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Executives

Tom Shields - COO

Ron Michels CEO

Analysts

Aalok Shah – D.A. Davidson & Co.

Harsh Kumar – Morgan, Keegan & Co., Inc.

Anthony Stoss - Craig-Hallum Capital

Quinn Bolton – Needham & Company

Richard Shannon – Northland Capital Markets

Todd Koffman - Raymond James

Edward Snyder - Charter Equity Research

ANADIGICS, Inc. (ANAD) Q1 2011 Earnings Call May 3, 2011 8:30 AM ET

Operator

Good morning. My name is Brook, and I will be your conference operator today. At this time I would like to welcome everyone to the ANADIGICS first quarter 2011 earnings conference call.

On the call with us today is Ron Michels, CEO, and Tom Shields, Chief Operating Officer. 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. Shields, you may begin your conference.

Tom Shields

Thank you Brook. Good morning everyone and welcome to the ANADIGICS first quarter 2011 earnings conference call. Before we get started please remember any comments made on 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 morning’s press release and in the company’s various filings with the SEC.

I would like now to turn the call over to Ron, for his opening remarks.

Ron Michels

Thank you Tom and good afternoon everyone. So given that this is the first earnings conference call since I was named CEO of ANADIGICS, I would like to introduce myself with a brief background, and then give you my vision for the company. This will then be followed with a review of our first quarter results, business outlook of the second quarter and some detail behind the products and the future roadmap, which I want to spend some time talking about, and I’m pretty excited about it.

So first a little of my background – is 25 years with ANADIGICS – following my initial position with the company back in 1987, I was about 15 years old back then. I held numerous management and executive positions with the company. Most, or some of the people on Wall Street, I believe know me. Hopefully several on the call know me and for those that don’t, you will shortly. But basically, I’m the one that started the Broadband product line at the company, and it continues to be very profitable product line for the company, even today.

Broadband which is comprised of CATV, WiMAX, wireless LAN reached its peak back in 2008 at about 104 million. Prior to assuming my current role, I have served as the company’s Chief Technology and Strategy Officer, that was since 2009. I have several technical publications and patents in the area of RF, and I was instrumental in launching our Bi-Fect technology into the latest generation ILV process, and also prototyping of new architectures for the advanced development; some of the products you’ll hear about today.

I’m looking forward to leveraging my extensive experience at ANADIGICS in this role as CEO.

So, first let’s talk about the first quarter. Our first quarter revenue was in line with prior guidance and the influencing factors contributing to this sequential revenue decline were discussed during the company’s last conference call, so I won’t go into it in further detail.

I would like to point out that our top North American wireless customer represented 38% or 16.6 million of our total revenue for the first quarter. This was equal to the same level of revenue that was generated from this same customer during the fourth quarter of 2010.

Clearly, ANADIGICS has been confronted with a challenging set of circumstances. As we enter the second quarter, our challenges will continue as we’ll be unable to maintain the same revenue rate from that top wireless customer.

Demand for our WCDMA power amplifiers on existing platforms is winding down, additionally the customer has changed chipset vendors for which our products were not qualified in time for a ramp of their new programs. This will result in a sequential decline in revenue from this customer of approximately 10 million in the second quarter.

While we’re working very closely with this customer, and its chipset vendor on next-generation reference designs, and customer platforms, we will experience further reductions in revenue from this customer through the remainder of this year as several of their products approach end of life.

This significant quarterly revenue change will make the remainder of 2011 challenging as we work very hard to replace the revenue with new business.

Now, having said that, our revenue forecast for the second quarter of 2011 is 35 to 37 million or a sequential decline of 6.5 to 8.5 million.

But on a positive note, we’re anticipating an increase in sequential revenue from all of our other wireless key customers including Samsung, ZTE, and LG. In addition, we expect revenue from broadband to increase by approximately 2.5 million, which is about 37% over the first quarter driven by the assumption of growth in our cable infrastructure product line, and I’ll discuss more on that in a few moments.

While I’m hopeful that our revenue guidance for the second quarter represents a trough for 2011, we cannot say that with 100% assurance at this time. So as we look in to the second half of 2011, we know that revenue will decline with that North American customer. At the same time, we have multiple products that are expected to be designed into many wireless platforms, which include Samsung, ZTE, Hauwei, which could potentially increase our market share with these customers.

As with any wireless platform design win, predicting volumes of these platforms, and if and when they go into production is extremely difficult. Also, it’s important to understand that these specific customers tend to give us short lead times, sometimes in the order of less than four weeks, and that makes it even harder to make longer-term forecast.

So given these circumstances, I want to outline the steps that we’re taking today to directly address the challenges that we face. Together with Tom Shields, at his new role as COO, our first priority is to refocus the company and drive efficiencies across the organization. This is including a reallocation of our resources and a realignment of our cost.

We’ve reduced our work force by just under 10% over the last few days, and we’re taking prudent measures to further streamline operating expenses to properly adjust for the lower revenue base.

In conjunction with these actions, one of the most important objectives is to reinforce the strong relationships that we have with all of our current customers. I’m working very closely in coordination with our sales and product development teams, and all of our key customers to increase our product visibility in order to secure future design wins. And we also have a dedicated team whose sole activity is to actively engage with the largest reference design partner. This is a very important concept, we’ve just set this team up in the last few weeks and I’m very pleased to say there’s been some early progress made.

Now, let’s talk a little bit about product development which will be critical – is a critical area focus for me, going forward, and I consider one of my greatest strength to be that I’m a hands-on technologist person. The core aspect of our technology and strategy going forward will be leadership in this area. I believe that the company has been very successful in the past two years in creating a hybrid and scalable manufacturing model. And we’ve significantly improved our manufacturing efficiencies at our Warren FAB, and that’s been producing some of the best cycle times and yields in the industry.

And our recent development of the ILB process, that has been mentioned earlier, will provide an average of 25% reduction in dye size, and that’s because there’s an extra level of interconnect being introduced and much smaller feature sizes. This of course in turn will directly increase our internal capacity.

With this solid manufacturing and process foundation in place, we must now focus on leveraging this competitive advantage and capitalizing on new opportunities. For some time now, our served available market, our SAM, has been limited to the PA-discrete market. While this market has served us well and will continue to provide us with enhanced revenue opportunities, this selective focus has prohibited us from benefiting from the extended market from PADs which is PA Duplexers and also multi-mode PAs.

As I look at the needs of our customers and compare our discrete product offerings, I find that we need to make some adjustments on delivering, and I want to deliver PADs and MMDA products.

These adjustments, I believe, will provide us higher volume opportunities and increase market share over longer-term. I focus the teams specifically on delivering these products, and we anticipate product samples to be available during the second half of 2011.

Additionally, I’ve created a new task force of advanced development engineers that will be working side by side with strategic marketing and product development groups. This group is tasked with rapid development of products for both wireless and broadband and these will be targeted markets, and will be focused as well in the long-term product roadmap.

So, let’s get more specifically into the product pipeline. Starting with PADs, we announced earlier this year that we’re working on a new product family, which we expect to increase our served developable market by approximately 1 billion. A PAD is created by combining one of our dual-band power amplifiers with a duplexer on the same laminate, and the use our ILD process enables a smaller footprint in what we have today, and a lower cost.

PADs have the potential to generate meaningful growth in the coming years as this solution effectively doubles our served available market while supporting key requirements to some of our most important customers. And again, I’ll mention the PADs that we’ve doing our dual-band PADs.

In addition to PADs, we’re also working on multi-mode power amplifiers, MMPAs for short. Our multi-mode PA has qua- band GSMH, and dual-band WCDMA functionality. This is a divertive product of MMMB, which you’ve heard a lot about in the past, and a nearer-term opportunity I believe, that leverages that earlier MMMB development.

Let’s talk about LTE. Development of LTE networks is starting to gain momentum. Manufacturers are under pressure to design new mobile devices with unprecedented multi-media capabilities that will allow network operators to improve broadband connectivity.

We recently announced the expansion of our highly-efficient 4-G LTE power amplifier family to encompass 15, that’s 15 LTE bands worldwide, at which we are sampling heavily today.

So in addition to wireless, broadband remains an important market and growth driver for us in the second half of 2011. We continue to expand our offerings for the broadband market including a family of new products addressing market drivers in the DOCSIS 3.0 enabled devices, cable modems, CATV subscriber home gateways, hybrid line amplifiers, 75-Ohm Gain Blocks for CATV infrastructure, and mobile WiMAX-enabled devices.

In particular, I’m very excited about our CATV line amplifier product line, which is expanding in not one, but two ways. The first is incorporating GaN, gallium nitride in to our surface mount line amplifier portfolio. So that’s the surface mount line amplifier portfolio which will now have GaN. And the second is new products through the expansion into a hybrid form factor. Both of these changes will actually double our SAM for line amplifiers. We’ve already begun sampling the GaN devices to our largest infrastructure customer.

To further expand our broadband opportunities, we’re expanding our family of Femtocell products, supporting the enterprise market of the Femtocells. We are proactively targeting this growing market through a complete family of Femtocell products, which includes our AWB7227 PA that has exceptional linear output power, high efficiency, and provides support for WCDMA, HSDPA, and LTE interfaces. We’re further expanding our SAM by developing higher power efficiency products, and this is important for small cell infrastructure applications. And I’m happy to say we’re in the process of teaming with a Tier 1 OEM in that area, which will be an expanding SAM for our broadband products.

In summary, although we’re clearly disappointed with the first quarter results and our second quarter guidance, I believe that our core technology, products and manufacturing expertise can definitely reestablish ourselves as leader in our industry. I can’t stress enough that our foundation for future success is still intact. We continue to serve a large and growing end market, and have excellent engineering resources to support all of the key customers and reference design partners.

We have a healthy balance sheet, and are actively taking the necessary steps to align our cost base and revenues over the short term while prudently committing resources to further expand our technology base and product offerings. I believe that these actions will result in significant near-term improvements in our operating performance without compromising our product design and development.

We also have a solid pipeline of leading products that I believe will drive an increasing number of design wins with new and existing customers over the coming quarters.

Despite the significant challenges that we definitely face, I am committed to returning our company to growth and profitability and becoming more efficient in everything that we do.

So with that, I’ll turn this over to Tom, for the financial update. Tom?

Tom Shields

Thank you, Ron. For the first quarter of 2011 we reported revenue of 43.5 million and a non-GAAP loss of $0.07. As Ron mentioned, these results were directly in line with our previously financial guidance.

The GAAP net loss for the first quarter was $0.16 and included an expense of 2.8 million in non-cash stock-based compensation. We also recorded a charge in the first quarter of 2.9 million related to management separations previously announced on March 28. This charge was tied specifically to employment agreements for which $700,000 was a non-cash charge.

The breakdown in revenue reported for the first quarter consisted of wireless of 36.2 million and broadband of 7.3 million, both of which came in line as previously expected. Gross margin achieved on a reported revenue was 12.8 million or 29.4%. Operating expenses were 17.9 million with R&D of 11.8 million, and SG&A of 6.1 million.

Depreciation expense was 4.8 million, and we closed the quarter with 104 million in combined cash, cash equivalents and marketable securities, a reduction of 2 million from year end.

Turning to the second quarter of 2011. Earlier in his opening comments, Ron emphasized the negative impact we can expect on the anticipated sequential revenue decline from our largest customer. He mentioned that the revenue guidance for the second quarter has a range of 35 to 37 million. This revenue was expected to be split between broadband of approximately 10 million, representing a sequential increase of 37%, and wireless of 25 to 27 million, which represents an anticipated sequential decline of 25 to 31%.

Based on this range of revenue expected for the second quarter, we anticipate a non-GAAP loss per share of 16 to $0.17. Gross margin for the second quarter is expected to drop to 20 to 21% of revenue. While broadband revenue is expected to increase and has a higher margin attributable to its products, they will not be sufficient to cover the decline in wireless.

Operating expense will be slightly below Q1 levels but we will continue to emphasize R&D product development as we stay on track in meeting the opportunities presented to us from our customers and major wireless chipset vendors.

At the same time, given the lower revenue, we have taken immediate actions to balance our infrastructure to our current revenue stream. Approximately 10% of our work force has been eliminated over the past few days, and we have undertaken other cost reduction initiatives where appropriate without jeopardizing our R&D efforts.

The cash cost attributable to the reduction in our work force will amount to $1 million and is expected to result in an annualized savings of 4 million.

Total cash consumption during the second quarter will be approximately 9 to 10 million, and includes the cash payments totalling 3.7 million for the management separation and reduction in our work force.

We have also allocated $1 million for capital expenditures. As such, we expect to end our second quarter with at least 94 to 95 million in cash and cash equivalents.

We continue to place a strong emphasis on gross margin improvements as articulated in the past. A re-evaluation is well underway to ensure we address and accelerate the right programs for gross margin optimization. We look forward to updating everyone and providing more detail on our specific programs, and a resulting positive impact expected from them in the near term.

With that, I’d like to open the call to questions. Brook?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Aalok Shah with D.A. Davidson.

Aalok Shah – D.A. Davidson & Co.

Hi, guys. Ron, a couple quick questions for you. In terms of – in your prepared comments you talked about the discrete PA market versus maybe doing a little bit more module work. Can you give us a sense of maybe a timeline of when we could expect you guys to have a little bit more features set in terms of the power amplifier market?

And then secondly, maybe if you can, Tom, talk about maybe what your goal is to get back to break even, what would be a number to get – on a revenue basis, to get back to a breakeven number?

And then lastly, just 10% customers in the quarter.

Ron Michels

Okay, I guess I’ll start, Aalok; some great questions. Thank you very much. So just – all the power amps that we make today, we actually refer to them as modules because the power amps sit on laminates. The question I guess you’re getting at is more of front-end modules, which some refer to as modules that have more than just power amp capabilities in them where they incorporate filters and switches and that kind of thing.

So on the pads and on the multi-mode power amplifiers, both of those will be in the second half of the year where there will be hardware that we will be showing the customers. And in both cases, there’s teams that are tasked with timelines and we expect that to happen in the second half of the year. I’ll pass it to Tom for your financial question.

Tom Shields

Aalook, good morning. First of all, in terms of our top customers for the first quarter of 2011, it included RIM, clearly, and Samsung, which is greater than 10%, and GTE and Huawei were just below 10% of total revenues for the quarter.

Regarding your question relative to breakeven, essentially the one that that we’re reviewing is the gross margin. Clearly, the RIM business was highly profitable and so as we look at the product portfolio for the second half, we have to evaluate exactly the margin profile in those products and the range of revenue that we can expect. So as I mentioned for the second quarter, we’re looking at a range of gross margin between 20 and 21% on 35-37 million of revenue.

So basically at a minimum, a breakeven at 55 million at 30% gross profit would get me a 9-gap breakeven. However, clearly as I mentioned in my opening remarks, the more we can optimize gross margin, clearly we can accelerate that breakeven point. But for now, that would be a benchmark that we can live with.

Aalok Shah – D.A. Davidson & Co.

Okay, and Tom can I ask a quick follow up? In terms of strategic thinking, you know, given that Broadband probably has much higher margins attached to it and probably the PA business has probably been in a bit of a drag right now, is there thoughts that maybe you can focus a little bit more on Broadband versus PA? Can you give us a sense of strategic direction on where you guys might be thinking at this point?

Ron Michels

Yeah, I guess I’ll take that. Absolutely, we think about those kinds of things all the time. We have two focuses and one is – well, the near-term focus is to replace the revenue that we’re losing from our largest customer and with that comes more utilization. So that’s job number one.

Job number two is product roadmaps. And the emphasis – and we’ve reorganized the company with respect to that, by the way. And that is the very strong emphasis – and I personally bring a lot of that to the table because that’s what I’ve done for the company for many years. And that will be in both areas. So wireless is a huge market with a huge amount of potential for us that we have not tapped into that we’re going to tap into, and we need to do that because we have this beautiful running machine that we call a FAB that’s got more capabilities than it’s ever had before and it needs to be fed with a large market.

But in parallel, and a lot of the things I discussed in the beginning of this meeting, there’s lots of things we’re doing in Broadband that we hadn’t done before. And as you say, our effort is to build that business because the margins are wonderful. Just in the line-amp area alone, we’ll be doubling the SAM in just a few months with the new product offerings. So yes, we plan to build that business and take advantage of the wonderful margins that it brings.

Aalok Shah – D.A. Davidson & Co.

Okay, thank you very much.

Ron Michels

You bet.

Operator

Our next question comes from Harsh Kumar with Morgan, Keegan.

Harsh Kumar – Morgan, Keegan & Co., Inc.

Hey, guys, a couple of questions. Your OpEx rationalization, you just mentioned it kicked in about 10 days ago – you did that about 10 days ago. Should we expect that to kick in at some point in this quarter or will it be next quarter before it kicks in, and what level will that take your OpEx to?

Tom Shields

Okay, this is Tom. So you’re referring to the cost initiatives we undertook this quarter?

Harsh Kumar – Morgan, Keegan & Co., Inc.

Yes.

Tom Shields

Okay. So we had 17.9 million in total OpEx in Q1 and my comments suggested that we would be slightly below that number. So basically, because the R&D efforts that are well underway and because of the strong promise we have relative to key programs with chipset vendors and key customers, we’re probably looking at 17.5 million for the second quarter. And partially for which allowance in dollars for the R&D. However, it’s possible it could become lower, but then as we look at the second half, clearly we’ll have other programs in place to reduce the total operating expenses for the company.

Harsh Kumar – Morgan, Keegan & Co., Inc.

Got it. Got it. And then Tom, occasionally, or almost every quarter you provide a little bit greater breakdown of the Broadband settop and [inaudible] WiFi and WiMAX. I was wondering if you would be good enough to give us this?

Tom Shields

Sure. Hold on one second for me.

Harsh Kumar – Morgan, Keegan & Co., Inc.

Sure.

Tom Shields

So you want Broadband specifically because the majority of the wireless is principally WiBand CDMA.

Harsh Kumar – Morgan, Keegan & Co., Inc.

Yes.

Tom Shields

So let me give Broadband, essentially, and this goes hand-in-hand with what we said during the last call. So when we look at set-top boxes we did experience a decline roughly of 50% for 2.5 million from Q4, placing us at a about 2.4 million of total set-top box revenue.

Harsh Kumar – Morgan, Keegan & Co., Inc.

Okay.

Tom Shields

On infrastructure, also dropped roughly 50% and that came in at about 2.3 million. Wireless LAN actually came in at 1.7, it did not drop as steep as the other two.

Harsh Kumar – Morgan, Keegan & Co., Inc.

And then my next question and then I’ll move on back in the line after this. I think on the last call you had mentioned that there was some inventory in China and Korea. Tom, was that a part of the guidance as well, and if so, how much?

Tom Shields

To your point, so we carried over the excess inventories from distributors from Q4 that we mentioned on our Q4 earnings conference call. And subsequently as sit here today, there’s still been an influx of inventory that’s carried over, particularly in wireless; far less in Broadband. So we’re still being impacted by a level of revenue that’s still turning in China.

Harsh Kumar – Morgan, Keegan & Co., Inc.

Fair enough. I’ll get back in line. Thanks.

Operator

Our next question comes from Anthony Stoss with Craig-Hallum.

Anthony Stoss - Craig-Hallum Capital

I want to do – go through the numbers a bit on your guide, Tom. So RIM is going to be down roughly $10 million sequentially and you stated that you expect all other wireless customers to grow. Your mid-point of your guide of 26 million for the wireless side would show really no growth from your wireless customers. That’s for one, if you could give us more detail on that.

And secondly, you know, with your – with one chipset vendor being out at RIM and it’s affecting you, what happened to the qualification process for Qualcomm? Why did we miss out on this reference design with Qualcomm regardless? Thank you.

Tom Shields

Sure, good question. Thanks, Tony. First of all, you mentioned regarding the wireless. You’re right on relative to mid-point. As I mentioned, we do expect increases relative to Samsung, GTE and Huawei, and we’ll lose roughly 10 million RIM, as Ron mentioned and also our distribution business has not ticked up. So we’re seeing the remaining decline, in terms of your analysis, Tony, is coming 100% through distribution.

In regard to qualifications, there’s no doubt, there’s been an abrupt shift by our largest customer to the new chipset vendor. Certainly, with that particular chipset vendor, our products were being reviewed. At the same time during a visit in the first quarter by a prior CEO, it was noted that they weren’t meeting specs. So then we said, okay, we understand. Let’s get back and do another turn. Subsequently, in April our team went out there and what we learned was in fact we were a little bit late with the products. However, while they were qualified, we couldn’t get them a bill of materials. Our hope was that at a minimum if we couldn’t get first-source supplier, we could get secondary source. But unfortunately, as a result of the products being late with that particular chipset vendor, we’re in the position that we’re in.

Tony, just to further add, rest assured with this particular chipset vendor, we’re very, very please relative to the conversations and our parts, while they did indicate to us specifically that they were better-performing parts than the incumbent. Unfortunately, we were too late to the bench and as a result, we’re working very feverously on the next-generation platforms with them and also [inaudible].

Anthony Stoss - Craig-Hallum Capital

Let me ask you this then, Tom, along the same line. When do we think we could resurrect our relationship with RIM and maybe it has nothing to do with your technology, but when maybe can you start generating revenues again with RIM?

Tom Shields

Okay, understand something. The relationship is solid, okay. So both with them and the chipset vendor, so we’re very pleased at what’s going on. When someone has a shift that they did, obviously, they don’t necessarily know perhaps who the PA supplier of choice recognized by the chipset vendor. So after the fact, clearly they know who it is. However, this – the product lifecycle doesn’t stop because we already know the next generation, number of platforms that they’ll be releasing to market, whether it will be a Smartphone or a Tablet, and more importantly, we also have an extensive grow map as a result of some key individuals that we put in place set by Ron that work very closely with particularly Qualcomm.

So we’re very, very pleased, and don’t make any mistake about it, the relationship is very strong [inaudible] and we have a key product roadmap that will most likely turn out to be very prosperous for the company in the longer term.

Anthony Stoss - Craig-Hallum Capital

Thank you.

Operator

Your next question comes from Quinn Bolton with Needham & Company.

Quinn Bolton – Needham & Company

Hi, guys. I just wanted to follow up on Tony’s question about the references design at Qualcomm and the fact that you were late. Was this for discrete PAs? I think Qualcomm has historically used discretes in their reference designs, where you had referenced a move to MMPAs and PADs, was it for these newer products that this particular chipset design was looking for and those were the products you relate with. If you could just give us a sense whether it’s discrete versus some of these more module solutions? And then I have a couple of follow-ons.

Ron Michels

Yeah. No, what we relate with was discrete PAs.

Tom Shields

And this is Tom. To your other comment regarding the MMMB, interesting enough, their product roadmap is directly in line with the product roadmap that Ron has created and refocused the energy of our work force on; particularly the PADs and the MMPA. So we feel very good that we choose the right path and we choose the right course to ride going forward.

Quinn Bolton – Needham & Company

And just any further comments, you know, you guys have had discrete wideband TMA or HSPA PAs on the market for years. What was it in terms of specs that was new that caused you to be late? I mean, is there that much innovation going on or was there some certain spec that was required with the new chipset or for RIM that, you know, required a new product design on the discrete PA?

Ron Michels

No, actually it’s kind of ironic because that reference design and the PA that’s in that reference design, another vendor now of course, is actually what we do very well. So I think what happened was that we – the company got hung up on adding certain features and did a few extra iterations on it and missed the timeline to get on that reference design and that, of course, rippled right through RIM. It was, you know, a chipset issue that rippled through into RIM. But no, there was no key specs and certainly all of those specs today, we meet. We’re just not on the bill of materials.

We have tightened up our relationship with that chipset partner. It used to be phenomenal. As you know, this company was number one in 3G just a few years ago, through that chipset provide was where most of that success came from. So we know everybody there. We’ve put a team together here at ANADIGICS, which I mentioned earlier. We’ve already had a couple visits in the last two or three weeks, and we’ve showed them new roadmaps, new approaches even to some of the discrete PAs that we’re looking at that we think has resonated. So I think going forward, you’re going to see a different level of performance, but I think that’s what happened in the past.

Quinn Bolton – Needham & Company

Okay, and then just one more question on sort of the reference designs. You know, as the reference design partner starts to look at these more module-based solutions, any sense of how quickly the market may shift from discrete to the more module-based or PADs and MMPA-type designs? Is that potentially 30% of the market opportunity in 2012 or greater, or less? Just trying to get some sense. You guys, again, have been very strong historically in discrete PAs and modules from our highly integrated solutions, our newer products and you’ll have those sampling in the second half, but just wondering what’s the risk that the market starts to shift before your production qualified on the module-based solutions?

Ron Michels

Yeah, good question. I don’t see – I mean, the shifting has taken place already. I don’t see a huge shift going forward any quicker than it’s been shifting in the past, which is not at a particularly fast rate. So PADs already captured probably about 20% of the market and that’s a market we don’t play in. Of course, our entry into the PAD market will be with something that we don’t think exists today and that’s dual-band PADs.

Then on the MMPA, not a lot of market share there at this point, although we’re pretty excited about how quickly that may grab market share going forward. And some of what people think is a MMMB today, we think will be MMPAs with some satellite PAs sitting next to them on the reference design. Does that answer your question?

Quinn Bolton – Needham & Company

Yeah, that’s great. And then just for Tom, you know, obviously the gross margin has come in. I think the inventory ticked up in the first quarter. Is part of the lower gross margins in the second quarter, you guys are really ratcheting down utilization, perhaps even to a level below what would be consumed in the market just to keep inventories in check to the extent that revenues begin to recover could we see that utilization swing back to something where you’re starting to add inventory again rather than burn inventory?

I guess bottom line, is there an inventory change that’s depressing gross margin in the near term reflected in that gross margin guidance?

Tom Shields

Yeah, this is Tom. To your point, the fabulization will certainly drop at probably below 50% in the second quarter. If you look at the balance sheet, the inventory did rise because we anticipated a much higher revenue rate during the second quarter so we have to pull back. And as we look into the second half, then we’ll have to make a call relative to how we’re going to run the FAB toward the latter part of the second quarter. But yes, it’s fabulization dropping.

Quinn Bolton – Needham & Company

Great. Thank you.

Operator

Your next question comes from Richard Shannon with Northland Capital Markets.

Richard Shannon – Northland Capital Markets

Hi, guys. Just a couple questions for me. First of all, Tom, I think in response of [inaudible]’s question about distribution, I think you mentioned they’re kind of roughly flatish in the second quarter. When do you envision that one returning to growth and returning to more normal levels?

Tom Shields

Hey, Rich. This is Tom. That’s a good question. Obviously, I don’t have an answer today. We’re hopeful that the inventory burns off as quickly as possible, particularly – and we’re addressing the wireless side because in distribution for broadband, we feel a lot more optimistic. So we would expect, and hopefully see signs of renewed growth during the second half, but I cannot assure you that at this moment.

Richard Shannon – Northland Sec.

Okay, fair enough. And maybe a second question for Ron. I just want to make sure I heard you right. Your prepared comments about, I think you said you recently created some new teams focusing on some new chipsets. I wonder if you could remind us exactly where you are in terms of the chipset vendors you’re working with and where you have great exposure, and whether this is talking about expanding the number of chipset vendors or just reinitiating with some ones where you’ve been historically very strong?

Ron Michels

Yeah. No, it’s clearly – it’s clearly focusing on where we were successful in the past and that’s with Qualcomm. Basically, they’re the biggest by far. They’re the chipset manufacturer that we have the most engineer-to-engineer interaction with in the past and that’s already begun to renew. So I can’t be on every reference design with every chipset manufacturer. I have to pick one and we’re very lucky that the one that we’ve picked is one that we have a lot of interaction and history with.

Richard Shannon – Northland Sec.

Okay, fair enough. So maybe just one last question kind of looking a little farther out. You obviously talked about an established a foundry relationship and I think you’ve talked in the past about allocating at least a minimum amount of business to them just to kind of keep them going over time, obviously with a lower level of revenues it seems like you’d want to prioritize using – increasing internal utilization. I’m kind of curious about your strategy of using your foundry going forward.

Tom Shields

This is Tom. Certainly foundry remains very important to us. We know what capacity means to the market, so we will continue to work very closely with the foundry partner, which is Winn Semiconductors, relative to the allocation of capacity requirements. There’s no doubt our first priority has to be cover the fixed costs in our current FAB, but we’ll work very diligently with Winn Semi. At the same time, it’s nice to have a position where you can recognize that you can have well over $100 million of combined capacity which you want to sell to the market. But that’s where we’re at.

Richard Shannon – Northland Sec.

Great. Thanks a lot, guys.

Operator

(Operator Instructions). Your next question comes from Todd Koffman with Raymond James.

Todd Koffman - Raymond James

Thank you very much. I have a question, a follow up that someone asked. With regards to the RIM business, I guess it’s about 16 million in the quarter and in a prior – earlier question, someone said it’s going down about 10 million if you look at your guidance. But it seems like it might be going significantly lower, maybe even virtually to zero given that you signaled that Samsung would be up sequentially, ZTE would be up sequentially, LG in your opening remarks was said to be up sequentially, Hauwei up sequentially. Could I just get a clarification; is the RIM business basically going to virtually zero? That’s my first clarification question.

Tom Shields

This is Tom. To your point, down 10 million from Q1 denotes that it could be a range of 6 to 7 million in Q2. No, there’s continuation of current platforms that will continue to stretch for the remainder of the year. The issue is what size of the revenue it will be, but not, it will not go to zero. At the same time, hopefully we can intercept new programs later in the year.

Todd Koffman - Raymond James

How does the math work, that if you did 36 in wireless this quarter and the five OEMs you called out are up sequentially, but you’re guiding wireless down by roughly 10? The math doesn’t seem to work. Something has to be going down.

Tom Shields

Right. Hey, Todd, this is Tom. As I mentioned, when we say certain customers are up sequentially, it doesn’t denote they’re going to be up 10%. They could be up a couple hundred thousand or half a million. As I mentioned in your response to Tony’s question, were the outlier is in terms of sequential drop is distribution. So that’s where the hole is in addition to the drop in RIM.

Todd Koffman - Raymond James

Okay. One last follow-up question. You called out that in the March quarter, RIM was 38% of total revenue and I guess in the September quarter of 2010 there was some confusion as to whether you had any 10% customers, who those 10% customers were. There was some conflicting remarks. Given that, in the current March quarter, given the customer concentration, can you give any more specificity regarding how big some of the other important customers were; notably Samsung and LG in the quarter?

Tom Shields

This is Tom. I apologize for the confusion that we provided back in Q3, but back then RIM was 32% of total; Samsung was greater than 10%, in fact, it was 12%. Distribution, World Peace Group was 10% and above and ZTE was just hovering very close to 10. As we look into Q1, Samsung is north of 12%, so it’s growing very nicely. ZTE is just shy of 10, and we have Huawei just shy of 9%. And going forward, you know, Cisco is on the rebound, so it’s going to be greater than 10% of revenues for Q2 - as we look at the cable infrastructure business, which is nice to see. And we do expect that in Q2, ZTE is greater than 10, Samsung is greater than 10 and then of course, research will still be greater than 10 of total revenues.

But to you point, yeah, we’ll be as specific as we possibly can relative to the percentage of revenue.

Todd Koffman - Raymond James

Thank you very much, Tom. I appreciate all those numbers. Good luck.

Tom Shields

Thank you.

Operator

Your next question comes from Edward Snyder with Charter Equity.

Edward Snyder - Charter Equity Research

Thank you very much. Welcome, Ron, I guess in a manner of speaking. Ana seems to be coming late to the PAD game, several of the vendors [inaudible] you pointed out there make about 20% of demand here. And you’re not really late on the MMPAs, but a little tardy because obviously Micro is already starting to ship PowerSmart to several large vendors. How do you expect to differentiate when you finally get these products out? Will you be doing features or performance, or cost, or all three of those? I’m just trying to get a feel for how you made gains against incumbents that have been shipping this product for a while.

And then you talked about the issues with RIM, was it primarily missing – you were adding features, was these features essential for what either Qualcomm or RIM wanted to do on this new platform? And in which case, if it hadn’t been added you wouldn’t have made qual, or is it something you were looking to add as kind of an extra benefit and just got wrapped up in the schedule and missed call there?

Ron Michels

Okay, some good questions Edward. I’ll start with the question on the reference design missed at the place last year. I think there were no advanced features that stand out in my mind that was something that we had missed because they were something like linearity or something that the chipset guys were asking for that was fundamental that we couldn’t meet. It was more of we delivered something to them which had a few things that weren’t exactly what they needed, a DC block not on the right place; that kind of thing. So we made those changes, but unfortunately a few of the changes the guys made didn’t work, they had to do another iteration. By the time they go back to Qualcomm, it was too late. So again, it was nothing in that that to me spelled anything but just inability to deliver. It’s more of a one-off thing than performance. Absolutely a one-off thing.

On the PADs, the way we will differentiate ourselves is – and you’re right, we’re late. We’re late, but I think from a design standpoint and an approach standpoint, we have some unique things that I think we’ll be looking at, which will save us on dye size and also to some extent, improved performance. But again, what we’re going after is dual-band PADs. The marketplace now is 100% single-band PADs. Dual-band PADs create and added complexity when bands tend to talk to each other and there’s isolation issues and things like that. We think we have some unique approaches to that. So I think that it’s kind of resetting with dual-band PADs where even though we’re behind on the single-bank PADs, it’s not the same deal with dual-bands because it’s a different product and it’s a different set of issues, which I think we’ve got our handle on.

Also another issue on the dual-bands product line that everybody will face is size. How do you get everything into the size of package that the chipset providers are asking for. And we’ve got some solutions that give us, we think, a smaller solution from everybody else, which will allow us to get into a form factors, which is very attractive.

On the MMPA, we have been in – so MMPA, again, combines two separate specifications. One is for qual-band EDGE and the other modulation is either CDMA or WCDMA. So it makes it a multi-mode by combing those two. We fit in both markets separately with some very interesting approaches, even a couple years ago when we used to sell EDGE parts. I thought we had some very, very unique ways of approaching that marketplace. We choose at the time to discontinue that business because we didn’t think it was as profitable as other businesses that we had been getting into, RIM wrapping and that kind of thing.

Today we look at it differently and I think that we have a unique approach there is as well. Some of it will be using silicon in a way that I’m not sure has been done before and that where it comes out of the MMMB approach that we have been looking at. So actually there’s a quite a bit of work that’s been done along those lines over the last year on the MMMB program, which was quite sizable for this company. And that will be directly transferred to the MMPA. So I feel pretty good about what we’ll be offering there as well.

Edward Snyder - Charter Equity Research

So to that point, most of your competitors – say [inaudible] is doing a standalone MMPA power control because power control is obviously a bigger part of this – a big part of it, not a bigger part of it. [Inaudible], are you going at it alone or are you doing power control yourself or are you partnering with that and just concentrating on the GaS? It seems to be two distinct [inaudible], the largest being most of the GaS guys partnering with somebody to do the power control.

Ron Michels

Yeah, good question. So we have, as far as engineering – as far as envelope tracking, which is a method of achieving much higher efficiency and it’s something new that has not been incorporated into power amps that are in production to date, we have a couple different approaches. One is we’re working on some approaches in advanced development where we basically do everything ourselves and we have a standalone silicon IC that provides the necessary information that [inaudible] the PA. We also have an approach where we’re working with actually two outside vendors who will supply that silicon chip to enable envelope tracking. So we have an internal solution and then we have solutions we’re looking at through partnering through two different partners. So we actually are doing quite a bit of work in that area.

On the MMMB that exists today, it’s a very nice part and we have competitors that we’re competing with that know what they’re doing and they’re very professional and very good. I believe that MMPAs will bring a performance level that is very similar to what discrete PAs do today, whereas the MMPAs that exist now, that basically have as many as eight bands and they’re reprogrammable, and they have a lot of features that are interesting features. In the end, I think MMPAs are where in the next year or two, you’ll see – you’ll see them take off because they have the performance that is required that are in phones today with discrete PAs.

Edward Snyder - Charter Equity Research

And then, Tom, real quick, I’m just trying to make sure I understand your guidance. Obviously, RIMs going to be down and [inaudible] will be down next quarter. The RIM business, do you see that tailing off in the second half of the year until the new design wins that you’re working on now come to fruition or will we get kind of a stable level after 2Q so when we’re modeling we don’t show a tail off in that business?

Tom Shield

Good question. Yeah, looking out, we would anticipate continuation of decline. So assume it would [inaudible] in Q3. If we look at a forecast, it goes below $5 million for Q3 and perhaps less than that for Q4. So we know what the challenge is and we do believe there’s opportunity clearly in other customer base, but RIM, by far, is a customer’s revenue for which we have to replace immediately.

Edward Snyder - Charter Equity Research

Okay, but certainly this client is going to be less in subsequent quarters, there’s a better chance you can make it up with growth other places, right?

Ron Michels

That is correct. We’re hopeful that we can offset it, but we can’t guarantee it.

Edward Snyder - Charter Equity Research

Sorry, one more question. Ron, in the past, I’ve had extensive discussions with former people in your position. I mean, one of the biggest problems in ANADIGICS’ space is that we’ve not really invested in a lot of technology that some of your competitors have. You don’t have in-house BAW or SAW. And on the PAD business especially, if you look at particularly [inaudible] offerings because their BAW capabilities, they’re the only two guys that have high-performance BAW in house, that kind of gives the a size and performance advantage, certainly in band-2 PADs. How do you intend to tackle that end of it? I mean, you are coming from kind of a weaker position here, are you looking to just do smarter design to try and get the footprint that they’re going to be able to give because they can design it themselves, or are you partnering with somebody who has higher performance than say someone Skyworks is buying from? I’m just trying to get a feel for how you want to be competitive in a business that you don’t have a lot of the internal technologies?

Ron Michels

That’s a good question. I think we have some tricks up our sleeve from a design standpoint that we think will make what we’re doing unique. As I say, and that plays into how we have multi-band PADS as opposed to single-band PADs.

To answer the question about in-house versus procuring these things externally, as you had mentioned, here’s SAWs, there’s BAWs, there’s now three or four different flavors of technologies that are required depending on what loss you can tolerate and which band you’re in, what frequency, that kind of thing. So it would be pretty extensive to be able to do these in house and to be able to make all of the different types of filters that you need to be able to have a complete product set. So to me, it doesn’t make sense to do that in house, of course as you pointed out, we don’t have the capability either way. But we’re going to be procuring when we have two or three vendors that we’re already building products from and I think that that model will work financially.

Edward Snyder - Charter Equity Research

Great. Thanks a lot, and good luck guys.

Operator

Our next question comes from Harsh Kumar with Morgan, Keegan

Harsh Kumar – Morgan, Keegan & Co., Inc.

Hey, guys. Tom, I’m going back to the breakdown. Sorry, I’m going back to the breakdown you gave me, the 1.7 million WiFi, WiMAX, set-top box 2.4 and infrastructure 2.3. I’m still missing about a million dollars relative to your broader broadband breakdown that you have earlier in the commentary. Am I missing something in these numbers or did I mis-hear one of these numbers wrong?

Tom Shields

No, you cut out too quick. The last component was WiMAX.

Harsh Kumar – Morgan, Keegan & Co., Inc.

I got you. Okay. Thanks. Thank you.

Operator

At this time, there are no further questions. I will now turn the conference back to Ron Michels for closing remarks.

Ron Michels

Thank you very much. Your questions were excellent. It’s been a pleasure to be on my first call. I look forward to meeting everybody in person and I just want to thank everybody again for their time and their continued support of ANADIGICS.

Tom Shields

Thank you.

Operator

Thank you. This concludes the conference. You may now disconnect.

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