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ANADIGICS (NASDAQ:ANAD)

Q2 2012 Earnings Call

July 30, 2012 5:00 p.m. ET

Executives

Ron Michels - President and CEO

Terry Gallagher - CFO

Analysts

Quinn Bolton - Needham & Company

Blaine Carroll - Avian Securities

Dale Pfau - Cantor Fitzgerald

Harsh Kumar - Stephens

Aalok Shah - D.A. Davidson

Ed Snyder - Charter Equity Research

Pete Enderlin - MAZ Partners

Operator

Good evening. At this time I would like to welcome everyone to the ANADIGICS second quarter earnings conference call. [Operator instructions.] Thank you. Mr. Terry Gallagher, CFO, you may begin your conference.

Terry Gallagher

Thank you, operator, and good afternoon everyone. Welcome to ANADIGICS second quarter 2012 conference call. With me today is Ron Michels, our president and Chief Executive Officer.

During the call, we will make forward-looking statements about our business. I must remind you that actual results could differ materially from our projections based on various risk factors, including those described in the press release issued earlier today, and our reports on Forms 10-K, 10-Q, and other filings with the Securities and Exchange Commission.

All numbers during the call will be presented on a non-GAAP basis. Non-GAAP financial measures exclude equity compensation charges and other specifically identified non-routine items. These non-GAAP measures are provided to enhance the understanding of our core operating performance. A full reconciliation of these non-GAAP measures to our GAAP results was presented in our press release.

With that said, today I’ll begin with our financial discussion. For the second quarter, revenues were $25.1 million comprised of $18 million in wireless and $7.1 million in infrastructure, formerly referenced as broadband.

Sequentially, this represents a reduction of $3.3 million for the first quarter, or a decline of 11.7%. As expected, infrastructure declined marginally after supplying pent-up demand in Q1. The lower revenue in wireless was principally due to an anticipated reduction of $2 million with Research In Motion, and then also by smaller declines in China OEMs who saw their own market shares drop as Apple and Samsung increasingly dominate smartphone sales.

For the quarter, we again had three greater than 10% customers, namely Samsung, ZTE, and Huawei, and another five customers in the 5% to less than 10% range. These customers include Cisco, LG, two of our distributors, Richardson and World Peace Group, and also Sierra Wireless, who replaced RIM within this category in the quarter.

Gross profit was impacted first by the decline in revenue and second by lower absorption of manifesting costs beyond the implemented cost reductions. We also absorbed additional costs as we introduce and ramp new technologies, processes, and products. Over time, these margin headwinds will ease as revenues recover and we complete the transition from legacy to new products.

In total, our non-GAAP gross profit declined sequentially by $3.8 million. For the quarter, our non-GAAP gross margin was negative 7.7%. Research and development expenses declined 4% sequentially but remain elevated as we continue to bring more products to market and accelerate new product introductions. There is substantial activity in the wireless area, and we view our offerings as differentiated and highly competitive. We’ve received positive market feedback from customers and are working to secure design wins in support of revenue growth later in the year and into 2013.

Selling and administrative expenses decreased by approximately 6% to $5.4 million following our second quarter reductions in force as we continue to eliminate or reduce noncritical expenses. We remain focused on streamlining our cost structure and on that front, we recently took additional actions that further reduced annualized expenses by over $1 million.

Our non-GAAP loss in the second quarter increased sequentially by $3 million to $17.9 million, or $0.25 a share, which excludes stock based compensation and the Q2 restructuring. Our EBITDA loss also increased by $3 million to $13.8 million for the quarter.

We ended Q2 with a strong balance sheet including a solid $73.1 million in cash and marketable securities. Working capital was well-controlled, with a reduction in accounts receivable to 46 days, while inventory was reduced to a level that approximates five turns per year.

Capital spending in the quarter was $0.7 million, and depreciation expense was $4.2 million. Capacity utilization was approximately 40% during the quarter. As in past quarters, we will not be providing specific guidance. However, as indicated in our press release, we believe revenues have stabilized as new products and wireless ramp and offset the decline in legacy business.

We are pleased with the traction we continue to see in the development of our new products, and for further on products I’ll turn the call over to our CEO, Ron Michels, who can discuss it in more detail.

Ron Michels

Great, thank you Terry, and good afternoon everyone. Today I would like to review market dynamics, the progress that we’ve achieved with our new products, and catalysts that we anticipate will drive new revenue.

ANADIGICS growth strategy relies on three market drivers, all fueled by the increasing demand for wireless data consumption. The first driver is the accelerated transition to 3G/4G, which is accompanied by growing RF front-end content in mobile devices. The second driver is the increasing carrier deployment of small cell networks that utilize our infrastructure power amplifiers, and the third driver is the expanding use of high-performance wifi enabling higher data rate connectivity in mobile devices.

These market drivers are creating new applicational areas where we will be able to leverage a clear competitive advantage. Our first growth driver is the accelerated adoption of high-speed data devices in wireless markets. While overall mobile device shipments year to date have remained flat, our newest generation of products in the development pipeline are focused on high-performance 3G/4G devices.

This market segment offers an exceptional growth opportunity. In June, we announced our new ProEficient amplifier product family that uniquely provides high efficiency across all power levels. These power amplifiers lead the industry with an unprecedented 48% efficiency at high power, combined with greater than 25% efficiency in low power mode. ProEficient products therefore deliver longer battery life for more talk time and greater data application use.

Since sampling our first single-band ProEficient solution in May, customer reaction has been phenomenal. We’ve secured several design wins since starting production shipments to tier one OEM, which is expected to further ramp up during the third and fourth quarters. We also received tremendous customer pull for ProEficient performance in other bands, and are now sampling those products. Additionally, we’re preparing our next-generation dual band power amplifiers based on ProEficient technology as well.

Our multi-mode, multi-band, or MMPA, products, which address the need for higher levels of integration across bands, have achieved commercial success and expanded our served available market. We have design wins across two OEM customers, and have started production volume shipments for mobile devices that are expected to launch in the third quarter.

Also, we’ve secured additional sockets with our Penta-Band 3G/4G power amplifier, in both data card and automotive and applications. We expect to start production volume shipments to customers late in the fourth quarter with a steady increase throughout the first half of 2013.

Furthermore, our dual-band power amplifier has continued to be recognized by manufacturers for their strong combination of performance and integration. Samsung is using these power amplifiers for the new Galaxy S3, available on both the Verizon and Sprint networks.

With the successful market introduction of MMTA, outstanding design win activity with ProEficient power amplifiers, continued traction with our Penta-Band TA, and dual-band design wins in flat flagship products such as Galaxy S3, we believe ANADIGICS’ wireless mobile device portfolio is positioned for strong growth.

Our second growth driver is the development of small cell devices, which we believe represents an economical and pragmatic solution to address the rising demand for mobile broadband data. Traditional wireless infrastructure buildouts require significant capital expenditures. However, the use of enterprise-class small cell solutions allow carriers to precisely target areas of dense wireless broadband demand. These can include universities, office campuses, and shopping centers.

During the past quarter, we continued to expand our family of high-performance small cell power amplifiers to support additional bands and additional power levels. Customer interest in these solutions is strong, and we have considerable traction in this market, with a growing number of design wins. Working closely with industry leaders, ANADIGICS is now specified on Qualcomm and Mindspeed reference designs.

We believe the small cell power amplifier represents a significant growth opportunity for us for our infrastructure business. Several enterprise class solutions are expected to launch in the upcoming months, and recent market forecasts indicate that unit shipments for the entire small cell market will grow by a factor of 5x next year.

In the CATV market, we continue to anticipate stable, long term growth. Across all markets, we are leveraging our proven line amplifiers in head-in and distribution applications. We’re also working closely with key customers as we build traction for our next generation gallium nitride line of amplifiers. Building on our reputation for reliability and ruggedness, ANADIGICS is continuing to innovate within the CATV market space, and expects to introduce new products later this year.

Lastly, our third growth driver is the expanding use of wifi for high data rate connectivity in a wide range of mobile devices. In a relatively short period of time, we’ve applied our latest wafer process technology to our wifi front end intellectual property.

The result is a very compelling set of new products ideal for strengthening wifi connectivity in mobile devices. Our highly integrated and extremely compact front end ICs offer a unique combination of transmit and receive performance in both 2.4 and 5 gigahertz bands. We are sampling key customers, and the feedback to date has been outstanding. These products expand our existing portfolio of power amplifiers and front end wifi components.

Furthermore, we anticipate a growing need for high-performance RF front end components to enable full scale deployment of 802.11ac in mobile devices. To deliver the ultra-high data rates made possible by the 802.11ac, the front end mobile devices must combine very high transmit linearity and very high power efficiency.

Our wafer process technology enables a unique combination of industry leading linearity, outstanding efficiency, and ultra-small form factor. This level of performance and integration enables exceptional data rates and longer battery life in mobile devices. The alignment of our existing wifi IP portfolio, our latest wafer process technology, and these new performance requirements make wifi a very compelling growth opportunity for ANADIGICS.

In summary, we continue to aggressively execute on our market strategy with new product introductions that drive expansion of our served available market. Specifically, we’re addressing the front end areas of wireless mobile devices with dual-band power amplifiers and MPAs, ProEficient power amplifiers as well.

We’re also utilizing expertise in power amplifier design to take the leadership position in the enterprise small cell market, which is expected to follow a steep growth trajectory in 2013. Lastly, we are leveraging our differentiated technology and IP to address the wifi market trend toward higher data rates in mobile devices.

We believe that ANADIGICS technology and product innovation positions us to capture new business at existing customers as well as target new applications and win new accounts. With a robust product development pipeline, manifesting prowess, and strong industry relationships, we believe that ANADIGICS has a bright future.

Thank you. We’ll now open up the floor for questions.

Question-and-Answer Session

Operator

[Operator instructions.] Your first question comes from the line of Quinn Bolton with Needham & Company.

Quinn Bolton - Needham & Company

It sounds like you’ve got some pretty good traction on the new products, whether it’s ProEficient, whether it’s the MMPAs or the Penta-Band. I know you’re not giving formal guidance, but it sounds like you’re talking about stabilizing revenue in the third quarter. Wondering when you think the new products kind of offset the decline in legacy and get you back on a growth path. Is that fourth quarter of this year? Or do you think that new products aren’t large enough to offset the legacy until sometime next year?

Terry Gallagher

We’d be looking for Q3. We feel like, as we say, stabilized so that the new products ramping up are replacing what’s falling away, or aging out. So then we would look for that to continue and grow in the fourth quarter. That’s where we’d see the increase.

Quinn Bolton - Needham & Company

Okay, so by the fourth quarter you think that the new products can get you back on that growth path?

Terry Gallagher

Yeah.

Quinn Bolton - Needham & Company

Great. And sorry to kind of bring up a cash question, but it looks like you ended with just over $70 million of cash. I think the Street currently probably has you losing $50 million on the income statement in the second half of 2012, and through 2013, which would get you down to a fairly low cash balance. Wondering if you could give us your thoughts on cash, how much cash do you think you need to run the business, and at what level, from a cash perspective, do you start to get uncomfortable with cash. At what point below would you start to think about having to do a financing.

Terry Gallagher

The number is $73 million, so a shade more than that. So yes, we are watchful of our cash and executing on the cost reductions where we’re able. We take out costs, as we just did. There’s a lot of positive activity in here inside the company on the R&D front, new product development, and we’re going to continue to fund that.

In the larger context, though, and at the heart of your question, we’ve got adequate cash and if ever necessary we do keep an active shelf for appropriate or opportunistic access. But in terms of how much cash you do want to keep on hand, I would say it’s generally prudent to keep nine months, let’s say, of forward cash consumption on hand. And we’re well within that.

Quinn Bolton - Needham & Company

And then just one last one for Ron. You mentioned three of the new products. Didn’t hear any discussion of the dual-band pads. I think one of your competitors last week saw limited uptake of the dual-band pads. Wondering if you’re seeing sort of a pause or delay in the market adoption of that. Any updates on the dual band pad products?

Ron Michels

That’s a good question. We’re seeing the same thing, actually. Our pad product development pretty much is completed. We have several combinations of bands, products that we think are quite good. Demand is not as strong as we expected, therefore pads are not an emphasis for us for future R&D.

Operator

Your next question comes from the line of Blaine Carroll with Avian Securities.

Blaine Carroll - Avian Securities

Terry, looking at the opex for a minute, it was down sequentially about $800,000. Part of that was the restructuring that you had previously announced. And then I guess we’re looking for another $500,000 dropped into the third quarter as the second part of the initial restructuring kicks in. But this incremental million, does that start to hit in the third quarter? And what’s the split between opex and gross margin on that?

Terry Gallagher

So the newest cost reduction is on an order of an annualized little north of a million dollars. Some of that will happen quick in here, maybe $150,000 or something into Q3, and then carry on into Q4 and then let’s say a little more than half is going to click in more in a Q1 kind of timeframe. But we’re taking those costs out. Those would be below the line costs. They really wouldn’t be cost of goods items.

Blaine Carroll - Avian Securities

But most of that new million that you’re talking about is in opex?

Terry Gallagher

That’s correct.

Blaine Carroll - Avian Securities

As we roll all that together, Terry, what should opex be in the third quarter?

Terry Gallagher

Maybe $15.5 million maybe thereabouts? Tending a little bit higher. I don’t want to shortchange on R&D. So that’s my hesitancy.

Blaine Carroll - Avian Securities

Do you expect the wireless business to grow sequentially, Ron?

Ron Michels

We think there’s a high probability that the broadband business - as we used to call it; now we call it the infrastructure business - stays relatively flat for the rest of the year. And then we see hopefully some significant growth next year as the small cell market starts to crystalize. So any growth that we do get will be from wireless, and yes, we do expect it to grow. And we have a lot of very good news about design wins.

Of course, the part of it and the reason why we don’t give more guidance is the older business dropping off, and at what rate does it drop off at. It feels like we’ve overcome that, and we’re winning the new business faster than the older business is dropping off, but we don’t know for sure.

Blaine Carroll - Avian Securities

A couple of your competitors that have already reported sort of talked about the ramp with the 28 nanometer Qualcomm platform, which I’m assuming is what’s in the Sprint and the Verizon announcements that you made, that maybe that’s not ramping as quickly as originally thought, because of supply constraints. Are you seeing any of that with your business at Samsung?

Ron Michels

So our chips sit next to the 8960, and we’re not seeing any slowdown at all as a result of it with our Samsung business.

Blaine Carroll - Avian Securities

And Samsung would be up sequentially as well?

Ron Michels

We believe so.

Blaine Carroll - Avian Securities

Terry, what was the cash flow for operations? And then the free cash flow? I didn’t catch those.

Terry Gallagher

I always just talk to EBITDA, and that was $13.8 million.

Operator

Your next question comes from the line of Dale Pfau with Cantor Fitzgerald.

Dale Pfau - Cantor Fitzgerald

You mentioned you’ve got one band of your ProEficient out there that probably is going to be shipping. What band is that? And what are the other bands that are going to follow behind it?

Ron Michels

The band that’s out there now, that we’re getting strong demand on and design wins, is band one. And then the other bands that we’re sampling are band two, band four, band five, and band eight.

Dale Pfau - Cantor Fitzgerald

And how about on your MMPAs? I assume you’re doing one, two, four, fives in those?

Ron Michels

At the moment, we have an MMPA that has two and five, and then another product that has one and eight.

Dale Pfau - Cantor Fitzgerald

And how’s the traction on those?

Ron Michels

The traction is very good. And of course the MMPA has quad band edge as well. The traction is quite good. So we have - as I mentioned in the script - two different OEMs that are pulling on the parts. And so one is Japan, and the other is Korea. We can’t mention the names at this point, but we will in the future.

Dale Pfau - Cantor Fitzgerald

And then on the small cells, you know, this year that market appears to be a little bit disappointing. There’s still a fair amount of talk about it. What gives you some confidence that it’s really going to pick up next year?

Ron Michels

We’re not assigning a huge amount of revenue to it, by the way. Our broadband, or our infrastructure, business is approximately today a $7 million per quarter business. So it doesn’t take a large win to make that business go up.

Several studies that we subscribe to say that today it’s the kind of business we see is on the order of a couple hundred thousand dollars a quarter. We’re thinking that that will go up by a factor of five. Hopefully in the Q2 timeframe.

But we have two or three different studies, and customer that we talk to, and the reference design partners all think that this thing will start to happen certainly by the middle of next year. We’ll keep our fingers crossed.

Dale Pfau - Cantor Fitzgerald

And margins on that product? Will they be as high as your broadband products? Or will they be more close to your wireless product margins?

Ron Michels

At the moment, they’re closer to the broadband side.

Dale Pfau - Cantor Fitzgerald

And you said utilization was only about 40%?

Terry Gallagher

That’s correct.

Dale Pfau - Cantor Fitzgerald

Have you gotten any traction on trying to outsource any of that business or is it completely mothballed at this point?

Terry Gallagher

A couple of different factors. We are still working with [Winn], and we’re running some wafers there. So that does dent into the short term occupancy here. Now we’re looking at many different ways beyond just product growth to keep that fab and to utilize that asset in a better way.

Dale Pfau - Cantor Fitzgerald

On your GaN business, is that any significant revenues right now?

Ron Michels

No. We see some CATV revenue that will probably start happening in Q4. And then the second half of 2013 is when we think we’ll probably see some revenue for higher power infrastructure products, and they’re all GaN based, some of which are being sampled today.

Operator

Your next question comes from the line of Harsh Kumar with Stephens.

Harsh Kumar - Stephens

We’re hearing from a couple of other companies that have reported that broadband is sort of starting to get to be an interesting area, i.e. it’s starting to make a turn. I’m trying to put that interest context of your comments, Ron, of a flattish broadband business. Could you just clarify what’s going on there?

Ron Michels

Our business is composed of primarily CATV subscriber and CATV infrastructure. The subscriber side of it is ramping down for us, because the gallium arsenide content in set top boxes and modems is decreasing. So that business is dropping. However, the infrastructure business, for us, is, I’d say, growing at a fast enough rate to make up for the other side of it that’s dropping off. I don’t see any indication that the CATV infrastructure is going to have any leaps and bounds as far as growth this year, although we are hearing that may be the case next year.

Harsh Kumar - Stephens

And then my other question was, you guys sound really excited about the small cell market. You talked about a couple of design wins kicking in over the next few months. I’m curious if you could give me a sense of ramp, either in dollars, or units, or any kind of color to help me understand what this market means to you. Obviously we know directionally, but in terms of just either content or size.

Ron Michels

You probably won’t be happy with my answer, because we can’t give too much guidance, but I think to give you a little color, we’re on, I’d say, three or four different reference designs. We named two of them, one is Qualcomm, and the other is Mindspeed. And there are others that we at this point can’t mention that we’ll announce in the future. But I’m thinking that anybody that has a reference design for this market has an ANADIGICS part designed into it. Some of these boxes have as many as six, seven power amplifiers of hours in them. So when they start to ramp, we get a good multiplication factor. I think if you look at the guys that are studying the market, they say it starts to happen in Q1. I’m being conservative. I’m saying it’s probably Q2.

Operator

Your next question comes from the line of Aalok Shah with D.A. Davidson.

Aalok Shah - D.A. Davidson

Terry, I may have missed this, but did you already say who the 10% customers in the quarter were?

Terry Gallagher

Yeah, that’s Samsung, ZTE, and Huawei.

Aalok Shah - D.A. Davidson

And in terms of your former biggest customer, is there any more revenue from RIM at this point for you guys?

Terry Gallagher

They were around where we had thought they were going to be, a little north of $500,000, in Q2, and we are not forecasting anything going forward. Although we are engaged with them, and working with them. It’s just we’re keeping things conservative.

Aalok Shah - D.A. Davidson

And as you look forward - and I’m trying to get a sense of maybe down the road, even 12-24 months down the road - how do we think about your relationships with your baseband partners at this point? Is it as critical as it was maybe a couple of years ago? Or how do you think you stand with Qualcomm, maybe even Broadcom, at this point?

Ron Michels

I think pretty good. I think that a lot of the design wins that we’ve gotten to date, I’d say over the last couple of months, have not been specifically design wins at a reference design partner. They’ve been customers that have come to us, and they’ve wanted to alter a reference design and make room for a new technology like a ProEficient DA to save power and battery life.

So what’s happening is some of the products that we’re developing are compelling enough where customers will use them whether it’s called out specifically on a reference design or not. And that’s very good news for us, because as we start to get back into the reference design game, which is only a little over a year ago, there isn’t enough time that’s passed to have won reference designs and to be seeing revenue from those, for the most part. Some of that will start next year, but at the moment, the quicker way to get revenue is to get in directly to the OEMs, and that’s happening for us.

But we have a very good relationship with Qualcomm. We have the [Goldy] compatible products, which basically is the Penta-band part that I was referring to. And that’s doing quite well with automotive design wins, which won’t start until probably Q2 of next year. And we haven’t talked a lot about that, but there’s multiple design wins there. We’re still trying to get our arms around when that market starts to kick in. But when it does, we’ll have a significant piece of it.

And there’s other things that we’re doing with Qualcomm that we will mention when we can. Same thing with Broadcom. We have several design wins with some major OEMs where the Broadcom chipset is used. So I’d say we’re doing well with both of them.

Aalok Shah - D.A. Davidson

It sounds like you’re starting to see some good traction out of Samsung. Is there new geographies that could be opening up for you guys such as maybe the emerging markets such as India and China that you’re starting to penetrate further into? Or are you thinking maybe at some point the TD-SCMA maybe something interesting for you guys to get more leverage out of at some point down the road?

Ron Michels

That CDMA market in China, we’re not sure that that’s something that we’re going after right now. We have kind of limited resources and a lot of opportunities to work toward. One trend that you could observe about ANADIGICS is that we primarily have been a CDMA supplier, and all of our new products - the MMPA, the band one, ProEficient - as a matter of fact, all the ProEficient bands that we’re sampling - they all are aimed toward the WCDMA market, and of course they’re all LTE-compatible as well. By getting into WCDMA, it gets us into a larger market. It’s two times the size of the CDMA market worldwide. And it also changes the geography of some of the areas we’ll be selling into. So I guess the answer is yes to your question, for maybe a different reason.

Aalok Shah - D.A. Davidson

And Terry, one more question for you, and I know this is going to be on the border of you giving guidance, but in terms of how investors should think about you guys from cash flow standpoint, is there a path toward breaking even here in the next year or so? And what type of revenue level should we be looking at at that point?

Terry Gallagher

I think it would be more of an H2 of ’13 and as we’ve talked about before, kind of $45 million revenue rate does talk to breakeven when you’ve kind of got the right balance or mix. And we get to more of the [ILD] products working into our product portfolio.

Aalok Shah - D.A. Davidson

And Terry, what kind of gross margin should we be thinking about at that point?

Terry Gallagher

I believe it was somewhere around 30%, which was eclipsing there.

Operator

Your next question comes from the line of Ed Snyder with Charter Equity Research.

Ed Snyder - Charter Equity Research

Terry, did you give a detailed breakdown of the segment revenue? Specifically, what was infrastructure and how much was set top boxes for the broadband?

Terry Gallagher

That was $18 million for wireless side, and $7.1 million on the infrastructure side.

Ed Snyder - Charter Equity Research

And of that $7.1 million, how much was CATV infrastructure?

Terry Gallagher

I believe cable was circa $4.5 million, let’s say, of that $7.1 million, the balance being picked up wifi, wimax, other.

Ed Snyder - Charter Equity Research

And you mentioned that RIM was slightly above about $500,000?

Terry Gallagher

Yeah, half a million.

Ed Snyder - Charter Equity Research

And then Ron, part of what the Qualcomm [unintelligible] which is excellent, but they’ve been out showing the CMOS amplifier, as you’re probably aware of by now, in Korea, and are looking to do. It apparently has quite a few capabilities, multiband 3G, quadband edge, [SOS], switches. You’ve got Peregrine out on the road talking up CMOS integrated amplifiers, and of course they’ve got the SOI stuff. And both RF Micro and Skyworks either have out, or are moving out, to SOI on the switch side of it, which I would imagine would have some leverage in the CMOS side of it. How do you see that playing out for ANADIGICS? I know you guys have looked at this stuff in the past, but correct me if I’m wrong, don’t have any effort in either SOI or in the CMOS side of it. Is it material? Is it entering your main markets? Or is this some ancillary market that these guys are addressing to try to fill in the blank?

Ron Michels

First I would say that it’s very good question. I could go on forever with the answer, but I’ll keep it brief. First of all, the ProEficient parts that we’re sampling now, that we’re getting very strong pull, have 48% efficiency at high power, and better than 25% efficiency at low power. That is unique, and it doesn’t matter what technology does it. If you have it, you can win a lot of sockets right now.

The other thing about our ProEficient parts is that with the ILD process that we have, we can make them fairly inexpensively, at least compared to your typical gallium arsenide products that we made a year ago. So the cost difference between silicon and gallium arsenide, I think, there is still a difference but it’s lessening. So I think customers will pay for the couple extra points of efficiency, especially at the low power levels. If they’re not using a DC to DC converter, actually it becomes critical.

Now, as far as CMOS and SOI, we have experience and actually development in both areas. We have an advanced development group that is working on CMOS PAs, and we have a whole set of SOI switches that we’ve developed that we may use in some of our modules, or we may at some point market them separately going forward. So we do have an effort there, and we do understand what those technologies can do.

At the moment, we’re not in a rush to rush out any silicon products, because we have pretty much our hands full handling the demand and the pull that we’re getting for the products that we’re doing today. However, we’re keeping a watchful eye, and when the time comes we think that we’ll be part of it if we have to move in that direction.

Ed Snyder - Charter Equity Research

Have you heard of any customers talking? I mean, especially the mainline top tier handset OEMs? Has there been much in the way of requests for CMOS? Or is this more something that’s a white label, kind of 2G guys, low cost 3G guys in China?

Ron Michels

We have not seen a strong pull for it at this point.

Ed Snyder - Charter Equity Research

And then your high efficiency amplifier, that 48% sounds pretty good. That’s well above what we’d seen in CMOS already. Just [unintelligible] to the 42-45%. To the issue of costs, has your gas cost dropped because of your process? Or because wafer costs in general are coming down in gas?

Ron Michels

No, this is all about our process, and the critical dimensions of our ILD process, and the multilayer aspect of it. Also, at the same time we’re reducing our precious metal that we use in wafers. And as you know, gallium arsenide doesn’t use a lot of masks, so it has the potential where it can be a relatively inexpensive technology.

So we’re turning all of those knobs to make gallium arsenide less expensive. And as that happens, the delta between gallium arsenide and silicon starts to lessen. Especially if the silicon die is rather large.

Operator

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

Quinn Bolton - Needham & Company

Just two quick follow-ons for Terry. Terry, your breakeven revenue of $45-50 million, that’s an EBITDA breakeven still, or is that a profitability breakeven?

Terry Gallagher

That’s EBITDA breakeven.

Quinn Bolton - Needham & Company

And then secondly, how should we be thinking about gross margin here in the near term? It sounds like the gross margins were negative in the June quarter. A mix of absorption, lower revenue, and then new products probably yielding below mature levels. It sounds like revenue is roughly flat in the September quarter, so I imagine revenue and absorption doesn’t change much. And so unless there’s a big change in new product gross margins, my guess is you’re looking at gross margin roughly flattish or equivalent to the June quarter. But just wondering if there are puts and takes we should be aware of on that gross margin, specifically with the new product ramp.

Terry Gallagher

In terms of the large moving parts, I think you’ve nailed it, and you’d be prudent to continue to model in a little bit of that ramp headwind.

Operator

Your next question comes from the line of Pete Enderlin with MAZ Partners.

Pete Enderlin - MAZ Partners

How much of your R&D in the quarter was for materials for sampling?

Terry Gallagher

Generally we look at R&D expenses for the development effort, a large portion of which is people cost. I think, to get at your point, we were looking for it to modulate back down, and that was where we were when we spoke three months ago. But that didn’t all come to pass, because we were working the new products, introductions, and sampling. So I would say we were expecting it to come down a bit, but it didn’t come down to that level, because we kept that sampling activity higher.

Pete Enderlin - MAZ Partners

So going forward, as your revenues begin to ramp up sequentially, what should we think about in terms of the level of R&D spending going forward?

Terry Gallagher

I think you want to keep it flat. It’s a good sign for the future when R&D is up like that. So $10.5-11 million, something on that order?

Pete Enderlin - MAZ Partners

Okay. And given your focus on maintaining as good a cash position as you can, could you just give us a sense of what the effect of ramping up these new products will be on your cash flow going forward? In other words, basically, what’s your cash conversion cycle going to be?

Terry Gallagher

I’m not sure if I’m getting all the nuances of your question, but let me just say that in terms of the new product introductions, we’ve got it modeled in, and the expenses that we were just talking about should have it. And then in terms of how that gross profit is initially, less than optimal, or less than long term planned, we’ve got that modeled in as well.

Pete Enderlin - MAZ Partners

Right, but once you get the gross margins back to where they should be, there’s still a question of collecting the money, and I don’t know exactly how that works.

Terry Gallagher

Sorry, so you’re talking about the investment into working capital?

Pete Enderlin - MAZ Partners

Yes, basically.

Terry Gallagher

We’ve got it modeled in, and generally, I guess in terms of the balance sheet, you can offset payables and inventory, and then in terms of accounts receivable, it’s one-half of the increase in revenues.

Operator

At this time, there are no further questions.

Ron Michels

Great. Thank you operator. So to summarize, I believe ANADIGICS has made tremendous progress this quarter in commercializing our newest generation of RF solutions. By focusing our efforts on three industry growth drivers, which is wireless 3G/4G data, small cell infrastructure, and new wifi applications, we believe that ANADIGICS is very well positioned for success.

Thank you everybody for joining the call today.

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Source: ANADIGICS' CEO Discusses Q2 2012 Results - Earnings Call Transcript

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