Conexant Meets Fourth Fiscal Quarter Expectations and Delivers Full-Year Revenue Growth of 34 Percent

NEWPORT BEACH, Calif.—(BUSINESS WIRE)—October 26, 2006— Conexant Systems, Inc. (NASDAQ: CNXT) today announced fourth quarter and full-year financial results for fiscal 2006, which ended September 29, 2006. For the fourth fiscal quarter, the company reported revenues of $245.9 million, within the guidance range communicated at the beginning of the quarter. Conexant also met expectations for core gross margin improvement and core net income for the quarter. For the full fiscal year, the company delivered revenues of $970.8 million, a 34 percent increase from fiscal 2005 revenues of $722.7 million.

Conexant presents financial results based on generally accepted accounting principles (GAAP) as well as selected non-GAAP financial measures intended to reflect its core results of operations. The company believes these core financial measures provide investors with additional insight into its underlying operating results. Core financial measures exclude non-cash and other non-core items as fully described in the GAAP to non-GAAP reconciliation in the accompanying financial data.

Fourth quarter fiscal 2006 revenues of $245.9 million decreased 2.3 percent from third quarter fiscal 2006 revenues of $251.6 million, and were up 14.4 percent from $214.9 million in the fourth quarter of fiscal 2005. Core gross margins in the fourth quarter of fiscal 2006 increased to 45.8 percent of revenues, up 60 basis points from the 45.2 percent level of the prior quarter.

Core operating expenses increased in the fourth quarter of fiscal 2006 to $91.8 million from $88.4 million in the prior quarter as a result of increased investments in new product development. Core operating expenses in the year-ago quarter were $79.9 million.

Core operating income in the fourth quarter of fiscal 2006 was $20.7 million, compared to third quarter fiscal 2006 core operating income of $25.5 million. Core operating income in the fourth quarter of fiscal 2005 was $6.7 million. Core net income for the fourth quarter of fiscal 2006 was $14.4 million, or $0.03 per diluted share, compared to $18.6 million, or $0.04 per diluted share in the third quarter of fiscal 2006. In the year-ago quarter, the core net income was $0.3 million, or $0.00 per diluted share.

On a GAAP basis, gross margins for the fourth quarter of fiscal 2006 were 45.7 percent of revenues, compared to 52.3 percent in the prior quarter. Third fiscal quarter gross margins included a gain of $17.5 million related to the termination of a wafer supply and services agreement with Jazz Semiconductor, Inc. GAAP operating expenses decreased to $108.1 million in the fourth quarter of fiscal 2006 from $137.3 million in the prior quarter. Third fiscal quarter operating expenses included a $30.0 million charge for the settlement of litigation. The GAAP operating earnings were $4.4 million in the fourth quarter of fiscal 2006 compared to a loss of $5.7 million in the previous quarter. The GAAP net loss for the fourth quarter of fiscal 2006 was $21.1 million, or $0.04 per diluted share, compared to a GAAP net loss of $67.1 million, or $0.14 per diluted share, in the third quarter of fiscal 2006. The company's fourth fiscal quarter 2006 GAAP results also included a $12.9 million decrease in the value of warrants in Mindspeed Technologies, Inc. For the year-ago quarter, GAAP gross margins were 40.3 percent, GAAP operating expenses were $99.7 million, GAAP operating loss was $13.1 million, and GAAP net income was $50.1 million, or $0.10 per diluted share. GAAP net income for the fourth fiscal quarter of 2005 included a gain of $49.0 million on the sale of equities in SiRF Technology Holdings, Inc., and an increase of $22.0 million in the value of warrants in Mindspeed Technologies, Inc. The GAAP net loss for fiscal 2006 was $122.6 million, or $0.26 per diluted share, compared to a net loss in fiscal 2005 of $176.0 million, or $0.37 per diluted share.

"Fiscal 2006 was another year of significant progress for Conexant," said Dwight W. Decker, Conexant chairman and chief executive officer. "Year-over-year revenues increased 34 percent, we achieved our highest-priority goal of delivering 10 percent core operating margins in the third fiscal quarter, two quarters ahead of schedule, and we remained solidly profitable on a core basis exiting the year. We also improved core gross margins as a percent of revenues by more than five points during the year.

"In the fourth fiscal quarter, despite widely reported weakness in the markets we address, the Conexant team delivered financial results that met the expectations we set entering the quarter," Decker said. "In July, we anticipated that fourth fiscal quarter revenues would be in a range from up 1 percent to down 3 percent sequentially. We delivered revenues of $246 million, down 2 percent sequentially. Broadband Media Processing is now our largest business, and our set-top box business again achieved record revenues and has now delivered five quarters of sequential double-digit revenue growth. We increased core gross margins by approximately 60 basis points sequentially to 45.8 percent of revenues. This was better than we expected at the beginning of the quarter, and our seventh consecutive quarter of sequential core gross margin improvement. Core operating expenses were $92 million for the quarter as we continued to modestly grow new product development investments, primarily in Broadband Media Processing. Core net income came in at $0.03 per diluted share, in line with our expectation entering the quarter of $0.03 to $0.04 per diluted share.

"During the quarter, we announced that we expect to receive approximately $100 million in cash proceeds when the merger of Jazz Semiconductor and Acquicor Technology is closed, which we anticipate in the first quarter of calendar 2007," Decker said. "We exited the quarter with $341 million in cash, cash equivalents, and investments. In last quarter's earnings announcement, we communicated plans for a debt-only financing. We intend to retire our convertible notes due in February 2007 by using a combination of proceeds from such a financing, from the Jazz transaction, and from our current balance of cash, cash equivalents, and marketable securities."

First Fiscal Quarter 2007 Outlook

"The overall semiconductor market continues to demonstrate signs of weakness, and as a result, our customers are cautious in this uncertain environment," Decker said. "Nonetheless, we expect Conexant revenues for the first quarter of fiscal 2007 to be approximately flat on a sequential basis, in a range between $243 million and $248 million. We anticipate that continued growth in our set-top box business will be offset by further weakness in the legacy portion of our Wireless Networking business.

"We expect core gross margins of approximately 45 percent in the first quarter of fiscal 2007," Decker said. "We anticipate that core operating expenses will be approximately $94 million, a level we plan to maintain for the near-term. We anticipate that core operating income will be in a range between $16 million and $18 million. As a result, we expect our core net income to be $0.02 per diluted share, based on approximately 500 million diluted shares outstanding."

Note to Editors, Analysts and Investors

Conexant's conference call will take place on Thursday, October 26, 2006, at 5:00 p.m. Eastern Time / 2:00 p.m. Pacific Time.

To listen to the conference call via telephone, dial 866-650-4882 (in the US and Canada) or 706-679-7338 (from other international locations); security code: Conexant. To listen via the Internet, visit the Investor Relations section of Conexant's Web site at Playback of the conference call will be available shortly after the call concludes and will be accessible on Conexant's Web site at or by calling 800-642-1687 (in the US and Canada) or 706-645-9291 (from other international locations); pass code: 8804659.

About Conexant

Conexant's innovative semiconductor solutions are driving broadband communications and digital home networks worldwide. The company has leveraged its expertise and leadership position in modem technologies to enable more Internet connections than all of its competitors combined, and continues to develop highly integrated silicon solutions for broadband data and media processing networks.

Key products include client-side xDSL and cable modem solutions, home network processors, broadcast video encoders and decoders, digital set-top box components and systems solutions, and dial-up modems. Conexant's suite of networking components includes a leadership portfolio of IEEE 802.11-compliant WLAN chipsets, software and reference designs, as well as solutions for applications based on HomePlug(R) and HomePNA(TM). The company also offers a complete line of asymmetric and symmetric DSL central office solutions, which are used by service providers worldwide to deliver broadband data, voice, and video over copper telephone lines.

Conexant is a fabless semiconductor company with annual revenues of approximately $1 billion. The company has approximately 2,800 employees worldwide, and is headquartered in Newport Beach, Calif. To learn more, please visit

Safe Harbor Statement

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: This release includes forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally can be identified by phrases such as Conexant or its management "believes," "expects," "anticipates," "foresees," "forecasts," "estimates" or other words or phrases of similar import. Similarly, statements in this release that describe our business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. All such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.

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