WJ Communications Announces Fiscal Q2, 2005 Results

Business Wire, July 28, 2005

SAN JOSE, Calif. -- WJ Communications, Inc. (Nasdaq:WJCI), a leading designer and supplier of RF solutions for the wireless infrastructure and RFID reader markets, today announced results for its second quarter ended July 3, 2005. The Company also announced that effective for the second quarter of 2005, the Company would recognize revenue from its distribution channels when the Company's distributors have sold the product to the end customers (the "sell-through" method). The Company had previously recognized revenue upon shipment to its distributors less estimated reserves for returns and pre-authorized price reductions (the "ship-to" method).

As a result of changing the application of its revenue recognition policy regarding its distributors, the Company will defer revenue recognition on approximately $4.1 million of products that remain in distributor inventories and have not sold through to end customers as of July 3, 2005. The Company will recognize revenue on these products as the Company's distributors sell the product to their end customers in future periods. Including the effect of the aforementioned $4.1 million adjustment, revenue for the second quarter of 2005 was $4.0 million, derived primarily from the Company's core business consisting of semiconductor components, multi-chip modules and RFID reader modules. The revenue from our core business for the second quarter of 2005 included revenue from our acquisition of EiC and Telenexus, Inc. of $0.2 million and $0.6 million, respectively. A full discussion of the sell-through revenue recognition method is included at the end of this press release.

If the Company had not changed its method of revenue recognition regarding its distributors, revenue for the second quarter of 2005 would have been $8.1 million from its core business consisting of semiconductor components, multi-chip modules and RFID reader modules. This compares to the revenue of $8.4 million in the same period last year, consisting of $7.1 million from the core business and $1.3 million in revenues from the legacy wireless assembly business. This also compares to the revenue of $7.8 million in the first quarter of 2005, consisting of $7.5 million from the core business and $0.3 million from the legacy wireless assembly business.

The Company reported a net loss of $7.8 million for the second quarter of 2005 or $0.12 per common share. This includes the impact from the one-time revenue adjustment described above, a charge of $1.2 million related to an employee separation agreement, and $0.4 million of professional fees related to a potential strategic business combination, which the Company decided not to consummate. This net loss compares to the net loss of $9.9 million for the second quarter of 2004, which included a charge of $8.5 million for in-process research and development related to the acquisition of the infrastructure assets from EiC Corporation.

As of July 3, 2005, the Company had cash, cash equivalents and short-term investments of $37.0 million with no long-term debt outstanding. This compares to $38.6 million in cash, cash equivalents and short-term investments at the end of the previous quarter.

"On a comparable basis, our core business continues to grow. During my first few weeks on the job, we have identified a number of opportunities to improve upon our underlying business. Over the next quarter, I intend to lay out a strategic plan designed to help improve our performance and attain profitability in the shortest time period possible," said Bruce Diamond, Chief Executive Officer and President of WJ Communications. "While the reasons for changing the revenue recognition method are strictly accounting related, we believe that the side benefits of this change include a better understanding and focus on end user demand for products that the Company sells through distribution. This revenue recognition method is consistent with the practice of many other semiconductor companies."

"During the quarter, our cost of sales benefited from approximately $200,000 in cost savings due to the closure of our Fremont, CA wafer fabrication facility," added Ephraim Kwok, Senior Vice President, and Chief Financial Officer of WJ Communications. "For the upcoming quarter, we expect our revenue to be in the range of $7.6 million to $8.0 million. Our gross margin this quarter was impacted due to the change to the "sell-through" method of revenue recognition, and we expect the gross margin for the upcoming quarter to be in the range of high 40's to low 50's percent."

Additional information on the change to a sell-through revenue recognition method

Effective for the Company's second quarter ended July 3, 2005, the Company changed the application of its revenue recognition policy regarding its distributors. The Company had previously recognized revenue upon shipment to its distributors less estimated reserves for returns and pre-authorized price reductions (the "ship-to" method). Effective for the second quarter ended July 3, 2005, the Company will recognize revenue from its distribution channels when the Company's distributors have sold the product to the end customer (the "sell-through" method). Historically, the Company has received stock rotation requests from its distributors that were within the amounts estimated and contractually allowed with only one exception of an insignificant amount. However, the most recent request for stock rotation during the second quarter ended July 3, 2005 was higher than the amount contractually allowed. Management believes the increasing percentage of new products introduced by the Company makes it likely that stock rotation reserves will continue to be difficult to estimate based on historical patterns and contractual provisions. Based on this change in facts and circumstances and management's future expectations, the Company believes that it can no longer reasonably estimate the amount of future returns from its distributors. Accordingly, recognition of revenue and associated gross profit on shipments to distributors will be deferred until the resale to the end customer. This change will be effective for the Company's second quarter ended July 3, 2005 and will result in a one-time revenue reduction of approximately $4.1 million which represents the current unsold inventory held by its distributors. Accordingly, the revenue of the second quarter ended July 3, 2005 was $4.0 million, including the aforementioned $4.1 million of adjustment.