Anaren, Inc. ( ANEN)

F2Q2011 (12/31/10) Earnings Conference Call

January 27, 2011 5:00 PM ET

Executives

Lawrence Sala – Chairman, President and CEO

George Blanton – SVP, CFO and Treasurer

Analysts

Mike Walkley – Canaccord Genuity

Rich Valera – Needham & Company

Marc Balcer – Bluefin

Christian McDonald – Kennedy Capital

Presentation

Operator

Good day ladies and gentlemen, and welcome to the Anaren Incorporated Q2 Earnings Conference Call. During today’s call, all lines will be in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions on how to participate will be given at that time. (Operator Instructions) As a reminder today’s conference call is being recorded.

I would now like to turn the conference over to your host, Larry Sala.

Lawrence Sala

Thank you. Good afternoon and thank you for participating in the Anaren fiscal 2011 second quarter conference call. I’m joined again today by George Blanton, our CFO; and Joe Porcello, our VP of Accounting. I’ll provide a brief overview of the results of the second quarter after which George will review the financial highlights and we will then take your questions.

Certain statements made during this conference call will be forward-looking statements. These statements involve risks and uncertainties that could cause actual results to differ materially from those discussed. You are encouraged to review our SEC reports and exhibits to those reports to learn more about the various risks and uncertainties facing our business and the potential impact on our net sales, earnings and our stock price.

Net sales for the second quarter were $43.4 million, up 6% from the second quarter of last year. Robust demand for Wireless standard components continued throughout the quarter resulting in strong revenue growth and improved profitability for the group. In addition, the Space & Defense Group delivered another solid quarter and is experiencing a very active opportunity environment.

Non-GAAP operating income for the quarter was $6.9 million or 15.9% of net sales, up 35% from the second quarter of last year. Strong Wireless standard component sales and a favorable mix of shipments for the Space & Defense Group drove the improved profitability for the quarter. Wireless Group net sales for the quarter were $15.6 million, up 26% from the second quarter of last year, continuing strong demand for standard infrastructure and consumer components drove the increase in net sales from the second quarter of last year. The combination of our recent new product introductions and the expanding deployments of the fourth generation wireless networks are positively impacting demand for our products.

New product and technology development efforts remained focused on expanding our standard component product portfolio. During the quarter we continued to expand our Xinger III, our high power resistor and consumer component product line. In addition, the development of the Anaren Integrated Radio or AIR product line of low power wireless transceiver modules continued and the product line is being positively received in the market. Customers that exceeded 10% of Wireless Group net sales for the quarter were E.G Components, Huawei and Richardson.

For the Space & Defense Group net sales for the quarter were $27.8 million, down 3% from the second quarter of last year. The continuing high quarterly sales volume and a favorable sales mix positively impacted the Group’s profitably for the quarter. Space & Defense Group revenue and profitability for the quarter were negatively impacted by the continuing capacity expansion initiatives in our Unicircuit operation. This initiative should be completed by the end of the current third quarter.

Product and technology development initiatives for the group remained focused on expanding the RAD-hard hybrid electronic module standard component product line for space applications, advancing our RF manifold and hybrid electronic module technologies for radar applications, and the development of integrated microwave assembly technology.

New orders for the quarter were $23.2 million and including contracts for components and assemblies for use in ship borne radar and various satellite applications. During the quarter the Group was selected to receive a contract valued in excess of $20 million from Thales-Alenia-Space for the development and production of integrated beamforming assemblies that will be deployed on the IridiumNEXT satellite payload. The contract is expected to be finalized in the current third quarter.

Space & Defense Group new business environment remained robust due to an increase in the number of satellite based applications. Space & Defense Group order backlog at December 31st, 2010 was $74.3 million. Customers that generated greater than 10% of Space & Defense Group net sales for the quarter were Lockheed Martin, Northrop Grumman, and SRCTec and Raytheon.

George?

George Blanton

The highlights of the second quarter income statement and the balance sheet as of December 31st, 2010 are presented on a non-GAAP basis. These non-GAAP measures are each adjusted from GAAP results to exclude certain non-cash items including equity-based compensation and intangible amortization. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with accounting principles generally accepted in the United States. Please refer to our Q2 earnings release for a reconciliation of GAAP and non-GAAP measures

Non-GAAP gross margin was 16.5 million or 38% for the current quarter, compared to 13.5 million or 35.3% for the second quarter of last year. Gross profit as a percent of sales increased 270 basis points from the second quarter of last year due to higher sales levels and a more favorable sales mix for both Wireless and Space & Defense business segments. Wireless standard component sales increased 53% from the second quarter of last year and were partially offset by a decline in the sales of custom assembly products.

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