More Problems for Anadigics

Anadigics Inc. (ANAD - Analyst Report), recently announced that some of its new 3G power amplifiers are being used in LG Electronics' new ARENA (KM900) multimedia, touch screen handsets for the European, Asian and Central/South American markets. The company recently launched a new family of WCDMA/HSPA power amplifiers (PAs) that incorporate RF power couplers, which enables simplified design of 3G handsets, data cards, modems and other types of UMTS subscriber devices.

Anadigics designs and manufactures radio frequency integrated circuits (ICs) for the wireless and broadband markets. Within the wireless market, the company focuses on handsets and infrastructure equipment. In the broadband market, the company has customers in the cable set-top box and infrastructure market.

The company badly needs to win designs and get its business back on track. The company lost significant market share (primarily at Samsung) as it was not able to meet increased demand from customers, which turned them away to other sources of supply. This was mainly due to inefficiencies in the company’s manufacturing operations. The problem was compounded by the economic slowdown leading customers to delay their orders in this weak environment. The gross margin (excluding stock-based compensation expense and cost of sales adjustment) plummeted to 11.1% in the first quarter from 36.7% in the same period a year ago and 19.4% in the prior quarter.

Anadigics was all set to set up a fab in China in the second half of 2009 but the company has decided not to invest any further in this fab and is on the lookout for suitable revenue streams including partnership with a manufacturer and leasing opportunities. The China fab would have reduced operating expenses dramatically along with providing improved access to the growing wireless and wireline markets in China.

Last year, Anadigics was subjected to investor class-action lawsuits on account of alleged misleading statements regarding its operations and profitability.

The key issues remain – winning back the business it has lost, clearing out inefficiencies in manufacturing operations, diversifying source of supply and key foundry partners and lowering its cost base.

The stock price crashed to $1.19 in November 2008 but recovered some of the lost territory. The stock is currently trading at $4.00 and we maintain our Hold rating on the stock.