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Anadigics, Inc (NASDAQ:ANAD)

Q2 2008 Earnings Call

July 22, 2008 05:00 pm ET

Executives

Tom Shields - Chief Financial Officer

Bami Bastani - Chief Executive Officer, President.

Analysts

George Iwanyc - Oppenheimer

Ed Snyder - Charter Equity Research

Jay Srivatsa - Roth Capital Partners

Harsh Kumar - Morgan Keegan

Pierre Maccagno - Needham & Company

Todd Kaufman - Raymond James

John Lau - Jeffries & Company

Aalok Shah - Davidson

Tony Stoss - Craig Hallum

Mike Burton - Think Equity

Steve Ferranti - Stephens Incorporated

John Pitzer - Credit Suisse

Operator

Good afternoon my name is Frenal and I will your conference operator today. At this time I would like to welcome everyone to the Anadigics Second Quarter Earnings Conference Call. All line has been place on mute to prevent any background noise. After the speakers remarks there will be questions-and-answer session (Operator Instruction). I would like to turn the call over to Mr. Tom Shields, e CFO. Thank you Mr. Shields you may begin your conference.

Tom Shields - Chief Financial Officer

Thank you operator, good evening everyone and welcome to the Anadigics Second Quarter 2008 Earnings Conference call. Bami will begin tonight's call with a few opening comments and I will then provide the Second Quarter 2008 financial review and the third Quarter 2008 financial outlook.

Bami will then follow to discuss the Company strategy and market positioning, and then 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.

Bami Bastani – Chief Executive Officer and President

Thank you, Tom and good evening everyone. I am pleased to say with our reported revenue of $80.5 million for the Second quarter, we achieved record quarterly revenue on our 13th consecutive quarter of sequential growth. This represents an 8.2% increase in revenue sequentially and a 49.4% increase in revenue year-over-year.

During the second quarter 2008, we continued our efforts in increasing manufacturing output and manufacturing capacity. We are successful in improving our gross margins to 38.4% of net of sales and increasing our profitability with pro forma EPS of $0.18 per share. Surpassing our second quarter guidance and astute expectation. Year-over-year growth for wireless was 78% while broadband achieved 19%. Taking highlight of Q2 was our broadband performance achieving 35% sequential growth.

As we entered quarter, third quarter in 2008, broadband will continue to have a strong momentum which will partially offset and expect a decline in wireless as certain of our customers have lower their demand expectations on a reducing inventory levels. As such, we have guided to Q3 sales in the range of $75 to $81 million and an EPS performance in the range of 10 to 14%. We believe there is slowdown in wireless to be temporary as design and activity has increased and therefore we are aggressively pursuing our capacity expansion plan in China to meet future demand. Following Toms remarks I will provide you with more detail on the company’s strategy and positioning in the marketplace.

Tom Shields – Chief Financial Officer

Thank you, Bami. As Bami indicated we are very pleased with the achievement of our 13th consecutive quarter of revenue growth and increased financial performance as reported for the second quarter 2008. In particular, we reported quarterly revenue of 80.4 million representing sequential growth of 8.2% and year-over-year growth of 49.4%. Our GAAP EPS was $0.10 up 43% sequentially, and up 233% year-over-year. Our pro forma EPS which includes non-cash stock compensation expense discontinued operations and an impairment charge on auction rate securities was $0.18 up 20% sequentially and 18% over the prior year.

The pro forma earnings includes the add back of the 591,000 of interest expense on the convertible notes when computing the pro forma earnings EPS. Our reported pro forma gross margins was a percent of net sales was 38.4% compared with 86.8% last quarter and 36.7% reported in a year ago quarter. For the second quarter 2008 we achieved an approximate 60% contribution to gross margin on a sequential revenue growth in the quarter. Our pro forma operating income as a percent of net sales was 13.2%, another key milestone for the company, this compares to 10.5% reported last quarter and 7.8% reported in the year ago. The primary factor leading to the favorable financial results for the second quarter compared with our previous guidance stand from this stronger revenue and broadband. Broadband revenue in the second quarter 2008 was 31.2 million, up sequentially by 8 million or approximately 35% and up 5.1 million or 19% versus the prior year.

Wireless revenue in the second quarter 2008 was 49.3 million and decrease sequentially by 1.9 million or 3.7%, but up 21.6 million or 78% over prior year. Our top customers and revenue for the second quarter included Intel, Samsung, LG and Walmay, operating expenses in the second quarter 2008 were 20.3 million and increase 0.7 million sequentially, with R&D increasing 0.5 million and SG&A by 0.3 million.

Our cash balance include of both short and long term marketable securities of June 28, 2008 as 161.4 million compared with 166.5 million at March 29, 2008. Our CapEx spending for the second quarter was 14 million and depreciation was 3.9 million.

Turning now to the business outlook for the third quarter 2008, net sales for the third quarter 2008 are estimated to be in the range of 75 million to 81 million, net sales at this level will represent an approximately 26 to 36% increase on a comparable basis with third quarter 2007. Broadband is expected to continue strong momentum in revenue growth, while the low end of that sales guidance reflects softness in industry demand and inventory rebalancing that may occur in third quarter 2008 with our wireless customers. The gross margin range is anticipated to be at 35 to 36% of net sales, and this gross margin forecast includes $500,000 of increased depreciation and $500,000 of startup cost related to our announced China fab capacity expansion project. Additionally, our operating expenses are anticipated to increase by 1.0 million which also includes $500,000 attributable to startup cost related to our China project.

Net income per share on a GAAP basis for the third quarter 2008 is expected to approximate $0.1 to $0.5 pro forma diluted earnings per share excluding non-cash stock base compensation expected to be in the range of $0.10 to $0.14, and the net income and pro forma diluted earnings per share are based on an estimated diluted weighted average outstanding common share count of 62.7 million. Thank you and I would like to now the turn the call over Bami.

Bami Bastani - Chief Executive Officer and President

Thank you Tom. The first half of 2008 has strong impressive year-over-year growth of 50% following the digits. As Tom indicated our pro forma operating income of 13.2% in Q2 was a new highlight. Today, Anadigics is well-known global brand in our IC 12 three mega trends, a multimedia 3G handsets, the Wi-Fi and Wi-Max mobility and CATv and FIOs triple play.

Broadband delivered a strong growth performance that you need 35% sequential growth which included double digit sequential growth in all broadband product lines. Our set top box business grew 35% sequentially driven by strong traction at Motorola for both tuners and splitters and a strong demand from Cisco on our active splitters. We are ramping in high volume our new one gigahertz integrated tuners and active splitters in Motorola CATv set top boxes today. Our infrastructure business grew 89% sequentially, driven by increasing demand for our 12 volt and 24 volt lineups, our biggest customer being CISCO. We are ramping our DOCSIS 0.3 program, it will gain amplifier to multiple Tier-1 cable motor manufactures for using equipment which we received DOCSIS 0.3 certification from Cable labs in May. For FiOs we are now shipping amp and fiber to the whole amplifiers in production. In Wi-Fi we had record PA modules than sign-on ICs revenue in second quarter 2008 with our Wi-Fi business growing 21% sequentially.

Our Wi-Max business for fixed and mobile grew a record 49% in Q2 where shipping production orders have been 2.5 gig mobile Wi-Max to VTE, Samsung and others for US market build out and other overseas operators, and our PA’s are now in leading Wi-Max chips and reference designs such as VC and SeaQuans and others.

Our wireless grew 78% year-over-year, key highlight in wireless for second quarter 2008 include new customers in production for QuallComm module rim on Blackberry volt, Toshiba Edge products, OEM's for Motorola and Nokia 3-G CDMA e-video phones. We also have many new products for QuallComm reference design including 3/3, HELP3 PA's for 3-G CDMA e-video and UMPS. 3/5 HELP4 multi-band films or 3G CDMA EVDO and UMPS. 5/5 polar EDGE PA. 6/6 Polar HPA with DCBC converter interface, and the Voyage CDMA, PA ramping production and HELP4 Wi-band CDMA EVDO PA's for next generation QuallComm chipsets. We introduce two new HELP3 industry wideband CDMA which is be a products for Europe, single brand and dual band. Sales of our dual band CDMA EVDO and wide band CDMA is just be a power amplifiers more than double. Both Tier-1 customer such as Samsung, LG and talk to your smart phone and ODM such as RIM and CCI are selecting Anadigics for new design. Anadigics is setting the standard for smallest foot print at 3/5 millimeter for multi-band PAs, and lowest cost for band through integration which products such as our AW 6221 and 6321 and the market is noticing it.

We began shipping our new 5/5 polar HPA to early adopters of new Quallcomm chipsets including CCI and Novatel. We expect increasing demand for the smaller footprint PA and second half of this year that’s more platforms launched. With confidence in our business fundaments were going to head with our capacity expansion in china this is expected to impact our Q3 with startup expenses are approximately 1 million, approximately about penny and half. As we put in people infrastructure in place to turn on the facility. We are increasing our capacity with 3 pronged approach, first is our warn fab. We continued to focus on operation excellence as the both cover investment has been made to reach full potential by the year end. We are adding flexible wafer output by developing foundry relationships, and finally we are building out a China fab which is expected to come inline on second half of 2009.

Back for business outlook, we are seeing strengthening broadband and some softness in wireless sector as we entered the second half of '08. At present we believe the softness in wireless is more through a three phenomena as customers have been building up inventory in the channel and in critical component such as PAs.

Our new products set the goal standard as best of bead offerings, our India plus and HELP technologies is coupled with our multi-band, multi function PA architectures or providing our customers with differentiative space saving and performance winning platform as well as increased content for Anadigics. Our relationships with Intel, QuallComm, Cisco Motorola Connected Home and top tier OEMs is strong. We added new customers and platforms such as smart phones at RIM with Bolt, with Palm, with Centrino, QuallComm, with Gobi, Intel with Montevino, LG, with Voyager, QWERTY , VS, NV, NV2 and Samsung with SGHK200 and SGH750.

ANADIGICS in the forefront of technology cycles with its HSPA, LTE, convergence power amplifiers, Wi-Fi, Wi-MAX, DOCSIS 0.3 and FiOs, our new innovative product development efforts include some total amplifiers, satellite radio front-end ICs, high power and hybrid amplifiers for CET infrastructure and a smart phone wireless LAN and mobility wireless LAN and Wi-MAX convergence products, which will drive our momentum into future.

We will now open the line for questions and back to operator, please. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes form the line of George Iwanyc with Oppenheimer.

George Iwanyc

A softness such a thing, can you give us an idea of how Wi-Fi across the customer base or is it one or two customers that existing the weakness are?

Bami Bastani

The weakness we have seen are now different then what has already been talked in the industry, one of the large Korean customers for example is cutting inventories in half, the other one already announced phenomenal Q2 and guided to Q3. We see some weakness also in China customers. So, I think none of them our out of the order rate that has already not been announced. The marketplace by date, by down that was before.

George Iwanyc

Okay, and what signs do you see that gets you confident that trends are temporary?

Bami Bastani

If I look at our fourth quarter backlog, a quarter to date for fourth quarter we are running stronger than last year quarter to date on the wireless backlog. So I think what’s happening, that that’s personal view or our view in a sense that these things shifting in September-October time frame generally. And we are all going to wait and see to see what the shape of that in terms of their preparation for fourth quarter which third is – which September is beneficiary. And the other side we see a lot of designing activities of our products. So we very highly engaged with our existing customers plus some new ones as we mentioned.

So the designing activity plus the stuff that is already pre-position itself on fourth quarter gives us that the confidence.

George Iwanyc

And to be clear on the China ramp are you accelerating that is the time table being pull then or you still looking at roughly the same milestones that you are previously looking for?

Bami Bastani

Time table is the same, but the level of investment is increased to bring it as a production ready site as of course to a private line. And that’s the difference.

George Iwanyc

Okay. So the expenses the 1 million is incremental to what you had previously thought to be spending at this point?

Tom Shields

That’s correct. This is Tom. That's correct.

George Iwanyc

Okay. Well, thank you very much.

Thomas Shields

Yeah.

Operator

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

Ed Snyder

So I wanted to explore a little bit more the wireless side of the business and then touch on some of the broadband, but first the wireless. So Bami, are you saying -- we saw LG report loss yesterday and had a good quarter, they did say things are going to be a little bit slower and they did mention some of the carriers especially Indian were looking at owing up some inventory. But there is no indication from what they have said beyond next quarter the things are going to be picking up for them. They think it's an economic slowdown in India that may persist. Samsung is yet to report. You know better than I would what's going on there. So I just want to explore a little bit why you have confidence that things are going to snap back. Forget, let's not talk about design activity, which can take much longer to involve to evolve to actual orders, but why you think things are going to pick up in fourth quarter if the OEMs that you are supplying haven't given any visibility on demand thus far? And then you mentioned that they were stacking inventory in critical products like PAs, is that something you are seeing or are they telling you that they are holding inventory in that because it's short lead cycles or why would they do that? I am just curious.

Tom Shields

This is Tom. On your first question regarding what I believe the opportunity to resume growth in the wireless if we are shorting to three is two things going on. One is Bami indicated that the backlog where we have been historically in the second half of the year is certainly as much stronger such telling us something. Number two is you also get forecast directly from your customers. So on the one side, you got this poll that the customer they are telling you, "Hey, be ready for this by product, by line item what we potentially would like to buy from you and which are wrestling with as you got the forecast, but you don’t have the orders. So we see about the Q4 a much stronger sales forecast based upon what the customer is telling us the organization. And you look at the platforms that and that’s why we mentioned the designing activity. If those platforms come to market, they are going to ANADIGICS platforms. So that’s some of the reasoning behind us.

Bami Bastani

But the other thing is that we are not a Nokia mainstream but also Nokia's forecast for the whole industry within a upbeat mode. So that was another kind of a sight check for us.

Ed Snyder

Yeah, they did say it. But back to your point, Tom, and when you go back to your customers and say, "Look, if your forecast or one thing your order books or another" when they tell you, why did they see it as a slowdown now and why do they think it's going to be temporary?

Tom Shields

Well, first of all, I guess look at Samsung and Samsung had said that a strong Vision doing 200 million units for the year. Why they nail it down I believe from Q1 to Q2 and this still probably suggesting two or if not better. So unless they come back to the street and tell the folks that it's going to be less than 200, the reason to believe that based upon the share that we should be recipient up to next growth. So this turn indications at least that we sit down with the customers that could call for better performance. Obviously we are cautious just like the next guy because sometimes you think it will take one two quarters to correct itself. So the fact is that really an inventory rebalancing as one customer has indicated, yes. Therefore, that mean then you use a temporary inventory build for certain month. However, we know entering that the holiday trade reason. So the question is they are probably looking at the market from a consumer side and saying, "Hey, what's the market are going to look like?" So we believe that it's going to be -- maybe not it's not a September call, maybe becomes -- maybe strong October plus the question mark. So I think the direct correspondence what the customer is suggesting and then also thinking the same time relative to certainly some weaknesses that may occur. But on the surface, we are following the market.

Bami Bastani

Yeah, on the other side also Ed as we experienced last year, when these guys turn on a dime, they turn on a dime, so you better be prepared serving them. So you cannot go cautious on your ability to serve them.

Ed Snyder

This is why you are continuing with it.

Bami Bastani

Exactly.

Ed Snyder

Obviously, launching forecast are still very robust, but Nokia did talk pretty positively about the overall demand in the industry did hear guidance and you are expecting it's going to snap like this is quick?

Bami Bastani

Yes, you have to be ready.

Ed Snyder

Okay.

Tom Shields

And we document it to our customers to do that.

Ed Snyder

And say it again, sorry Tom?

Bami Bastani

To me the commitment is to make sure that we are going to be there when that demand surge potentially happens.

Ed Snyder

Yes, definitely. The broadband side of the retail was another a large customer, do they pushed off those ramp of their new platform, is this extended to life of [San Aroso] platform from what you are seeing now or do you think there is going to be a little bit of a hold this quarter between that one and the remote launch of the new one?

Bami Bastani

For us transition is themeless, in a sense that our product is used in multiple reputations to add throughput if I want to you know, [N] is nothing but some of ABG's one, two, three, four, five or so for us what we are feeding is certain of our products and feed the previous platforms and the next platform. So what they don’t ship in Montevino we benefit in San Aroso and what we ship in Montevino will be from what we are already shipping to them. So for us it’s a transparent.

Ed Snyder

I am sorry. Talking about, given as an apology, if I missed it. Did you break out N versus ABG in terms of revenue this quarter?

Tom Shields

No I did not. I believe the first one asked, but you know, essentially from a revenue standpoint 44% of the revenue was actually N and the remaining was the ABG.

Bami Bastani

Now, Ed when Montevino comes as you know Intel has fragmented the market. So depending on if you are dealing with the high volume consumer market, even if you are shipping a lot more ABG also. So ABG -- when it goes to Montevino ABG doesn’t go away.

Ed Snyder

Right, definitely. And then final question infrastructure set-top box versus infrastructure, in terms of revenue Tom?

Tom Shields

Yeah, Ron will provide some commentary, but you know, certainly, one thing we had suggested back in the Q1 was that we expected a reduction in growth and infrastructure. So we are very pleased that the growth did occur, it probably occurred much stronger than we anticipated and so it fell just below $7 million. And infrastructure so very strong relative to Q1. Q1 was only 3.5 million. Set-top box was 6.3 million up from 4.7. and then Wi-Fi was 18.3 up from 15 million. So all in all 8 million and 35%. So we are very pleased and that’s why we are relative to Bami's comments in third quarter, we will expect some continued momentum.

Ed Snyder

Very good. Thanks guys.

Tom Shields

Thank you, Ed.

Operator

Your next question comes from the line of Jay Srivatsa from Roth Capital Partners.

Jay Srivatsa

Yeah, thanks for taking my questions. Bami, can you speak to what you are seeing in the DOCSIS 3.0 space. Are you bullish as you look in the second half, are you expecting that more to be a fiscal '09 story?

Bami Bastani

The rampage is started, now whether DOCSIS 3 it's going to be 20% of the market, 25 or 15, it’s too early to tell for me, but we are ramping and we see more pullings, that’s one of those categories that the customers are pulling in demand. So I would say that slope on the exert is very positive.

Jay Srivatsa

Okay. Switching to the handset side are you concerned that your customers maybe losing market share or is it more of just overall weakness in the handset side? How do you see it?

Bami Bastani

You know, we -- more of a second camp to be very honest that we are seeing sort of a weakness overall weakness and maybe part of it is just hesitation, even not weaker. You talked about weakness and I will check on that there is a whole handset market is going to go up, we kind of begin to think is it psychological or is it real. So again historically by the time -- at this time of the year we are always cautious and we get close to September some times we can ship enough. So we are in that inflection point right now for the next 6 weeks or so.

Jay Srivatsa

Okay. and then last question on the margins. Can you give us any clarity on why you are guiding for gross, you might have expected if your wireless business is going to be lower that the broadband business would fetch slightly higher margins should actually favor your gross margin number?

Tom Shields

This is Tom. Yeah, when I mentioned in my comments was the fact that we do see half a million increase in depreciation and we have a half million for the startup cost. So to China, so there is a million dollars there and in accounting mix, mix within broadband and obviously projection that we have internally for wireless mix as well, so that’s why we have a range of 35 to 36.

Jay Srivatsa

So the 35 to 36 includes the one million in there?

Tom Shields

Yes, it includes one million which is 0.5 million for deprecation and another 0.5 million for China startup. There is another 0.5 million startup cost that is in SG&A for Q3.

Jay Srivatsa

Okay, thank you very much, good luck.

Tom Shields

Thank you.

Operator

Your next question comes from the line of Harsh Kumar with Morgan Keegan

Harsh Kumar

Hi guys, couple of questions Bami, one of your competitors in particular has been making several noise about potentially getting into a lot of the handset guys that you mentioned, do we concerned at this point in time that you might have lost a couple of slots and so the weakness in handset might be explained with that?

Bami Bastani

You know, the answer is going to be different from handset manufacturer. For example, we see a genuine weakness in 3G handset manufacturers in China, and I call the genuine weakness. If I talk about Korea I think we are hold, we are one of the large ones, with another one waited demand by far exceeded our supply, we had to sit down and think what we can do and what we cant do and then clearly some of those sockets did go through our competitors. Now our business is still at a growth starting year-over-year and every three months new platforms comes and like I said some of designing activity were basically and the fact that we are putting new capacity and we have new capacity where we are over that, its threshold of pain, Q1 threshold of pain kind of a thing or Q4, Q1 threshold pain. So it’s a little bit of everything.

Harsh Kumar

Okay, thanks that’s helpful Bami. A question on Bami, are you shipping that yet or is that something, could you just maybe give us a status of dealing what’s going on there, what’s your expectations for that Bami?

Bami Bastani

Its beginning of the ramp, so I will put in the 100s of 1000s of unit category and its moving up rapidly.

Harsh Kumar

And moving on a question for Tom I guess, Tom, as you try to continue to build out your fab and I understand that you will be doing this to second half of next year, why would I not think that your margin doesn’t get to move up from this level. In other you’re going to have to incur cost of this nature on a continual basis or maybe you can give me some color around this and help me out a little bit with respect to how we can think about margin going forward?

Tom Shields

Right. So, there is no doubt we have always suggested that we like to achieve a minimum 50% contribution on the revenue change quarter-to-quarter and there is not doubt as you add more CapEx you’re going to send depreciation and hopefully its going to offset by resorption. But there is no doubt, the revenue growth is critical and the mix between revenue is critical relative to how high the margins to get, there is no doubt as we lookout the startup cost going forward, starting to Q3 we got a factor in the necessity of those cost in the beginning particularly for the training recruitment of resources and then into the production in the revenue phase in the second half of the year. I have got a count for the cost related to startup for next few quarters, but its really the revenue drive, how high the revenue in that mix between the broadband and the wireless sector that we drive the needs which is the margin growth.

Bami Bastani

I would to stick in that we see first order is going to be the level of revenue.

Harsh Kumar

Got it, that’s very helpful. And then last quarter I would like somebody else get on, at the latest the last check that you guys have would be a loan of customers, did you get any indication that they are still kind of cautious in taking orders down or do you think that maybe the level of cautiousness to your customers is free and the order is flattening out getting better, the last round of checks that you did, any kind of information of the incremental would be helpful?

Tom Shields

Harsh, this is Tom, we were accounting for any cautiousness relative to the range that we guided today.

Harsh Kumar

Okay.

Tom Shields

So therefore, we sure we have consciousness, but we factored what we thought we believe could be low end, however, as Bami September could be come on I guess. So therefore the guidance obviously would be a lot different, but I think we accounted for hopefully the cautiousness that the customers have been.

Harsh Kumar

Okay, very well, thanks guys.

Operator

Your next question comes from the line of Pierre Maccagno with Needham & Company.

Pierre Maccagno

Congratulations on the Bami and Tom.

Bami Bastani

Thank you, Pierre.

Pierre Maccagno

So, what is the CapEx that you’re expecting for '08 and '09 at this point?

Tom Shields

Well, for the remaining second half of the year we’re budgeting approximately 35 to 40 million of CapEx.

Pierre Maccagno

Okay.

Tom Shields

And then the trench of the CapEx for China is 50 million for the first half of 09.

Pierre Maccagno

Okay, for the total 09?

Tom Shields

For '09 basically our estimate for preps is only about 75 million.

Pierre Maccagno

And so that will be the total expense for that fab growth?

Tom Shields

No, we mentioned that the amount that have allocated for the China fab was 100 million. And then we still – we are putting a maintenance CapEx for one, and also for backup generation for example, other means s which we need allocated CapEx.

Bami Bastani

Yeah, some of that 75 covers China, plus some left over in New Jersey.

Tom Shields

Although, line of share in China.

Pierre Maccagno

And then regarding a word as none, could we talk about any other design of purity or new customers other than Intel that you are working with, that you see potential further growth?

Bami Bastani

Yeah, for example we talked about growing the production with some smart phone manufactures RIM is one of them and other ones that the haven’t announce yet.

Pierre Maccagno

Oh that’s got it thanks.

Bami Bastani

Thank you, Pierre.

Operator

The next comes from line of Todd Kaufman with Raymond James.

Todd Kaufman

Thanks very much, just a clarification on guidance for the September quarter even the momentum may that you have seen in broadband in the June quarter, is it fair to say from a ballpark perspective the wireless business could be down in the mid teens on a sequential basis in the September quarter?

Tom Shield

Our September -- you said mid teens, I will approximate 10 or below.

Todd Kaufman

10% or less is what you…

Tom Shield

Yeah, I think to your point, on the lower end of range you mentioned, the lower end or range then you are probably talking double digit, however range now is less than 10%.

Todd Kaufman

So then the kind of things the question if you look it your peers in the market that may be clearly there has been some moderation in the end market but Bami alluded to some design set I guess you didn’t have capacity for or otherwise some share losses, can you split the two between that sort of total double digit sequential decline as it relates to share work versus design market pullback?

Tom Shield

This is Tom, I couldn’t, I don’t think so, I think basically we believe its more attributable to the softness that and the consciousness by our customers, there is no doubt if I mention that when you certain capacity and you try allocated between the broadband wireless you’re going to forego certain designs, but I would say more on my side Bami the cautiousness by our customers. They want to see a factoring on what potential design losses that they have occurred.

Todd Kaufman

Thank you very much.

Operator

Your next question comes from the line of John Lau with Jeffries & Company.

John Lau

Got it. Thank you Tom and Bami, one of your competitors indicated lower expectation in the Q3 due to Montevino push out and you mentioned seeing sustained strength in your Santa Rosa, looking forward which is what I think while lot of the concerns are, do you see a sustained forecast for these Wi-Fi product as you transition from Santa Rosa to Montevino have a follow up thank you.

Bami Bastani

Yeah, the answer is yes, because I mean, Intel, the whole concept of Montevino is to sell a lot of processors at different price points, and we see that strength yes..

John Lau

So, I think a lot of the concerns are because of I guess the red rate that’s in the market with the company with the competitor china getting lower expectation and the implied message would be that as you go into Q4 they’re going to take that business away from your is the time growing, is that how we should look at it?

Bami Bastani

A) time is growing and b) we will wait until fourth quarter to see who will gets more.

Tom Shields

I mean, it’s been four years when we claiming things, lets show me the money.

John Lau

That’s a good one. And then finally just as a followup I think that we will clarify the wireless commentary that you had as you mentioned the weakness that you had Bami, if you kind of split it in different way, how much of that wireless weakness that you’re seeing in Q2, its more related to the end market versus an inventory correction at a specific vendor?

Bami Bastani

You know, John, I can’t quantify the two, but I know, for example, in China we have both of it going.

John Lau

I see.

Bami Bastani

And the other side in a Korea its more of a market collection.

John Lau

Okay, so there is fact of both and its not a market share loss issue but just combination of the inventory correction and the overall macro?

Bami Bastani

And, those are the primary – we did turnover some socket to competitors because we just couldn’t sell the prescription right, but we are engaged in every design that goes on right now. So that’s like for us having that capacity is critical, I mean, that just number one thing that people ask us is we are investing to read the benefits of our strong market position. As a strong market position we wont be investing.

John Lau

Okay, thank you.

Tom Shields

And John, the relation the relation with QuallComm is exceptional.

John Lau

Okay, thank you.

Operator

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

Aalok Shah

Hi guys, a got couple of question for you guys, Bami mentioned to you just don’t have the capacity to meet sort of demand out there, is that all on the 3G side of things right now, is that some of your legacy as well?

Bami Bastani

Well, that was the comment about the past.

Aalok Shah

Okay.

Bami Bastani

That was like a Q4, Q1 comment.

Aalok Shah

Okay.

Bami Bastani

We have shift a lot of the stuff.

Aalok Shah

And then I am curious the decision to accelerate the build in China, how does that affect your outsourcing thoughts at this point?

Bami Bastani

We are l continuing with that because of leave that old one company you probably put 10 to 20% of your capacity outside and so, we can deal with charge upturn, downturn those kind of things. So I believe that we will have 10 to 20% on ongoing basis, and I hope that our qualification will be completed in Q4 timeframe. We are physically running wafers right now foundries pure qualification and characterization.

Aalok Shah

Okay. So in total you have an additional 10 to 20% of capacity coming on from your outsourced partners, but then you have the China facility coming online sometime middle next year. So on – how should me, I mean, Tom how do we think about the utilization rates as we go into the next year, I mean, is it something of the next year that may be market doesn’t return to the point where you gather thing you may be (inaudible) a big yet?

Tom Shields

Well, we are looking at it, there is no doubt -- no minds that in 2009 it’s going to be a superior year. And if look at the markets the Lorand markets that in peer question like Wi-Max, one more Wi-Max here, because it hits earlier we want to prepared. DOCSIS 3.0 becomes lot stronger than market expectations when we prepared. The new opportunities within broadband FiOs, Wi-Fi and other that we didn’t mentioned provide unique opportunity for us to be prepared and to be optimistic and bullish about next year. And wireless no doubt 3G is a phenomenal story, I think one of our competitors had said the same thing relative to number vise CDMA PAs required and the various devices. So, we have never seen that there is something last longer then short term and may be short term is hopefully on the quarter. But we meet the customers as Bami said, when you have put the capacity end for us, because as Bami mentioned the technology makes the difference and that’s what we are betting for next year.

Aalok Shah

Okay. And Tom, in terms of that then what are you running at a pretty high utilization rate as it right now through one?

Tom Shields

Correct. It's just where…

Bami Bastani

We aren't the one that seems around 90, maybe up to 100. You have to…

Tom Shields

Lets look at down.

Bami Bastani

Compress it. And so -- well, I mean we did 80. So we are 80 out of 90 that's a high number.

Aalok Shah

Okay. And then in terms of the commentary about the weakness in the third quarter. When -- is there time maybe you saw that over the last few weeks? And I know somebody already asked the question, have you seen it continue but was there any one particular customer in general or was it just kind of weakness across?

Bami Bastani

I just think what we saw is that we saw kind of a continuous the high backlog and then just flat talk for a while and that’s what got us to go and start saying what's the inventory in the channel, what's the inventory at the customer and what's the -- why the forecast is different and the backlog and the same timeframe as reports have started coming that there is some softness in third quarter.

Aalok Shah

So to your commentary about Q4 in the backlog there, I am sure you guys are pretty conservative but what gives you the confidence that they won't stretch out that backlog at that point as well?

Tom Shields

I mean what we see in the market and I can fairly say that the ability or the lead times from first half the visibility has gone down. But compared to a year ago this time, probably the visibility is as good or better in terms of the lead times that the customers have given us. So we are better than last year this time in terms of visibility. We are not as good as the first half.

Aalok Shah

Okay. Great. Thank you very much.

Thomas Shields

You are welcome.

Operator

Your next question comes from the line of Tony Stoss with Craig Hallum.

Tony Stoss

Hi guys. Maybe to help me understand the China facility a little bit more. It seems like you are spending more money than you originally planned. Are you elevating the model wafers that you plan to run through there? I guess that’s kind of my first question. I will follow up after that?

Bami Bastani

From a tool set the answer is yes. Of course as you know until you are qualified and running production on any given tool then it doesn’t fix your depreciation. So it's a question of where you keep on the balance sheet. And right now given the lead times and qualification equipments as we have seen is anywhere between six to nine months by the time you qualify and release to production. Our experience basically told us if anything takes longer than you think what we went through last year. And so we want to position ourselves that we don’t repeat last year, here is all the demand and the tooling are still coming in. So the 50 million going to 100 million primarily is driven by tool redundancy, so its not be factored in pilot line one of the kind, it's at least out of the two. And if I ballpark it, the tool capacity in that factory is somewhere in the 40% of New Jersey even though the footprint is larger but we are tooling it to about 40% and then once we get to that level then we could add more equipment and then remove bottlenecks.

Tony Stoss

Bami, could you comment on kind of more just pricing, is it stable, what's your view on pricing going forward within the industry?

Bami Bastani

I would say we still see price stability. 3G and broadband both are showing similar characteristics.

Tony Stoss

Okay, Tom, if you would might add some commentary on new customers. You are bringing another couple in Q3. How much if you could say is within your guidance, is it a couple of million dollars, is it significant, any potential 10% customers longer term being added?

Tom Shields

I can't comment by customer, but there is certainly nice opportunity where certain customers that we are looking at beginning in Q3 that could in fact be a 10% customer, yes.

Tony Stoss

Great. Thanks guys.

Tom Shields

Thanks Tony.

Operator

Your next question comes from the line of Mike Burton with Think Equity.

Mike Burton

Hey guys, couple of quick ones. On the CapEx side, things were breaking that out. If we get 75 million in '08 and 50 million in the first part of '09, can we then assume our kind of a run rate around 5 million a quarter in the back half just for modeling purposes in '09? Is that 60 million, does that sound about right? And then secondly, is should we consider depreciation to be going up about half a million each quarter until we get right to the end of the project or how should we see modeling that? Thanks.

Tom Shields

Mike, its Tom. For 2008, we are looking at, between 60 to 65 in total.

Mike Burton

Okay.

Tom Shields

And then in 2009 we made reference to $75 million number. So second part of your regarding depreciation we had 3.9 million in Q2 and we agree with you, increased about half a million on a quarterly basis. Yes.

Mike Burton

Okay, thanks. And then on the -- if you could breakout within wireless how much was GSM versus CDMA and WCDMA?

Tom Shields

Yeah, basically majority if not, 100% was all 3G.

Mike Burton

Okay. And one the WCDMA portion, just so we can kind of have a ballpark, you know, obviously, LG had some commentary, very different commentary related to WCDMA end market than CDMA going ballpark where WCDMA is?

Bami Bastani

Well we see wireless at all 3G, but you know, I don’t breakout any product line, but Wideband was very strong, yes.

Mike Burton

Okay. And then lastly, just on the cost side, TI talked about some increasing cost, I am wondering for some of the raw materials and energy costs, are you seeing any of that feeding into some of your gross margin guidance that for the rest of this year?

Bami Bastani

Well, actually we monitor that daily now, because of its volatility that’s place and we try to hedge where we can, but absolutely we know with that remaining certainly in the model any arise is prices and any increase in cost coming from our suppliers. So, year we are concerned about it and we try to manage it too. That’s our abilities and taking any precautions relative to cost downs in other areas, but yeah we should be concerned.

Mike Burton

Okay, thanks.

Tom Shields

Mike, the way, by the way you fight that is for example as the product portfolio moves from 4/4 millimeter to a next generation 3/3, you are doing significant cost reduction. As now you are using a lot less lam in it and as you go to multi band, like the 3/5 that we are talking about dual band, multi band in those products you can again improve the gross margin. So if we were to stand still then you see gold prices have gone up and certain chemicals have gone up. But we fight that a -- we have to negotiate all the time and b, we have to move the technology further along and that’s what we do, that’s how we combat it. Most of it comes from technology moving along.

Mike Burton

Thanks.

Operator

Your next question comes from the line of Steve Ferranti with Stephens Incorporated.

Steve Ferranti

Thank you. A quick followup to the previous line of questions. You suggested that we are going to expect sequential rise of about half a million and depreciation? Is there anything we should model in, in terms of other costs, whether it be startup costs or depreciation on the property and plant? Any additional costs burn beyond that?

Tom Shields

For the third quarter, no we have incorporated the cost we expect to come through for the quarter.

Steve Ferranti

And then in prior quarters following that?

Tom Shields

In prior quarters we didn’t have any startup costs.

Steve Ferranti

Okay, I am sorry.

Tom Shields

Yeah, I think we would estimate that million would go to approximately 1.5 million for example in Q4.

Steve Ferranti

Okay. And just help me understand whether this depreciation costs is this in the form of tool depreciation or this is property and plant deprecation that we are talking about now?

Tom Shields

That deprecation increase relates to the CapEx that we have installed.

Steve Ferranti

Right.

Tom Shields

So it’s manufacturing equipment.

Steve Ferranti

Okay.

Bami Bastani

Yeah the new facility, though then depreciate until you (Inaudible) production.

Steve Ferranti

Right.

Bami Bastani

That’s like in the second half next year.

Steve Ferranti

Understand. And okay, got you. And then can you give us any sort of color in terms of wireless LAN business, how much of that is non-Intel these days?

Bami Bastani

I would probably want to say 7% of last year's non-Intel.

Steve Ferranti

7% of wireless LAN?

Bami Bastani

That’s correct.

Steve Ferranti

Okay. So majority is still Intel. And how much of that are you seeing in Wi-Max?

Tom Shields

Good point. We had 750,000 that we reported last quarter and that was up to million in the second quarter.

Steve Ferranti

Okay, okay. And how is the backlog and order flow feeling on the Wi-Max side of the of the business and are you seeing the initial signs is ramping there?

Tom Shields

Yeah, I guess we could add more color regarding the strength in broadband, as you look at to Q3 it doesn’t corporate some additional Wi-Max. So we see obviously Wi-Max step function, I think there is good positive signs relative to what customers are thinking, relative to the build out and perhaps what’s going to bring to market. So we believe this from conversation that 2009 particularly could obviously a pretty good year if things be on track. So based upon what happens perhaps we continue in the second half of `08 there is some very positive signs coming our way because of our leadership position.

Steve Ferranti

Okay, that’s all I had thanks.

Operator

Your next question comes from the line of John Pitzer with Credit Suisse

John Pitzer

Hi good afternoon thanks for taking my question, a lot of been answered. I guess to the extent which you guys have been managing a fairly tight capacity situation over the last couple of quarters. Can you help me understand to how that progress through the June quarter whether it would customers and allocation lead times to customers and your ability to compete for incremental design socket?

Bami Bastani

Yeah in Q2 related demand and supply were pretty much in balance so we don’t like to put it. We saw the area that we saw a lot of pull in was primarily in the broadband area, and we have included Wi-Fi, we have included the FIOs, DOCSIS 0.3, so lot of those new products and a new things coming to new market and then we saw pulling them to the extent that it was a bit in our lead time of course, we serve them to the extent that it still takes about 10 to 12 weeks to get things out of the fab and into assembly and test and ship to customer. To the extent it wasn’t within that 10 to 12 week lead time we have to serve within in Q3. So broadband across the board was, the story was pulling oriented, and then anything that has been in the past.

John Pitzer

Just to be clear to the extent that one of the concern has been your lack of supply kind of opening the door for incremental competition, you don’t think that was the case in the June quarter, you think your supply got up to demand?

Bami Bastani

And then I guess, relatively to the CapEx plan and the outsourcing plan, can you give us a sense of how much incremental capacity that’s going to add over the next several quarter and it maybe the way to think about it if you 90 million quarterly run rate today, as you bring down this new capacity and kind of ramp up your outsourcing plan what kind of quarterly revenue potential might you guys would be able to support?

Bami Bastani

Of course you have time phrase it right now. So New Jersey will wind up somewhere in the $90 to $100 million range and that’s what we had third quarter, and that’s been consistent with the previous, foundry at present I would put into the 10%, although we are depending on demand we will push it 20%, so 10% compared to the majority. So you are talking about another 10 million a quarter, maybe up to 20 million a quarter if needed on foundry, and in terms of what we can do out of China installed tool set are ballpark that in the 30 to 40% of what New Jersey is doing today. So if you take 80 million and add another 40% another 30 million of quarter that can come from there, of course, we staffered at the rates we need to, but you want to the tools in place, but those are the long polling detent. So we can conceptually ramp up, $130, $140 million to quarter mid year, with sufficiently time and planning.

John Pitzer

Perfect, thanks guys I appreciate it.

Operator

Your final question is a followup from the line of Harsh Kumar with Morgan Keegan.

Harsh Kumar

Hi guys, you know, there was a lot of talk of possibilities in inventory of the Korean guys. Bami in your opinion and I know you may not have the answer, but how much inventory do you think, how many weeks or months do you exist in the system to the best of your guess?

Bami Bastani

Yeah, that could be very hard for me to tell Harsh, because what we see is in many platforms, some of those platforms are running hotter than we though, some of them are all of a sudden stopped because they are not selling well. So remember the various platform driven like things like NV, NV 2 these are very hot selling phones and then we have soft extremely good performance in terms of product that we have sold. When we look at Voyage it sold very well. So it's been a platform dependent, it’s not across that board that everything there is like 6% more than they need.

Harish Kumar

Got it. And can I just ask one more Bami here real quick. About Gobi, coming back to it do you think Gobi as you look at the road map to the best of your knowledge, do you think it’s -- we can have a laptop sold by the end of the year for consumers to buyers or is that just next year deal?

Bami Bastani

No we believe there will be laptops by the end of the year from a materiality it’s a big number of next year, but the stuff that we shift now within the quarter you should be out from the customer sense.

Harish Kumar

Got it, fair enough, thanks.

Bami Bastani

You are welcome.

Operator

There are no further audio questions at this time.

Bami Bastani

So let make me recap by saying broadband is robust and growing sequentially. And literally in all fronts. Wireless is sequentially down. We believe that is primarily due to stock facing the market and somebody have been correction at customers. Our relationships are very strong this includes QuallComm Intel, Motorola, CISCO. We are brought new customers such as RIM and good set of ODMs. We are investing in the future that are positive long term outlook and we would like to invest three the benefits of our strong market position. And that reflects our china build out plant that we discuss and very detailed today. Thank you very much for being with us.

Operator

This concludes today's conference call. You may now disconnect.

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Source: Anadigics, Inc. Q2 2008 Earnings Conference Call Transcript
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