule to reach profitability later this year, the stock continues to be punished. Anadigics now sits at a price not seen since July 2012 when the stock hit $1.12 before more than doubling in price a few months later. Anadigics is currently trading at a ridiculously low price and should experience a significant price jump in the coming months.

Earnings Improving

Anadigics management has done a good job of optimizing efficiencies and transitioning product production over to its higher margin ILD process. The benefit of its $100 million capital investment in its Fab is finally starting to pay off and will continue to increase. In addition, Anadigics has been focused on winning designs that produce the right product mix to maximize profit and not bother with products that simply increase revenue that isn't profitable. This is illustrated in the recent Q1 2014 results just released. Due to regular seasonality Q1 revenue came in light at $23.3 million. However, with increased gross margins and supply chain efficiencies this resulted in a loss of .11 per share. To put it in perspective, in the previous quarter Anadigics had a loss of .10 per share on $36.2 million in revenue. Management guided for a ~8-12% increase in revenue for next quarter with continued gross margin expansion. This will likely result in a loss of $.07-.08 next quarter with a good probability for EBITDA breakeven in Q3-Q4. The EBITDA breakeven mark has been reduced to roughly $33 million in revenue, which should be achieved in the short term due to all the recent design wins which will ramp up in the second half of the year.

Design Wins

Despite stiff competition from Skyworks (NASDAQ:SWKS), RF Micro Devices (RFMD) and Triquint (TQNT) for design wins, Anadigics continues to land high profile sockets. It landed 10 new sockets in both smartphones and tablets this quarter alone which will drive growth in the second half. Notable wins include:

  • Telecom Galaxy S5 by Samsung
  • Verizon Galaxy S5 by Samsung
  • Galaxy Tab Pro by Samsung
  • Huawei Ascend P6S

Anadigics is also increasing its exposure in China to products which have favorable profit margins and continues to focus on winning WiFi infrastructure deals.

Cash position

One main concern of investors is the cash on hand. It would be an understatement to say Anadigics has brought the need for profitability down to the wire. It has roughly $14 million in cash on hand but also has accounts receivable of $12.4 million and a healthy inventory of $22.5 million. There is some balancing that can be done to preserve cash. In addition, there is a working line of credit that can be tapped into to fund growth of the company if need be. It would be unwise to do a public offering to raise money at these extremely low stock prices. It is finally time for Anadigics to turn the corner without returning to investors to raise more money and further dilute current shareholders.

Going Forward

I believe Anadigics will turn profitable in Q3 or Q4 this year but can it maintain the momentum going into 2015 with the seasonality of the first quarter? Bringing the EBITDA breakeven mark down to $33 million is extremely impressive considering the company struggled to make money previously even with revenues of $50 million. In my opinion, it is highly likely we will see Anadigics acquired in the near future. The recent merger of RF Micro Devices and Triquint into the new entity of Rocky is forecast to save 100s of millions of dollars for the two companies. There is a long list of companies I believe would be interested in acquiring Anadigics and its strong patent portfolio. Its products are still considered to be best in class by many and synergies between the company and a partner could lead to instant profitability. A takeover target of $300-400 million would be reasonable and represents 3-4x the current trading value. Interestingly, the poison pill (shareholders rights agreement) Anadigics had in place to prevent a hostile takeover was suspiciously terminated a couple weeks ago removing this important barrier. This agreement had been in place for over 15 years.

Conclusion

With a market cap under $100 million, Anadigics is extremely undervalued. The company is finally in a place where profitability is on the horizon due to a favorable product mix and supply chain efficiencies. Investors have been waiting for the company to breakeven for the last 3 years. It appears the company is finally on the cusp of achieving this goal. The current weakness in the stock provides a low risk opportunity to ride the next wave up into the $2-3 range. A likely acquisition is another avenue that would further increase shareholder value drastically from current levels.

Disclosure: I am long ANAD, SWKS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Source: Favorable Product Mix, Supply Efficiencies Keep Anadgics On Schedule For Profitability In 2014