10 August 2015

Anadigics' revenue falls 14.4% to $15.8m in Q2, as Mobile revenue drops 32.3%

For second-quarter 2015, broadband wireless and wireline communications component maker Anadigics Inc of Warren, NJ, USA has reported revenue of $15.8m, down 14.4% on $18.4m last quarter (towards the high end of the expected 10-15% drop) and down 32% on $23.3m a year ago.

Fiscal	Q2/2014	Q3/2014	Q4/2014	Q1/2015	Q2/2015
Revenue	$23.3m	$18.9m	$20.9m	$18.4m	$15.8m

Mobile revenue was $4.3m, down 32.3% (more than the expected 20-25%) on $6.4m last quarter and down 67% on $13.1m a year ago (falling from 56% of total revenue a year ago then 35% last quarter to just 28% now). The decline from Q1 was due largely to a steeper-than-expected roll-off of non-strategic mobile cellular business.

Infrastructure revenue was $11.5m, up 12.6% on $10.2m a year ago but down 4.7% (better than the expected 7-9%) on $12m last quarter (although still rising further from 44% of total revenue a year ago then 65% last quarter to 72% now). The drop in revenue from Q1 is due mostly to Wi-Fi (as the key customer digested excess inventory) and small-cell (which was expected to slow over delays at key carriers in Asia). "Despite market softness in small-cell and some temporary excess customer inventory to work through in WiFi, we experienced only a modest sequential decline in total infrastructure revenue," says chairman & CEO Ron Michels. Partly offsetting this sequential decline in both Wi-Fi infrastructure and small-cell, CATV revenue grew by over 20% sequentially. For example, in mid-May Global Technology selected Anadigics' infrastructure line amplifier for DOCSIS 3.1 equipment.

As expected since announcing its plan to shift from Mobile to Infrastructure a little over a year ago, (1) Mobile revenue has declined; (2) new Infrastructure revenue has ramped up; (3) the number of wafers needed from the fab has fallen, allowing fixed costs to be streamlined; (4) the development of Anadigics' vertical-cavity surface-emitting laser (VCSEL) manufacturing technology has expand its business and made more efficient use of the wafer fab.

"The challenge however is that the timing has not quite aligned to our original expectations," says Michels. First, Mobile revenue has declined, but at a faster rate than anticipated. Second, Infrastructure revenue for new products has grown, but at a slower pace than anticipated. "We can attribute much of this to the delay in the DOCSIS 3.1 transition and the deployment of small-cell networks worldwide," he adds.

"We've made tremendous progress streamlining our wafer fab operations to better match our business model," says Michels. "However, with the faster Mobile decline and slower Infrastructure growth, there remains more unused fab capacity than anticipated [fab utilization fell from 32% in Q1 to just 25% in Q2]. If used wisely, the available fab capacity can create very favorable operating leverage. However, in the near-term the additional fixed cost burden weighs on the profit & loss."

On a non-GAAP basis, gross margin fell from 23.2% last quarter to 20.5%, due to the lower revenue and the sell-through of legacy mobile products from existing inventory that did not require replacement (partly offset by the reductions in fixed costs from expense reduction activities). However, this is still nearly double the 12.8% gross margin a year ago.

Operating expenses have been cut further, from $10.7m a year ago and $8.1m last quarter to $7.7m.

Net loss has risen from $3.8m ($0.04 per share) last quarter to $4.5m ($0.05 per share) but, following the prior four consecutive quarters of loss reduction, this is still less than half the $7.8m ($0.09 per share) a year ago. Likewise, earnings before interest, taxes, depreciation and amortization (EBITDA) loss has risen from $1.6m last quarter to $2.5m, but this is still much better than $6.3m a year ago.

Capital investment was about $100,000 (cut further, from $350,000 a year ago). During the quarter, net cash fell from $13m to $11.2m (excluding $4m drawn under the firm's $10m credit facility), reflecting EBITDA loss and the restructuring costs incurred, partly offset by the sell-through of non-strategic legacy mobile inventory.

For third-quarter 2015, Anadigics expects revenue to fall a further 20-24% to $12-12.6m. This reflects a continued decline in mobile revenue of 22-27% due to non-strategic legacy mobile, a decline of 20-23% in Infrastructure revenue due to broad CATV market softness, and a decline in both legacy WiMAX and Internet of Things (IoT) business, and a slow return to small-cell revenue growth due to continued delays at major carriers in Asia. Gross margin is expected to fall by 500-800 basis points. "We are hopeful that both the revenue and gross profit dollars in Q3 will represent a trough," says chief financial officer Terry Gallagher. "We continue to identify ways to operate with a leaner cost structure, especially in light of the infrastructure market softness we anticipate through the end of 2015. As a result, we expect a marginal sequential reduction in operating expenses," he adds.

"When we entered 2015 we envisioned growing our CATV revenue by 30-50%. This was based on forecast that US cable companies with ramp purchases of DOCSIS 3.1 equipment and then Anadigics would add a second tier-1 customer in the USA. The ramp of demand for DOCSIS 3.1 equipment has not yet materialized. Many equipment suppliers are reporting a decline in revenue from US cable companies this year," remarks Michels. "While the timing of DOCSIS 3.1 network deployment is outside of our control, our focus is to win sockets in either DOCSIS 3.0 upgrades or early DOCSIS 3.1 systems. We're doing it in the USA, Europe and Asia. We've made great strides with new products with a tier-1 US-based CATV customer, which we think is well positioned to gain significant market share… we will be well positioned to benefit from the ramp of DOCSIS 3.1 demand that is widely forecast to materialize in 2016," he believes.

"While we continue to make progress in our core infrastructure businesses by launching new products, earning new design sockets, and gaining new customers, we expect the widely reported market softness in CATV and small-cell to persist through the end of 2015," says Michels. "We believe the softness in both markets will subside in 2016 as deployments pick up steam. Most importantly, we are prepared with higher design-win penetration and broader customer diversification to meet the demand when strong market growth does, in fact, return," he adds.  

"To address the impact any core market softness may have on the company's financials, we are exploring capitalization options that may provide adequate cash infusion over the next 12 months," says Gallagher. "We are already in discussions to revise certain covenants of the existing debt agreement [with Silicon Valley Bank] to maintain access to the capital that that facility provides. If such a cash infusion is secured, the company financials will be adequately strengthened to a level that mitigates any growing concerns that may arise as a result of continued infrastructure market softness," he adds. 

"We believe the EBITDA breakeven is achievable at a quarterly revenue level below $19m with fab utilization of approximately only 25-30%," says Gallagher.

"Regarding VCSELs, we expect the business to increase fab utilization," says Michels. "While we were modeling VCSELs to represent only 1-2% of total revenue this year, we are seeing a steady increase in activity and anticipate a ramp in production during 2016." 

See related items:

Anadigics' revenue falls 12% in Q1 to $18.4m

Anadigics' quarterly sales rebound by 10.6% to $20.9m

Anadigics' revenue falls 19% in Q3 due to decline in legacy Mobile

Anadigics' Q2 sales down 33% year-on-year, but infrastructure growth compensating for decline in legacy mobile

Anadigics lowers revenue guidance and cuts costs, including 30% of staff

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