I've written several articles in the last year following the turnaround story of Anadigics (NASDAQ:ANAD) and their pursuit to become profitable for the first time in almost 4 years. The formula that management has preached over the last year is simple: control cash, reduce personnel expenses, increase manufacturing and R&D efficiencies, shed unprofitable products and focus on high margin per wafer products and customers. Year-over-year, these initiatives have resulted in a ~50% quarterly reduction in loss per share to -.10 on a third less revenue. On June 26th, Anadigics continued its realignment strategy by reducing its workforce by 30% and focusing more resources on the higher margin infrastructure business and key mobile clients resulting in annual savings of $15 million (M). This realignment will further reduce the EBITDA breakeven point from $33-34M to a more manageable $26-27M. Investors did not react positively to the news, sending the shares down ~20% to an all-time low market cap of $73M. The frustration by investors is warranted as management has been very poor at predicting the timing of breakeven, constantly pushing it further out every earnings call. Patient investors who can tolerate volatility could be handsomely rewarded if these cost saving initiatives finally allow Anadigics to complete the turn.
On the conference call following the restructuring announcement management laid out its vision for how best to realign resources to achieve profitability. For long-term followers of the company most of the news was not new. For the last several quarters, CEO Ron Michels has been stressing the rebalancing of Anadigics's products from low margin mobile power amplifiers (PA) to the more profitable infrastructure business. The new strategy reiterated this message with some additional clarification. Anadigics will continue to support mobile but will be more selective and only go after sockets with high margins, such as their recently announced design wins in China. In addition, they will focus the majority of their R&D efforts on infrastructure related business. This is important because Anadigics spends a lot of money supporting a manufacturing FAB and trying to create products for the rapidly advancing mobile market which has very small margins. Additional mobile PA business can be outsourced to third-party foundries, similar to the strategy of their competitors. They should also look into selling off the mobile segment of the business altogether.
The focus on infrastructure related business has been the goal of the company for some time but appears to have been expedited due to the design win momentum they are seeing in this area and the need to conserve cash. In the last earnings call management stated they expected infrastructure revenue to overtake mobile by the end of the year accounting for ~60% of business. Focusing on infrastructure related business provides several benefits to the company.
- It allows R&D related activities to focus on a particular segment. Anadigics spent $8 million in R&D in last quarter alone. This is a significant amount of money for the company and these resources are better spent in developing profitable products. The fact is, with the revenue and size of the company they can't keep up with the competition when trying to develop PAs for numerous different business segments.
- The mobile PA business is high volume with very low margins. This is further illustrated by the recent TriQuint (TQNT) and RF Micro Devices (RFMD) merger to stay afloat in this competitive space. Infrastructure has higher profit per wafer allowing decreased operating and manufacturing costs.
- The focus on infrastructure enables a significant reduction in workforce. A company making ~$120-130 million in revenue cannot support 500 employees. Bringing the company down to 350 employees, which still seems a little high, allows more flexibility in cost savings.
The biggest risk for investors at this point is the amount of cash Anadigics has available to fund operations and if they will need to raise more equity. At the end of last quarter they had $14 million in cash, $12.4 million in accounts receivable and $22.5 million in inventory. In addition, they put in place a line of revolving credit of $11 million. With the loss shrinking every quarter these finances should be sufficient to fund the company for the next few quarters. However, if management cannot achieve profitability soon there would likely be another stock offering, which at the current stock price would cause significant dilution. Due to the stock trading under $1, management could also decide to do a reverse stock split. This would deter short selling in the stock and enable more institutions to invest. However, reverse splits can also bring the risk of renewed selling pressure.
Over the last year, the cost saving initiatives and product-mix rebalancing has resulted in a significant decrease in loss per share. However, the share price has not reflected this success decreasing from ~$2.5 in Q1 2013 to under $1 today.
Moreover, as I stated in my previous article the price per sales ratio for Anadigics is ~4X less than its major competitors (RFMD, SWKS, TQNT) reflecting a good bargain at these levels. Although those with a financial calculator would determine Anadigics is undervalued there are two major reasons the stock price does not reflect the turnaround story. First, is the worry the stock will see further dilution before the company can achieve breakeven and complete the turn. Second, is the lack of confidence by investors that management has a good grasp on the timing of the EBITDA breakeven. Initially management declared EBITDA breakeven would occur in the second half of 2013, then it was pushed back to beginning of 2014. CEO Ron Michels has spoken with confidence the last several months that they will achieve this goal in Q3-Q4 of 2014. With the restructuring and lowering the EBITDA breakeven to $26-27M is this still the prediction or has management once again miscalculated?
For Anadigics to successfully compete in the PA business and become profitable the restructuring announced last week was inevitable and in the long term should be welcomed by investors. However, with cash on hand a worry and management's lack of market foresight, concerns remain. With EBITDA breakeven reduced to a very manageable $26-27M and the company already achieving $23M in quarterly revenue they are inching very close to their goal. If expenses can continue to be controlled and Q3 guidance is an improvement over Q2 as expected, the stock has a lot of room to run. If profitability is achieved shares could easily triple or quadruple from current levels, a gain not likely to be found in other stocks in this space. I continue to accumulate shares at these levels.
Disclosure: The author is long ANAD. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.
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