Anaren's CEO Discusses F2Q2012 Results - Earnings Call Transcript

Anaren Inc. ( ANEN)

F2Q2012 (Qtr End 12/31/2011) Earnings Call

January 26, 2012 8:30 am ET

Executives

Larry Sala - Chairman, President and CEO

George Blanton - CFO

Joe Porcello - VP of Accounting

Analysts

Matt Ramsey - Canaccord Genuity

Rich Valera - Needham & Company

Chris McDonald - Kennedy Capital

Presentation

Operator

Good day, ladies and gentlemen, and welcome to Anaren's second quarter earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Mr. Larry Sala.

Larry Sala

Thank you. Good morning and thank you for participating in the interim fiscal 2012 second quarter conference call. I'm joined again today by George Blanton, our CFO; and by Joe Porcello, our Vice President of Accounting.

I'll provide a brief overview of the results for the 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're encouraged to review our SEC filings and exhibits to those reports to learn more about the various risks and uncertainties facing our business and their potential impact on our net sales, our earnings and our stock price.

Net sales for the second quarter were $35.7 million, down 18% from the second quarter of last year. The decline in sales for the quarter was due to the significant decline in demand for wireless infrastructure products as well as the decline in counter-IED related business within the space of Defense Group.

Non-GAAP operating income for the quarter was $2.7 million or 7.5% of net sales, down 61% from the second quarter of last year. Margins were negatively impacted by the overall decline in net sales and a less favorable business mix. But we believe that demand from wireless infrastructure customers will begin to increase.

In our fourth quarter, we have taken actions to significantly reduce our operating cost, improve our operating performance at these current business levels. We'll continue to monitor the wireless infrastructure market conditions and adjust our business model accordingly.

Wireless Group net sales for the quarter were $10.8 million, down 31% from the second quarter of last year. Despite the very strong demand for the first half of calendar 2011, demand from wireless infrastructure customers has declined significantly and is projected to remain at these low levels throughout the fiscal third quarter.

We're also transitioning to a vendor-managed inventory arrangement with our largest wireless customer, Ericsson, in the third quarter, which will have a negative one-time impact on our net sales for the quarter.

Our customers continue to forecast strong demand for all of calendar 2012, and we currently believe that demand will begin increasing in our fiscal fourth quarter.

During the second quarter, several new Anaren Integrated Radio or AIR modules were introduced, and the number of AIR product designs continues to increase. Also in the quarter, we launched the AIR BoosterPack development kit, which is promoted and sold through Texas Instruments and enables potential AIR customers to efficiently and cost effectively evaluate the AIR module performance in their specific applications. We believe that nearly 1,000 AIR BoosterPacks have been sold to date.

New product and technology development efforts may focus on expanding our wireless product portfolio and completing the development of our AIR-related software tools.

Customers that exceeded 10% of Wireless Group net sales for the quarter were EG Components who we sell through to Ericsson, Huawei and Nokia.

For the Space & Defense Group, net sales for the quarter were $24.9 million, down 10% from the second quarter of last year. The decline in net sales was due to largely by the decline in counter-IED related business.

Net sales for the Space & Defense Group improved from first quarter levels as operational and customer issues that negatively impacted deliveries in the first quarter were resolved in the second quarter. Profitability for the Group also improved from first quarter levels as a result of the increase in net sales and more favorable business mix and improved operating performance.

New orders for the quarter were $26.4 million and were driven largely by radar Passive Ranging and satellite applications. We're benefiting from the increase in global demand for ballistic missile defense radars and for satellite-based applications.

Product and technology development initiatives for the Group remain focused on expanding our RAD-hard hybrid electronic module product lines for space applications and advancing our RF manifold in integrated microwave assembly technology for defense applications.

Our Space & Defense order backlog at December 31, 2011, was $96 million. Customers that generated greater than 10% of the Space & Defense Group net sales for the quarter were Lockheed Martin, Northrop Grumman and Raytheon.

George?

George Blanton

Highlights for the second quarter income statement and balance sheet at December 31, 2011, are presented on a non-GAAP basis. These non-GAAP measures are each adjusted from GAAP results and 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 $11.6 million or 32.4% for the current quarter compared to $16.5 million or 38% for the second quarter of last year. Gross profit as a percent of sales decreased by 560 basis points compared to the second quarter of last year due to significantly lower sales volume which resulted in non-favorable overhead absorption for the quarter and a less favorable Space & Defense sales product mix.

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