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Anadigics, Inc. (NASDAQ:ANAD)

Q1 2008 Earnings Call

April 22, 2008 5:00 am ET

Executives

Tom Shields – CFO, Principal Accounting Officer

Bami Bastani – Chief Exec. Officer, Pres

Analysts

Anthony Stach - Cray Comp

John Wells - Jefferies and Company

Jay Srivatsa – Roth Capital Partners LLC

George Iwanyc – Oppenheimer & Co.

Todd Koffman – Raymond James

Aalok Shah – D. A. Davidson & Co.

Parish Kumas - Morgan Keegan

Stephen Ferranti – Stephens Inc.

Pierre Maccagno – Needham & Company

Michael Birch – Kennedy Capitals

Edward Snyder – Charter Equity Research

Dan Moonset - AAD Capitals

Operator

Good day and welcome to the Anadigics Fourth Quarter Conference Call. On today’s call is President and CEO, Dr. Bami Bastani and with him is Tom Shields, the CFO. I would now like to turn the program over to Mr. Tom Shields, please go ahead.

Tom Shields

Good evening everyone and welcome to the Anadigics First Quarter of 2008 Earnings Conference call. Bami will begin tonight’s call with a few opening comments and I will then provide the First Quarter 2008 Financial Review and the Second Quarter 2008 Financial Outlook.

Bami will then follow to discuss the Company strategy and market divisioning. We will then open the lines for your questions. 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 will now turn the call over to Bami for his opening comments.

Bami Bastani

Thank you, Tom and good evening everyone. I am pleased to say 2008 is off to a great start. With our reported revenue of $74.4 million for the first quarter of 2008, we achieved record quarterly revenue in our 12th consecutive quarter of sequential growth. This represents a 10.1% increase in revenue sequentially and a 50% increase in revenue year-over-year.

During the first quarter 2008, we continued our efforts in increasing manufacturing output and manufacturing capacity. We are successful in improving our gross margins to 36.8% of net of sales and increasing our profitability with pro forma EPS of $0.15 per share; surpassing our first quarter guidance and astute expectation.

Furthermore, our business outlook for the second quarter 2008 is also positive news. We are seeking our 13th consecutive quarter of revenue growth and expecting net sales to grow approximately 4% to 6% sequentially in the range of $77 million to $79 million and pro forma EPS increasing in the range of $0.16 to $0.17.

Following Tom’s remarks, I will provide you with more detail on the company’s strategy and positioning in the marketplace.

Tom Shields

Thank you, Bami. As Bami have indicated, we are very pleased with the achievements of our first quarter 2008 Financial Results. As we reported revenue of $74.4 million which represents sequential growth of 10.1% and as important our year-over-year growth was 50%. Our GAAP EPS of $0.07 was up 40% sequentially and compares to a loss of $0.02 reported in the year ago quarter.

Our pro forma EPS which excludes non-cash stock compensation expense discontinued operations and then apparently charged on auction rate securities was $0.15 up 15% sequentially; end up 88% over the prior year.

Our reported pro forma gross margin has a percent of net sales with 36.8% compared with 36.1% reported last quarter and 34.7% reported in the year ago quarter.

Our pro forma operating income as a percent of net sales was 10.5%, a key milestone for the company.

This compares to 9% reported last quarter and 6.2% reported in the year ago quarter.

The significant factors leading to the favorable financial results compared with our previous guidance of revenue between $68 million to $70 million in a pro forma EPS in the range of $0.09 to $0.11 stems from stronger than anticipated revenue in 3G, CATv setup box and cable infrastructure. In addition, we achieved a higher absorption rate coverage on fixed overhead in manufacturing than anticipated and the hiring of certain fab personnel anticipated in the first quarter was deferred into Q2. All of which contributed to a much higher than expected revenue in gross margin in the first quarter of 2008.

Wireless revenue in the first quarter of 2008 was $51.2 million, an increase sequentially by $8.9 million or 21.1% and $26.2 million or 105% over prior year. But the wireless 3G accounted for 98% of revenue in the first quarter of 2008 compared with 98% of revenue last quarter and 77% of revenue reported in the year ago quarter.

Broadband revenue in the first quarter was $23.2 million which was down sequentially by $2.1 million or 8.5% and down versus last year by $1.4 million or 5.8%. Our top customers in revenue for the first quarter 2008 included Samsung, Intel, LG and Walway.

Operating expenses it the first quarter of 2008 were $19.5 million for which R&D increased at $0.7 million from last quarter rising from increasing revenue opportunities within each of our product lines. SG&A increased $0.6 million from last quarter principally due to increased sales commission resulting from a favorable revenue growth.

Our cash balance inclusive of both short and long-term marketable securities at March 29, 2008 was $166.5 million compared to $176.8 at December 31, 2007. Our capex spending in the first quarter of 2008 was $21 million with depreciation in the first quarter of $3.2 million.

Turning now to the business outlook for the second quarter of 2008, we are seeking as Bami mentioned our 13th consecutive quarter revenue growth with guidance for the second quarter 2008 of revenue in the range of $77 million to $79 million, this would represent revenue growth in the range of 43% to 47% over the year ago quarter.

Our GAAP earnings per share is expected to be in the range of $0.09 to $0.11. Pro forma diluted earnings per share excluding non-stock compensation expense are expected to be in the range of approximately $0.16 to $0.17. The weighted average diluted shares outstanding for the second quarter of 2008 is estimated at $69 million which includes $7.6 million diluted shares from the convertible notes due 2009, thank you. I would now like to turn the call back over to Bami.

Bami Bastani

Thank you Tom and good evening everyone again. Our paths remain in the continued build up of our capacity to meet the growing demand for our business, our products, our customers and to sustain increasing profitability to meet the expectations of our shareholders. We recognize that this is a continuing process. We are addressing these opportunities to the following strategies, first by ensuring that we have adequate experienced personnel and equipment necessary to maximize outputs from our existing, Warren, New Jersey products.

We go then to just focus on operational metrics. We expect our product outputs will be capable of reaching its full capacity as expected in the second half of 2008; second, by adding flexible wafer outputs by developing foundry of relationships, which is underway. We expect to be delivering products through foundry by this yearend. Third, by completing the build out of our China platform in Kunshan ,China, this project is well underway and we expect this fab to come online in the second half of 2009. And fourth, by managing and exceeding the requirements and expectation of our customers and partners, this has been a key area of focus for our senior management team, I am pleased to say that in many ways, it has further enhanced our relationships with them.

Now, I would like to review some of the programs driving the demands for our business lead products within wireless and broadband. I believe that everyone is familiar with our goal drivers which are well articulated within our annual report. I am not aware of any other company in our industry who has better positioned itself with not one, not two, but three mega trends of multimedia handsets, Wi-Fi, Wi-Max, mobility and CATv triple play, with its differentiated technology than marked key partnerships and customers in Anadigics.

Now in wireless, we grew revenue sequentially by 21% and over a prior year period, by 105%. Our growth continues to be driven by increased demand for fiber optic tiers, traction in the adoption of 3G continues to be strong worldwide and demand for our top tier customers is healthy. Since we have consciously focused our product development and marketing on advanced 3G EDGE, WEDGE, Wideband, CDMA, HSPA and CDMA-EVDO technologies, the 3G Wideband CDMA EDGE products are ushering in higher gross margins, it is not just broadband product mix that enhances our gross margin now.

Our key highlights in wireless for the first quarter of 2008 include, we will increase production of high efficiency HELP2 power amplifiers for CDMA e-video phones to record levels and introduce a new product generation for the new AWSC band phones. We increased production of our highly efficient HELP3 power amplifiers for Wideband CDMA HSBA phones and data cards to record levels and continuous development of low band products for American, European and Japanese designs. We introduced our new polar EDGE power amplifiers for respective call com chip sets and offer innovative approaches to increasing talk time and reducing board requirements in handsets, data cards and embedded modules.

We have new products with call time reference designs are going to market. These include new HELP3 and HELP4 Wideband CDMA and HSBA clocks, new polar EDGE PA and our ZeroIC which is trademarked CDMA e-video bypass PA’s are entering production. Demand for our products remain strong going into Q2 also, driven by the customer phones as the LG NV, which is the VS9900, NV2 VS9100, LG Voyager QWERTY, new Chocolate and others.

Also, Samsung SHGU700 Ultra Edition, SGHJ200, HGS750, SGHU900, Zero Wireless air cards 81881 UUSC model, QuallComm Gobi platform, Quall Centro, recent additional rim BlackBerry 8700C and many other CDMA e-video EDGE and Wideband CDMA HSPA models.

Now in broadband, our first quarter financial guidance reflects roughly that we are seeing signs of the slow start in the CATv market for the table TV infrastructure and setup boxes. I am happy to report that our setup box business actually increased by 10.2% sequentially and 12.2% over the prior year quarter. Moreover, I am pleased to report that the secured production orders for our new one Gigahertz multi integrated tuner as well as active splitters from our tier one setup box manufacturers.

While CATv infrastructure did decline sequentially, it was less than previously thought, and as anticipated, we remain on track that CATv infrastructure resuming expected growth in the second quarter. Additional highlights include that we are now in production in volume with active splitters in files digital setup boxes. We are also into production with boxes three reverse amplifiers. Our Wi-Max revenue grew by 47% over the prior quarter and we are continuing to see increasing growth in demand for our Wi-Max PA’s. These includes both fixed point and mobile applications in the 2.5 and 3.5 Gigahertz frequency bands.

Some highlights in the Wi-Fi and Wi-Max include, we have received production orders and are shipping PA’s for the next generation 80211N platform using tier one notes for PCs from Intel. We have volume production shipments of our wireless band, BlueTooth, Ultra low current sign-on ICs into tier one US Smart phone manufacturers such as Palm. We have secured initial production orders for the high powered, high performance wireless and BlueTooth sign-on IC from leading Japanese module integrator that is supplying one of the innovative tier one US Smart phone manufacturers. We are shipping production orders of the 2.5 Gigahertz mobile Wi-Max PAs to VTE and Samsung for the Sprint’s US market buildup and other overseas operators and our PA’s are now in leading Wi-Max chips and reference designs such as VC and SeaQuans.

Now in closing, I would like recap that Anadigics is in the front of the technology cycle. Just look at our innovations in HSPA, HSPA-plus, 80211N, Wi-Max, dock history and files. For example, dock history, with 3S factors in the current dock S20 modems. We remain optimistic about the growth opportunities in our industry as a whole for our sale in our peers. The power amplifier market is in a new phase of growth with 3G requiring multiple amplifiers and Wi-Fi providing a second engine for growth. The strategy analytics is predicting the Gallium Arsenide IC markets to exceed $5 billion by 2012 and we are building our company as a major player to secure healthy market share of that business.

We are equipped to achieve goals as we are on track with our capacity additions in New Jersey, our foundry developments in Asia and our building construction in China. As you know, Anadigics has a strong balance sheet which is coupled with the opportunity to have that we have for continuous cash generation from operations paves the way for funding our growth in both short term and long term. This will continue to position us a strong player in our space. We believe for the foreseeable future that capacity and market demand for industry will be at a tight balance as the demand for advance multiple power amplifiers for 3G and Wi-Fi challenge the available capacity. This brings the stability and value-add differentiation for innovation to our markets where Anadigics has excelled.

At the same time, we know that revenue growth while it is necessary is not sufficient alone as used by our shareholders, as such we remain focused on the continued and sustainable expansion of both gross margin and earnings per share. And lastly, I am pleased to say, we took a significant step in aligning our metrics for variable incentive compensation as suggested by our shareholders by replacing EBITDA with EPS beginning of this calendar year 2008.

We now open the lines for questions and back to you, Operator, thank you.

Question-and-Answer Session

Operator

(Operator Instructions)

We will take our first question from the side of Anthony Stach from Cray Comp. Please go ahead.

Anthony Stach - Cray Comp

Hi guys! Congratulations and good job. Can you give me a quick update on the capacity, do you still expect to be exiting Q2 on that $90 million to $100 million out of New Jersey and then I have got a couple of other follow ups.

Tom Shields

We should be exiting Q2 around $90 million and probably Q3 around a hundred. Those are good, what I call capacity capabilities.

Anthony Stach - Cray Comp

Okay and if I am not mistaken, Bami, you said you expect to have the foundries up by yearend, could you give us a sense of if you think that is late Q3 or that is in Q4?

Bami Bastami

That is more of a Q4 proposition.

Anthony Stach - Cray Comp

Also, Bami could you give us a sense of kind of new customer, I am just curious as to what you have in the pipeline, what you are working on, and also an update on the Wi-Fi industry and what you see going forward via handsets and the held phone.

Bami Bastami

Let me take that second part first in terms of the pipelines via handsets. We see the Smart phones are making a reasonable strong push into incorporating these things. Well, most of the Smart phones are BG, they are not ABG, they are primarily BG, but what differentiates the product is that you have to be ultra low currents and also low profile and then highly integrated that is like low amplifiers or BlueTooth searches and routing and those kinds of things; where we have done a very good job of positioning ourselves.

A lot of those reference designs that are involved in Marvell’s standouts very strongly and some of the stuff that they announced is based on that coupling with Marvell’s chip sets, and then this first question was, in terms of the new customers, I would say primarily today, our business is driven by the strength of our top five or six customers and then the demand and the supplies that are affecting the marketplace. People like Samsung and Intel and LG and Cisco and Walway and more on the broadband.

So those are all roughly about 10% or more customers and then there is a plethora of could I say, very good customers like Sierra Wireless which has done very well for us and then those kinds of things continue.

Anthony Stach - Cray Comp

Another, if I may ask some question with you, can you give us a sense of your expectations on the stock comp going forward? And also, if there is any change on your view of what operating expenses might look like Q3 and Q4 of the year?

Tom Shields

Sure, the stock comp was approximately about $4.4 million in Q1 and it may rise by about $200,000.00 in Q2 and then it should rise anywhere between $4.8 million rounded for the second half average and then operating expenses; one thing about what we said is that the expenses that we attempt to guide to is always positively impacted by the revenue opportunities created through R&D from customers who request our samples on other platforms, so we saw that happen in Q1. So I still hold the thought that we still can maintain operating expenses, perhaps now maybe that $200,000.00 to $500,000.00 increase per quarter going forward, but rest assured that if we see opportunities as we saw in Q1, we will take advantage of those to continue to grow on revenues.

Anthony Stach - Cray Comp

So on the $700,000.00 that you originally had thought?

Tom Shields

That is correct.

Anthony Stach - Cray Comp

One last question for either of you guys, can you give us an update on Intel and Monte Vino and what you expect otherwise, your position within them?

Bami Bastani

We do need to follow what Intel’s announcements are, we just have said that they are providing volumes since the launch, but the rest of it, we really have got to keep our year-to-date grounds with Intel guidance.

Anthony Stach - Cray Comp

Okay, congratulations guys. Thanks a lot.

Operator

We will take our next question from the side of John Wells from Jefferies and Company, please go ahead.

John Wells - Jefferies and Company

Great thank you. Great results. I wanted to ask you a question, there has been a lot of concern out there about the end markets weakening, your guidance for Q2 following such a strong Q1 is refreshing, can you go through some of the indicators that you look for for this continued strength in three different buckets, how much of that is the market share gain? How much is the overall product growth in your market and how much of that is dollar content to give you that kind of growth into Q2? Thank you.

Bami Bastami

I can answer some of them and what I do not answer, you can ask again from Tom.

What gives us comfort of course is our strong backlog, so those who have backlog programs, had backlog, but do not want to talk about design winds, we like to talk about back log. So that gives us comfort regarding our Q2 guidance.

We have a lot of our products that are multi-band PA’s right now and those pitch higher AFTs and give us bigger content in a given form. A very good example is that for example, several of the 3G phones have got our penta band products which have the EDGE-plus Wideband CD and UMTS for example, incorporated in one PA. So that is two for one.

Like I said, we are starting at getting two slots with one PA module. We have a lot of dual band PA’s going into the EVDO phones, a lot of advanced multi-featured LG phones use that technology, so content technically is a part of it and a higher content integration is one and the same as the market share. There are so many PA’s to go around and then if you cannot get your arms around two or three of them in every shot, then you are gaining market share.

If you look at from a market share, definitely, we are very positive on gaining market share in that sector. I do not know any of our peers or competitors that can say, if I talk Q3 guidance, that that also for 13th quarters, that has been with what we see in every market.

Question in the market has grown. So market share is definitely a part of it.

John Wells - Jefferies and Company

That is great and just to follow up, as a follow up question, Bami, you mentioned strong backlogs, so I am going to throw this over to Tom Shields. Tom, Bami mentioned a strong backlog, can you give us what the turns was for the last quarter and what the turns are for this quarter to your guidance?

Tom Shields

Well, I believe we walked into the quarter with the law of the range fully booked. The last quarter and this quarter.

John Wells - Jefferies and Company

Very well. Thank you very much and congratulations.

Operator

Our next question from the side of Jay Srivatsa from Roth Capital Partners, please go ahead.

Jay Srivatsa – Roth Capital Partners LLC

Thanks for taking my questions, congratulations again Tom and Bami. A couple of questions, could you tell us on the era 11 and what percentage of the Wireless LAN business was era 11 in?

Tom Shields

The revenue, 59% of revenue was N in Q2.

Jay Srivatsa – Roth Capital Partners LLC

So that is meaningfully high from last quarter. I think last quarter, we were right around 40% of it, if I am not mistaken, right?

Tom Shields

Last quarter was roughly just around 53%.

Jay Srivatsa – Roth Capital Partners LLC

Okay, and in terms of the guidance, you mentioned the infrastructure business was somewhat weak in the March quarter, can you speak to which segments do you see bouncing back? Which segments are staying where they are and just give us some color on how the product performance is going to be in the June quarter?

Tom Shields

Basically the guidance that we have provided rounded like 3.5% around to 4% to 6% and the way we look at the business is between wireless and broadband, the purpose of today’s discussion, we are assuming that both would grow in similar rates, relative to the breakdown, we do see all three pipelines within broadband grow.

Bami Bastani

And according to our structure, these are 12-volts and 24-volts and then a lot of them are one Gigahertz upgrades.

Jay Srivatsa – Roth Capital Partners LLC

Maybe the last question to follow up on what John asked, one of the companies yesterday reported numbers and they talked about they are seeing a lot of weakness in the 3G segment, and yet you feel very comfortable, but can you give us some color, is it coming from your end customers or are you back in the trends by their means, can you maybe share some insight into that please?

Bami Bastani

First of all, I truly believe that in an environment that not all companies are going to be reporting, “closed cuts on the same clause” kind of a thing. You are going to have companies that are doing better in this space than others. In the 3G for example, QuallComm is doing phenomenally well, so if you are well represented by QuallComm reference designs and in your product portfolio, then you do well in 3G. Some other chips ads guys are not doing well, so if you are in that category, you are not going to do well.

The high-end phones and the Smart Phones again are doing well, so you are in that market sector, you are doing well if you are in the low-end, you maybe not do as well.

So it is going to be what is your target market and then who are your partners and then closed friends basically. That will determine whether you are going to be doing well in this climate or not.

And I leave it at that because I know at least three large companies that raised concern about 3G, but none of them are QuallComm-centric and none of them are high-featured centric.

Jay Srivatsa – Roth Capital Partners LLC

Okay, very good. Thank you.

Operator

We will take our next question from George Iwanyc from Oppenheimer, please go ahead.

George Iwanyc – Oppenheimer & Co.

Congratulations on the results, Bami and Tom. Just following up on Jay’s question. Can you give you us what the splits are for EVDO and WCD on your 3G side?

Tom Shields

So, we had $50.1 million of total 3G revenue of the $51.2 million reported worth of Wireless. Within 3G, EVDO was $15.8 million of the total which represents 31.5% and if we look at the fourth quarter, it was 30% of the revenue of 3G that were reported.

George Iwanyc – Oppenheimer & Co.

And do you expect that rough split to hold in the second quarter when you look at wireless trends?

Tom Shields

Yes, we do.

George Iwanyc – Oppenheimer & Co.

And you said you would be at full capacity in the second half of 2008, at this point, are you meeting full customer demand or are you still constrained in some cases?

Bami Bastani

Given that, one of the things I talked about is we have had a lot of high level relationships and instructions with our customers, so basically we have matched our expectations and their expectations and part of that is of course driving gross margin in high-end phones, so where we care, the answer is yes, we are perfectly aligned. Where there is low end phone for some developing market, we basically have said that we have given those to our competitors.

So we have been aligning our strategies very well with our partners and our customers and they are being and now we are happy.

George Iwanyc – Oppenheimer & Co.

Okay, and one final question. Tom, I believe you said that you deferred some headcount additions on the fab side and that contributed to the gross margin strength, do you expect to start adding those people at this point and what type of gross margin trends should we expect in the second quarter.

Bami Bastani

It is just the timing of when the recruits show up, so it is fully baked in our Q2 guidance.

George Iwanyc – Oppenheimer & Co.

Okay and gross margin fab ad, how should we look at it?

Tom Shields

Obviously, given the results that we are reporting for the guidance, gross profit will be up in Q2.

Operator

We will take our next question from the side of Todd Koffman from Raymond James, please go ahead.

Todd Koffman – Raymond James

Thank you, great results. Just a booking question, within the broadband segment, by far the largest piece is that wireless LAN, how big was wireless LAN revenue in the quarter?

Tom Shields

That will be $23.2 million that were reported. Wi-Fi represented 65% which compared to last quarter, essentially was the same percentage.

Todd Koffman – Raymond James

Any qualitative comments about the trend in that business looking forward?

Bami Bastani

A lot of demand pull, not just from Intel but multiple sources right now. It is a good business to be in.

Tom Shields

We are very optimistic relative, in addition to our strong relationship with Intel, we have seen strong evidence of design winds relative to new programs across several customers.

Todd Koffman – Raymond James

Thank you and good luck.

Operator

We will take our next question from the side of Aalok Shah from DA Davidson, please go ahead.

Aalok Shah – D. A. Davidson & Co.

Congratulations, a couple of quick questions, one is on the front end module side. I know that you have been talking about that and your competitors have as well, one specific competitor has been talking about some shares at Samsung because the current and coming does not have the full suite of products for fun and module, my guess is that they are referring to you. Can you kind of give me a sense, Bami, what are they talking about, number one, and number two, how competitive do you think you will be on the FEM-end module side and when do you think FEM-end modules would become more important for the Korean guys?

Bami Bastani

Yes, let me just answer the first concern that you raised. Frankly, I do not believe I am losing anything to anybody. There is so much demand out there. There is plenty to go around for everybody. I hope everybody gets a piece of it. Certainly, as you can see from our growth, we are riding the wave in a very strong way. Depending on the phones, you would see people who want to use FEMs or not. Some of our friends today are on some very nice high-end phones, so we do ship FEMs to do the high-end phones.

My estimate is in the 3G space, if you set Nokia aside, in other words, if you go with the QuallComm followers, you are in the single digit percent and this deal with very ultra thin this or ultra compact that and then over time, I see the penetration of FEM’s increasing also and we will ride that wave too.

So today, we are getting more than our fair share of whatever we produce today and then we will drive to get whatever is more than our fair share is for tomorrow, but FEM is a factor of today, it is a small percent when you count today’s QuallComm following and over time, it will increase and then we are riding that wave too.

Aalok Shah – D. A. Davidson & Co.

And then, Bami, is there something you are missing right now in terms of having a full scale FEM product, I mean, is it the filters or it something else that you might not have that somebody else might have and is something important at this point to focus on?

Bami Bastani

No, actually, a year and a half ago, if you go to the press releases that we put out there, we announced our FEM product at the GSM Congress along side with QuallComm, so we are open for business. We also are working with the Japanese module integrators. Where they have their own complex packages like LTCC or other things, and where they are by a highly integrated guy from us, so our decision in the FEM is when it comes to the filter, it is much better to buy it than to make it because we get the best of these products from the guy who is best at it.

Somebody like Fujitsu, Morata, IpCo, Seaside running around circles around other people when it comes to filters. So it is made for us and we decide to buy those and also in their strategy is to supply some standard FEMs and we play with that by providing that.

So our penetration in FEMs is increasing actually through both participation, both angles, and we are very happy with it.

Aalok Shah – D. A. Davidson & Co.

And then last question for me, just on the ASP front, has anything changed in the last couple of quarters from you guys in terms of what you are seeing inside the marketplace from the RESPs, coming under pressure at all more than usual?

Bami Bastani

No, I think, as I said, part of my prepared remarks, actually, we believe there is a stability in the marketplace right now because there is a very tight balance between capacity and demand, and with demand growing, just globally growing for this class of products, that balance will be in place and it is that tight balance, so there is no need for pricing stability.

Aalok Shah – D. A. Davidson & Co.

On the setup box side, I think you guys have mentioned that things are starting to improve a little bit, can you give us a sense of what linearity might have looked like on the setup box side throughout the quarter and kind of your prospects, I know that you may have mentioned this on Q2 already, but just give us a sense of what do you think is going on in the end-market for setup boxes right now?

Tom Shields

Obviously, in February, we had our Fourth Quarter Earnings Call, at that point, we probably had it expected or even suggested that setup box might be flatter, may be slightly down. As we saw in our past few earnings calls, our momentum started to build through our customer base and the demand that continued to increase for shipments in Q1 and we see that continuing obviously in Q2. We are in multiple digits. All digital setup boxes with both, well, Cisco and of course, Motorola, so we are seeing a robust, I would really classify as robust opportunities throughout the year.

Bami Bastani

Well one specific example that are brought up are FiOs. FiOs has significantly picked up steam in terms of demand above our initial projections which is good, not only our projections, but projections of people who were giving projections. So that is a good example of a digital setup box that we are participating in and that is doing very well.

Operator

We will take our next question from the side of Parish Kumas of Morgan Keegan, please go ahead.

Parish Kumas - Morgan Keegan

Hey guys, first of all, Bami and Tom, congratulations. I have got to say stellar numbers, stellar guidance, could not be happier with your results. Most of my questions have been answered, I have got a couple. Your gross margin, going back to the March quarter was obviously significantly better than what you were expecting yourself and what you have guided to, I was wondering outside of just the revenue increase, if there was any one factor that might have contributed to the margins coming in strongly for March.

Tom Shields

I have communicated in my prepared remarks that the combination of 3G, 3G by far was up essentially, 3G exclusive of the EVDO portion was up $5.2 million or 18%, so obviously, it is the healthier gross margin than the other product lines, that combined with a lower percent of decrease in infrastructure and a greater rise in setup box was significant to the given gross margin impact.

So all in all, again, we have been always talking about if we can ship a certain weigh of revenue toward certain product lines, we will continue to increase in gaining greater leverage, now as we saw in Q1.

Bami Bastani

And on fab rounds, fabulously! Our fabs created more output, just hummed like your smooth engine.

Parish Kumas - Morgan Keegan

So that actually takes me to the next question, fabs has been an issue for a lot, so we take it that that everything is all set, that Bami if I was to ask you, is there any more expansion to be done in the fab or are we all good there with the fab, no more changes to it as we stand?

Bami Bastani

The fab is a continuous thing, because as we said, we reached that $100 million a quarter capacity around the fourth quarter timeframe, $90 million around third quarter or exiting into Q2 into Q3 timeframe so far, so when you are growing a company, expansion is a fact of life, and so what you have got to do is just focus on execution and make sure you do not hit bumps on the road. But just, all hands on deck.

Parish Kumas - Morgan Keegan

And your guidance, just real quickly, real rough shows tremendous cost control. Obviously, your revenues are going up. I think you said your opex have gone up 500K, that also indicates margins moving up pretty nicely just to make the numbers or given that you are going to have seven million shares extra, can you give us a rough idea, what is going to be the big driver for margins outside, is there any other factor outside of cable infrastructure or is that the big one or mixed?

Bami Bastani

Well as part of the questions earlier, I cannot get them, but the one we have which is 3G has been tremendous. Technology is by far superior, so with the 3G momentum and obviously, the increase in the cable setup box and the infrastructure for the second quarter, in addition to the continued ability and opportunity created by our fab through execution is really pushing us relative to the increase in margin quarter-on-quarter.

Parish Kumas - Morgan Keegan

Got it, guys. Tremendous numbers. Thank you.

Operator

We will take our next question from the site of Steve Ferranti from Stephens Inc., please go ahead.

Stephen Ferranti – Stephens Inc.

Hi guys, terrific quarter, congratulations. You touched earlier upon the QualComm references on as being a driver for much of the success that you are seeing on the 3G side, I wonder if you can sort of give us some more color in terms of how much your customers are still relying on that reference design as sort of a template and how much you are seeing pull through as a result of that, and then I guess as a follow on to that, are you seeing competitors, newer competitors come in and start to be qualified on those designs as well.

Bami Bastani

We still view QuallComm as the strongest horse out there as reported by their own results and then guidance and are there new players coming in? Of course there are, we certainly, with Sony, the Ericsson mobile platform P&P is out there, there is BroadComm out there and there is NXP which is now combined with the C-Micro out there, and I believe all of these people will get certain amounts of share, but also, remember you are in an expanding market when it comes to 3 to 3.5G, so we still view the existing order is QuallComm is very ahead of others and there is room for others.

Stephen Ferranti – Stephens Inc.

Well, I guess my question was more aimed at are you seeing any of your competitors that were not previously, so you expect them on that reference design trying to perhaps gain traction in any of those slots.

Bami Bastani

In general, we expect our competitors to be in the 3G business, and remember, we are even today, with our subsidiaries, we are only I would say 25% of the market share, roughly.

So the other 75% is shared by our competitors; whether it is to the EMG reference design, which is the next big guy or with QuallComm which is sitting next, so absolutely. This is the market that in the fullness of time, will be more than 1.5 billion handsets in the next two or three years and I hope there are three or four players sitting next to us.

Stephen Ferranti – Stephens Inc.

And just turning to the gross margins, it looks as though we are sort of back on track for the 50% sort of drop down margin, does that imply that, and you touched on this earlier, but just wanted to clarify, does that imply that we are back at a more I guess modest level of increasing the fixed portion you crossed that you had sold?

Tom Shields

We obviously have communicated several times that we are focused on gross margin and EPS growth and that is our job and that is what we are trying to do day in and day out, and as we look forward, one of the key drivers is the product mix and part of, especially last quarter was the fact that the EVDOP’s is certainly important to our business and will continue to be. We still have a certain lag that are lower margin than we would like and we are looking for new certain things to get the margin up, but we are seeing a significant pull relative to the product lines that are favoring the gross margin and that is coupled with the fab as it continues to do what it has been doing lately which is being efficient, that is going to help us raise the ball even further, but certainly, we have a lot of nice levers that we have been following up of late, and you see, these are going to give us a rise for continued leverage quarter on quarter throughout the year.

Stephen Ferranti – Stephens Inc.

Great, and one last one for me, last quarter, you talked about leaving some money on the table, do you feel as though that there was some money on the table this quarter that you could have gotten if you had the capacity in place or are we past that point now?

Bami Bastani

The fact that we were expecting in the high 60’s and then we delivered mid 70’s; it means that we ousted ourselves, put it this way and I believe right now, we are in balance, I believe we are in balance and the more capacity, we bring them lines, I think we would be good for even building some like wide-bands and some finished goods, so you can cater more to customer delight as there are making changes and things like that, so I am happy where we are in terms of serving that margin and what I would say, a fair share of that market.

Tom Shields

I would just like to say that the revenue that we reported was very important in the eyes of our customers because we have actually demonstrated that we have made that issues where we have had unfinished goods at the start of the quarter. What it basically tells you is that cycle time is improving and obviously the efficiencies are improving and we will gain the confidence of our customers relative to shipments going forward, so first quarter was really impactful relative to what we discussed with the customers, so we are very pleased.

Operator

We will take our next question from the side of Pierre Maccagno from Needham, please go ahead.

Pierre Maccagno – Needham & Company

Congratulations on the quarter, Bami and Tom. Most of my questions were answered, and let me just about wireless or handsets, so what do you expect in the second half of the year, is there some significant volume do you expect or what can you tell us about it?

Tom Shields

There is no doubt, obviously, just look at our customer base today and we have also been discussing and well we have it in our press release, the comment on relative to additional customers in the wireless space, we have been growing relative shares with our customers, so as we look at perhaps the platforms to be shipped in the second half, there is opportunity for us to continue to gain shares, so if the customer in the market and the economy goes well, obviously, we are looking to have a continuation of an increasing revenue in wireless each quarter.

Pierre Maccagno – Needham & Company

But my question was specific wireless LAN for handsets.

Tom Shields

Wi-Fi for handsets.

Bami Bastani

We see Q3 probably, beginning of that as it materially develops for us and Q4 growing from there.

Tom Shields

I am sorry, Pierre, you are absolutely correct. We call it pre-production, but probably a little more than pre-production beginning in Q3 and we should see some material revenue commencing in Q4.

Pierre Maccagno – Needham & Company

And the difference of your design, I mean, is it significant or anything that you can comment on?

Bami Bastani

The designs are catered to very low profile packages. They are catered to very low current and they are catered to integration of functions such as switches, low noise amplifiers, BlueTooth, routing and those kinds of things. So yes, they are the same building blocks, but tailored in a different way and integrated for low current operation.

Pierre Maccagno – Needham & Company

And then the ASPs, the gross margins, how do those compare with the wireless LAN for the PCs?

Tom Shields

It is much of the end platforms that we are shipping today.

Pierre Maccagno – Needham & Company

Is there going to be an end time?

Bami Bastani

Right now, most of them are BG, BG but with more content such as LNA’s and switches and BlueTooth, routing and et cetera.

Operator

We will take our next question from the side of Michael Birch from Kennedy Capitals, please go ahead.

Michael Birch – Kennedy Capitals

Good afternoon, guys, nice results. Just a couple of quick questions, I want to ask about the capex thoughts. I guess, I was thinking about in cash flow assumptions, can you give me, Tom some thought about sort of how this is going to track over the year and from where do you think you are going to spend and sort of what level?

Tom Shields

And right now, I am estimating around $50 million for 2008, which includes our thinking relative to China, as we assess and gain greater information on the growth in 3G and all other product segments, one thing we have to be very mindful of is capacity. So Bami talked about our capacity in Warren for 2008, we discussed the opportunity for foundry development in the second half of 2008, and as we look at this 3G market, and it really goes well with multi content, and we have to look out and say, where is the additional capacity going to be coming from, so we would have to act quickly relative to fab capacity in China, so we will have more to say upon that as we get greater research, but for 2008 it is $50 million and we are re-evaluating the need for just some capacity to come online if we need it at an accelerated pace.

Michael Birch – Kennedy Capitals

Okay, so you think about that $50 million, do you think the bulk of that is spent for over the year, second half of the year? I am just trying to get some sense of about how you guys are going to be going to that and then if you can tell me too, Tom, about how much it would be, if there is any building expansion, that kind of thing?

Tom Shields

Okay, so we had $21 million in Q1, so over the next couple of quarters, you will see a majority of the spending occurred and for build outs, there are no build out for the building itself for Warren, except for perhaps the building relative to China, so you are talking about maybe $5 million dollars relative to the buildings itself. I hope that helps you.

Michael Birch – Kennedy Capitals

Okay, and then in terms of the foundry relationship. As you think about how that might lay out for you guys, I understand you are in the early stages of this, but would you foresee something in the order of 10% and 20% of your total productions, how would you think that reflects, I would want some idea of what your thoughts are.

Bami Bastani

Well, the 10% to 20% is the right mix in terms of independence on foundries and that gives you flexibility for surge and/or for some of the opportunities that you otherwise may not.

Michael Birch – Kennedy Capitals

Okay, and how do you think that might take to qualify someone for your products there?

Bami Bastani

We should be shipping products by fourth quarter this year.

Michael Birch – Kennedy Capitals

Okay, so in theory, you should sort of know who that is by now, right?

Bami Bastani

Absolutely.

Michael Birch – Kennedy Capitals

And last question, in terms of the converts that are coming into next year, what are your thoughts about taking care of those, maybe perhaps--?

Tom Shields

Obviously, they are selling well above par, I forget, maybe it was 176, I forget the exact number, but it is very difficult obviously to take them down, and it is more if they are willing to convert early, so at this time, if it was a different market, with probably different vehicles with those alternatives, we do not have the alternatives today.

Operator

Our next questions comes from the side of Ed Snyder from Charter Equity, please go ahead.

Edward Snyder – Charter Equity Research

Thank you very much and I know that you said that you are expecting utilization to exit Q2 at 90%. Where are you now and then in terms of the capacity expansion, do you expect them all to be, you are adding capacity as you go along, how are those chunks going to show up? I mean, are you going to spend another $50 million for the whole year, should we expect a kind of a linear expansion in your capacity as you go along, or is it going to show up more in a kind of lumpy?

Tom Shields

I do not believe we started at 90% utilized, what we were referring to was the extra rate once the capacity for the equipments that are installed in Warren to exit perhaps Q2 going to Q3 to $90 million capacity, the availability and then of course, anywhere between $90 million to $100 million.

When we are looking at the capex, we are right now budgeting $15 million to $17 million in Q2 and then relative to Q3, with maybe just the same, $15 million perhaps and then with the spillover into Q4.

Edward Snyder – Charter Equity Research

What was your utilization in the current period?

Bami Bastani

I am going to kind of say if you look into the four walls, which is the infrastructure we had in place, we can ratio $74.4 million to maybe raise that to $100 million per quarter.

Edward Snyder – Charter Equity Research

So it is probably 75% utilization basically?

Bami Bastani

That is 75% to the four walls, to the equipment as you know, equipment keeps coming in and gets installed, to some equipment here at 100% and then to some equipment you are in the 40% to 50% depending on if it was just recently, it bumped up the capacity with.

I mean, with that, what it says is that as new tools come in, we get even further efficient because again, the figure of maritime utilization will go higher and higher.

Edward Snyder – Charter Equity Research

And then I know it is probably pretty far out there, but any guidance on when you think you might be paying cash taxes or accumulating cash liabilities against your profitable?

Tom Shields

At the current time, there is no plan of recording a non-cash tax provision in 2008. We are working externally with others and tax professionals, so we expect some time in 2009 and obviously, given the results in Q1 and what we have got into Q2, we would expect people comping in 2009, but I do not think it is going to be significant.

Operator

We will take our next question as a follow up from Jay Srivatsa from Roth Capital, please go ahead.

Jay Srivatsa – Roth Capital Partners LLC

Bami, can you speak to the cable modem 3.0 market. We have heard that market clearly has a lot of momentum going into the second half, what kind of timing are you seeing in terms of people transitioning over from the existing cable modems and 3.0 and how, when do you think it is going to be material for you?

Bami Bastani

What we saw is people are getting ready for a launch and in the pre-build stage right now, and then we are getting those kinds of production orders. I referred to that in my script as pre-production. Orders are coming in in those categories. We are looking at it in the second half this year launch, my guess, and I am sure there are better guesses than mine is that you would be looking in the single to 10% digit penetration hopefully this second half and that is considered success and then, last time, DOCSIS1 and DOCSIS2 transition, the whole thing happened in approximately about 18 months, so once the flight wheel starts going, I anticipate we are going to be pretty fast.

Operator

We will take our last question from the side of Dan Moonset from AAD Capitals, please go ahead.

Dan Moonset - AAD Capitals

Thank you for staying on as long as you have for the call, I have got three different questions. The first question, it seems like, over half the questions on this call continued to center around relative market share. So can you talk about, I think you referenced a $5 billion market in 2012, if you are 25% share right now, that would put the market in about $1.2 billion, the goal from a $1.2 billion to $5 billion, apparently people do not believe, can you give us a sense or any kind of qualitative assessment of how we get from $1.2 billion to $5 billion and how that breaks out in the three major legs of the stool?

Bami Bastani

Today’s market is bigger than $1.2 billion. If you take all of the other elements of Gary Morrison, I would see that is in the marketplace, but be it whatever relative to relative numbers are, the handsets are going to be by far the biggest driver.

We are going to put it this way, their PA’s as you deal with PA’s for 3G going to 3.5G to 4G, and then if you looked at it, Wi-Fi is I would again a PA play, so I would say out of that $5 billion, about 80% of it is going to be power amplifier driven roughly.

Strategy analytics have a very good report on that and they segment the market very nicely and they cover it in-depth, but clearly the two big engines are handsets and Wi-Fi connectivity and are coursing between, you fill the space with new things such as Wi-Max which just a couple of years ago and is still is a very small amount, but could grow to be about I would say 4G world, Wi-Max in my mind could be about 20% to 25% of that 4G world, and I would give probably 70% of it to LTE as the standard as these new standard.

The other phenomenon is that we keep increasing number of bands, whether we want it or not, keep increasing the number and each band requires a PA and so we do not see that, and if you look at QuallComm GoBi platform for example, now it mimics the same things that we have seen on the notebook PCs and the Wi-Fi and Wi-Max arena developing bridge, now you are talking about an HSPA plus Wi-Fi and if you look at the 3G handsets, which have got their own multiple things, the new reference design also support Wi-Fi capability on these multimedia handsets.

So it is a growing world. It is absolutely a growing world from where we sit.

Dan Moonset - AAD Capitals

Can you talk about Apple, the good and the bad. I have to imagine the 3G iPhone coming out here in December, if nothing else, could be disruptive as well as beneficial for the overall market. What is your perspective on the good and the bad with Apple. Apple coming out, are we correct in assuming that the guys at Apple will never know if you are part of that or not?

Bami Bastani

Because it is Apple, we will never know if we are part of it or not. Unless, you open one up and look for us.

But what I think in terms of just general manufacture of the Apple phone, the graphic user interface on it is phenomenal. It has a very nice graphical user interface. Competition is not sitting idle either. That is something that once the race begins, people jump in, but one of these days, I think someone in June or so is the first to release the 3G which I think is a must have these days.

But also, do not discount Apple’s competitors.

Dan Moonset - AAD Capitals

Bami, it has to do with increasing shareholder value, very much appreciate the change in long term compensation model and EBITDA to focus on earnings per share or is that being a part of the component, can you talk about it, just give us a sense in terms of your philosophy on a company buyback. I think obviously, you have painted a picture of what capacity is going up, step function meaningfully, I can understand that, but maybe just a comment on the stock two weeks ago was the same price when you were doing $75 million a year, and now you are doing $75 million a quarter, just the balance between the buyback, or not a buyback and then if it is okay to ask on a public call just year 10B5 program and monthly insight are selling? Thank you.

Tom Shields

I would be happy to comment on buyback. We have just received, if you inquire regarding the buybacks, certainly, it would stop with the press unfortunately relative to the facts. We certainly have evaluated the opportunity, but as Bami said, and then Dan, as you articulated, relative to the potential side of the market, the balance sheet is strong and that we expect to continue to generate cash from operations, however, we believe that we need to maintain a healthy balance sheet to fund the company’s growth.

Just do not ask what the capex spending was for 2008, and we are seriously looking at the additional capacity for this $5 billion market and therefore, we have a test that perhaps we will kind of need to have down the road, so right now, it is very prudent for the company relative to the shareholders that we retain the cash to fund our growth and that is where we are at.

Bami Bastani

I would like to also supplement is that the caliber of the customers and the partners that we have, people like Intel, Cisco, QuallComm, they like to see a strong balance sheet because generally, when we partner with someone in the RF, it is for the long haul and there is a lot of unique solutions that you cannot replace turn of the dime, so they want you to be able to weather the industry’s ups and downs, so part of maintaining a strong balance sheet also in addition, the growth that we see ahead of us is to make sure those customers are in their comfort zone also.

Dan Moonset - AAD Capitals

And then finally, your 10B5 program?

Tom Shields

10B5’s are put in place long in advance; sometimes you think about it, it is about the smartest thing you did, and sometimes, you say, this may not have been the smartest thing you did depending on the trials of this product, so you better let them run. You cannot seem to appear with them, that is the intent, as said by the authorities and I am just going to let them run, and take the good with the bad, so we let them run, it is not something to be proud of, but just let them run.

Operator

We have no further questions at this time.

Bami Bastani

Well, it has been a wonderful Q1 and we are off to a good start and let me just make a couple of comments here. For those of you who follow us and there has been relentless rumors left and right about market share gain and loss and things like that, by our peers, by our competitors, but some analysts have faith in us. I do not know of any company that has delivered 12 consecutive quarters of growth that is market share and have guided us to the 13th. Competitiveness is in our DNA, our leadership is validated by the success of our products, our strong financial performance and our Q2 guidance’s momentum, as we work towards delighting our customers and creating value for you, our shareholders. Thank you very much.

Operator

This does conclude today’s teleconference, you may disconnect at any time and have a great day.

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Source: Anadigics, Inc. Q1 2008 Earnings Call Transcript
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