Revenue Increased from $140M to $170M; Two-quarter $70M Channel Inventory Reduction Initiative CompletedNEWPORT BEACH, Calif.—(BUSINESS WIRE)—April 20, 2005— Conexant Systems, Inc. (NASDAQ: CNXT) today announced revenues of $169.7 million for the second quarter of fiscal 2005, which ended April 1, 2005. The company had previously guided for second fiscal quarter revenues of approximately $160 million. Conexant also accomplished the first phase of its recovery plan by successfully completing its two-quarter channel inventory reduction initiative. Over this period, the company drove the consumption of approximately $70 million of inventory at distributors and direct customers in order to balance revenues with end-customer demand as rapidly as possible.
Second fiscal quarter 2005 revenues of $169.7 million increased 21 percent from first fiscal quarter 2005 revenues of $140.6 million, and decreased 30 percent compared to second fiscal quarter 2004 revenues of $243.8 million. The second fiscal quarter 2005 pro forma operating loss was $29.2 million, compared to a pro forma operating loss of $85.9 million in the first quarter of fiscal 2005, and a pro forma operating profit of $19.9 million in the year-ago quarter. On a pro forma basis, the net loss for the second fiscal quarter of 2005 was $0.08 per diluted share and in line with expectations, compared to a net loss of $0.20 in the first fiscal quarter, and a net profit of $0.04 per diluted share in the second fiscal quarter of 2004.
Based on generally accepted accounting principles (GAAP), the net loss for the second quarter of fiscal 2005 was $73.2 million, or $0.16 per diluted share, compared to a net loss of $120.7 million, or $0.26 per diluted share, in the first quarter of fiscal 2005, and a net loss of $143.4 million, or $0.41 per diluted share, in the second quarter of fiscal 2004.
Conexant provides pro forma results as a supplement to financial statements based on GAAP. The company uses pro forma information to evaluate its operating performance and believes this presentation provides investors with additional insight into its underlying operating results. A full reconciliation between pro forma and GAAP results is included in the accompanying financial data.
"Conexant's second fiscal quarter revenues of $169.7 million were nearly $10 million higher than previously expected, primarily due to greater-than-anticipated demand in our DSL business," said Dwight W. Decker, Conexant chairman and chief executive officer.
"During the quarter, we continued our focus on working capital management. We reduced internal inventory by $26 million, bringing the two-quarter reduction in this metric to $40 million, excluding the impact of charges," Decker said. "We collected $180 million in receivables during the quarter, reducing DSOs by 15 percent from 60 to 51 days. We achieved our targeted reduction from $93 million to $89 million in quarterly pro forma operating expenses. We also achieved our goal of holding our cash level flat, excluding any change in the value of our equity holdings, by capturing a gain of approximately $50 million through a refinancing of our headquarters building that covered our operating losses and restructuring costs.
"Our only disappointment during the quarter was that the timely completion of our two-quarter inventory reduction initiative required a number of out-of-the-ordinary channel actions," Decker continued. "These included selectively placing higher-cost products into more price-sensitive applications, and special pricing for certain customers on selected slower moving products. This dynamic depressed second fiscal quarter gross margins to 35.3 percent of revenues, a level below our expectations entering the quarter.
"From a broader perspective, by quickly returning channel inventory to normalized levels, we successfully executed on the first phase of our three-stage recovery plan," Decker said. "We are now focused on the second phase of this plan, which is to grow revenues, complete in-process cost reductions, and achieve profitability before the end of the calendar year. In order to reach this critical milestone, we are targeting a revenue level of $220 million, gross margins of 40 percent, and quarterly operating expenses of $80 million.
"Once accomplished, we will turn to our third phase, in which we will focus on differentiating Conexant by leveraging our unique broadband media and communications processing capabilities to develop new converged digital consumer electronics products and maximize our profitability," Decker said.
Third Fiscal Quarter 2005 Outlook
"We expect to deliver third fiscal quarter revenues of approximately $190 million, up approximately 12 percent sequentially from the $170 million in revenue we recorded in the just concluded quarter," Decker said.
"With the effects of our inventory reduction initiative behind us, we anticipate that gross margins for the current quarter will improve to a level of approximately 38 percent, despite significant and continuing price pressure in our DSL and wireless networking businesses," Decker continued. "We expect to further reduce pro forma operating expenses from $89 million in the March quarter to $86 million in the current quarter. Driven by these improvements, we anticipate that we will reduce our pro forma operating loss by more than 50 percent sequentially, from $29 million in the March quarter to a loss of approximately $14 million in the current quarter, resulting in a pro forma net loss of approximately $0.05 per share, based on approximately 470 million fully diluted shares."
Note to Editors, Analysts and Investors
Conexant's conference call will take place on Wednesday, April 20, 2005, at 5 p.m. Eastern time/2 p.m. Pacific time. To listen to the conference call via telephone, dial 866-710-0179 (domestic) or 334-323-9854 (international); security code: Conexant. To listen via the Internet, visit the Investor Relations section of Conexant's Web site at www.conexant.com/ir. Playback of the conference call will be available shortly after the call concludes and will be accessible on Conexant's Web site at www.conexant.com/ir or by calling 877-919-4059 (domestic) or 334-323-7226 (international); pass code: 59844236.
Conexant's innovative semiconductor solutions are driving broadband communications, enterprise networks 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 802.11a/b/g-compliant WLAN chipsets, software and reference designs, as well as solutions for applications based on HomePlug(SM) 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 that recorded more than $900 million in revenues in fiscal year 2004. The company has approximately 2,400 employees worldwide, and is headquartered in Newport Beach, Calif. To learn more, please visit us at www.conexant.com.
Safe Harbor Statement
This press release contains statements relating to our future results (including certain projections and business trends) that are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected as a result of certain risks and uncertainties. These risks and uncertainties include, but are not limited to: the substantial losses the company has incurred recently; the cyclical nature of the semiconductor industry and the markets addressed by the company's and its customers' products; demand for and market acceptance of new and existing products; successful development of new products; the timing of new product introductions and product quality; the company's ability to anticipate trends and develop products for which there will be market demand; the availability of manufacturing capacity; pricing pressures and other competitive factors; changes in product mix; product obsolescence; the ability to develop and implement new technologies and to obtain protection for the related intellectual property; the uncertainties of litigation and the demands it may place on the time and attention of company management; and the risk that the businesses of Conexant and GlobespanVirata have not yet been completely and may not be integrated successfully, as well as other risks and uncertainties, including those detailed from time to time in our Securities and Exchange Commission filings. These forward-looking statements are made only as of the date hereof, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.
Conexant is a registered trademark of Conexant Systems, Inc. Other brands and names contained in this release are the property of their respective owners.
CONEXANT SYSTEMS, INC. GAAP Consolidated Statements of Operations (Unaudited, in Thousands, Except Per Share Amounts) Three months ended Six months ended March 31, March 31, March 31, March 31, 2005 2004 2005 2004 Net revenues (See Note 1) $169,738 $243,781 $310,359 $421,114 Cost of goods sold (See Note 2) 109,766 142,116 243,231 240,312 Gross margin 59,972 101,665 67,128 180,802 Operating expenses: Research and development 70,539 53,734 143,080 92,888 Selling, general and administrative 28,362 30,602 58,368 53,411 Amortization of intangible assets 8,140 3,653 16,433 4,608 In-process research and development -- 160,818 -- 160,818 Special charges (See Note 3) 13,596 5,514 32,853 6,119 Total operating expenses 120,637 254,321 250,734 317,844 Operating loss (60,665) (152,656) (183,606) (137,042) Other expense (income), net 11,892 (9,736) 9,137 (35,017) Loss before income taxes (72,557) (142,920) (192,743) (102,025) Provision for income taxes 630 459 1,162 707 Net loss $(73,187)$(143,379)$(193,905)$(102,732) Basic and diluted loss per share $(0.16) $(0.41) $(0.41) $(0.33) Number of shares used in per share computation - basic and diluted 470,189 349,968 469,279 313,580 The GAAP consolidated statements of operations include the results of operations of GlobespanVirata, Inc. from Feb. 27, 2004, the date of the company's merger with GlobespanVirata. No restatement has been made to earlier periods. Note 1 - Includes $9.6 million and $17.5 million of pricing adjustments to inventories in the channel during the three and six months ended March 31, 2005, respectively. Note 2 - Includes $45.0 million of charges related to internal inventory in the six months ended March 31, 2005. Note 3 - Special charges consist of asset impairments, restructuring charges, integration costs, and other special items. CONEXANT SYSTEMS, INC. Pro Forma (Non-GAAP) Consolidated Statements of Operations (Unaudited, in Thousands, Except Per Share Amounts) Three months ended Six months ended March 31, March 31, March 31, March 31, 2005 2004 2005 2004 Net revenues (See Note 4) $169,738 $243,781 $310,359 $421,114 Cost of goods sold (See Note 5) 109,766 141,304 243,231 239,500 Gross margin 59,972 102,477 67,128 181,614 Operating expenses: Research and development 63,909 52,863 130,574 91,994 Selling, general and administrative 25,225 29,746 51,586 52,555 Total operating expenses 89,134 82,609 182,160 144,549 Pro forma operating income (loss) (29,162) 19,868 (115,032) 37,065 Other expense, net 6,741 4,686 15,670 9,289 Pro forma income (loss) before income taxes (35,903) 15,182 (130,702) 27,776 Provision for income taxes 630 459 1,162 707 Pro forma net income (loss) $(36,533) $14,723 $(131,864) $27,069 Basic income (loss) per share pro forma (non-GAAP) $(0.08) $0.04 $(0.28) $0.09 Diluted income (loss) per share pro forma (non-GAAP) $(0.08) $0.04 $(0.28) $0.08 Number of shares used in per share computation - basic 470,189 349,968 469,279 313,580 Number of shares used in per share computation - diluted 470,189 377,993 469,279 339,087 The pro forma (non-GAAP) consolidated statements of operations include the results of operations of GlobespanVirata, Inc. from Feb. 27, 2004, the date of the company's merger with GlobespanVirata. No restatement has been made to earlier periods. Pro forma operating income (loss), pro forma net income (loss), and basic and diluted income (loss) per share pro forma (non-GAAP) excludes certain non-cash and special items related to operations, and certain non-operating gains and losses. The company believes these measures of income provide a better understanding of its underlying operating results and the company uses these measures internally to evaluate its underlying operating performance. These measures of income are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from pro forma measures used by other companies. A reconciliation of GAAP consolidated statements of operations and per share information as determined under generally accepted accounting principles with the pro forma net income (loss) and pro forma per share information presented above is presented in the following table. Note 4 - Includes $9.6 million and $17.5 million of pricing adjustments to inventories in the channel during the three and six months ended March 31, 2005, respectively. Note 5 - Includes $45.0 million of charges related to internal inventory in the six months ended March 31, 2005. CONEXANT SYSTEMS, INC. Reconciliation of GAAP Consolidated Statements of Operations to Pro Forma (Non-GAAP) Consolidated Statements of Operations (Unaudited, in Thousands, Except Per Share Amounts) Three months ended Six months ended March 31, March 31, March 31, March 31, 2005 2004 2005 2004 Net loss (unaudited) $(73,187)$(143,379)$(193,905)$(102,732) Non-cash and special items: Amortization of intangible assets 8,140 3,653 16,433 4,608 In-process research and development -- 160,818 -- 160,818 IP litigation support costs 2,148 570 4,345 570 Special charges (See Note 6) 13,596 5,514 32,853 6,119 Stock compensation 3,019 1,157 6,008 1,180 Transitional salaries and benefits (See Note 7) 4,600 -- 8,935 -- Equity in losses (earnings) of equity method investees 3,371 (651) 6,460 (10,816) Unrealized gain on note receivable from Skyworks -- (16,456) -- (11,545) Unrealized (gain) loss on Mindspeed warrant 13,492 2,085 (1,281) (22,545) Inventory impairment -- 812 -- 812 Gain on sale of equity securities (11,112) -- (11,112) -- Write-down (recovery) of investments (600) 600 (600) 600 Pro forma net income (loss) $(36,533) $14,723 $(131,864) $27,069 Income (loss) per share, basic: Net loss (GAAP) $(0.16) $(0.41) $(0.41) $(0.33) Non-cash and special items 0.08 0.45 0.13 0.42 Pro forma (non-GAAP) income (loss) $(0.08) $0.04 $(0.28) $0.09 Income (loss) per share, diluted: Net loss (GAAP) $(0.16) $(0.41) $(0.41) $(0.33) Non-cash and special items 0.08 0.45 0.13 0.41 Pro forma (non-GAAP) income (loss) $(0.08) $0.04 $(0.28) $0.08 Note 6 - Special charges consist of asset impairments, restructuring charges, integration costs, and other special items. Note 7- Transitional salaries and benefits of $4,600 for the three months ended March 31, 2005, and $8,935 for the six months ended March 31, 2005, represent amounts earned by employees, who have been notified of their termination as part of our restructuring activities, from the date of their notification. Included in the above amounts for the three and six months ended March 31, 2005, are $632 and $928, respectively, of facilities related costs. CONEXANT SYSTEMS, INC. Consolidated Condensed Balance Sheets (Unaudited, in Thousands) March 31, Dec. 31, Sept. 30, 2005 2004 2004 ASSETS Current assets: Cash and cash equivalents (See Note 8) $141,206 $132,326 $139,031 Marketable securities (See Note 8) 104,613 135,597 163,040 Receivables, net 94,706 92,864 185,037 Inventories 110,098 136,438 194,754 Mindspeed warrant - current portion 3,250 5,634 3,599 Other current assets 22,608 17,521 20,768 Total current assets 476,481 520,380 706,229 Property, plant and equipment, net 51,052 53,266 55,741 Goodwill 718,335 714,852 708,544 Intangible assets, net 122,597 128,947 135,241 Mindspeed warrant 24,316 35,737 23,000 Marketable securities - long term (See Note 8) 117,981 123,266 137,604 Other assets 109,049 112,936 114,163 Total assets $1,619,811 $1,689,384 $1,880,522 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $92,392 $89,171 $141,533 Accrued compensation and benefits 33,708 44,511 40,423 Restructuring and reorganization liabilities 24,919 28,205 22,427 Other current liabilities 58,546 51,502 67,044 Total current liabilities 209,565 213,389 271,427 Convertible subordinated notes 711,825 711,825 711,825 Other liabilities 105,590 64,741 68,883 Total liabilities 1,026,980 989,955 1,052,135 Shareholders' equity 592,831 699,429 828,387 Total liabilities and shareholders' equity $1,619,811 $1,689,384 $1,880,522 Note 8 - Total cash, cash equivalents and marketable securities at March 31, 2005, Dec. 31, 2004, and Sept. 30, 2004, are as follows: March 31, Dec. 31, Sept. 30, 2005 2004 2004 Cash and cash equivalents $141,206 $132,326 $139,031 Other short-term marketable securities (primarily mutual funds, domestic government agencies and corporate debt securities) 10,222 2,587 13,764 Long-term marketable securities (primarily domestic government agencies and corporate debt securities) 117,981 123,266 137,604 Subtotal 269,409 258,179 290,399 Equity securities - Skyworks Solutions, Inc. (6.2 million shares at March 31, 2005, Dec. 31, 2004 and Sept. 30, 2004) 38,643 58,305 61,767 Equity securities - SiRF Technologies, Inc. (5.0 million shares at March 31, 2005 and 5.9 million shares at Dec. 31, 2004 and Sept. 30, 2004) 55,748 74,705 87,509 Subtotal Skyworks and SiRF (See Note 9) 94,391 133,010 149,276 Total cash, cash equivalents and marketable securities $363,800 $391,189 $439,675 Note 9 - The decrease in value of Skyworks and SiRF shares from Dec. 31, 2004, to March 31, 2005, was approximately $28.3 million, excluding the sale of 0.9 million shares of SiRF for net proceeds of $10.2 million during the three months ended March 31, 2005. CONEXANT SYSTEMS, INC. Selected Other Data (Unaudited, in Thousands) Three months ended Six months ended March 31, March 31, 2005 2004 2005 2004 Selected Data: Depreciation (See Note 10) $4,692 $3,670 $9,530 $6,825 Capital expenditures 10,280 5,045 12,362 9,902 Revenues By Region: Americas $21,267 $25,542 $39,706 $47,943 Asia-Pacific 132,585 198,298 238,057 338,660 Europe, Middle East and Africa 15,886 19,941 32,596 34,511 $169,738 $243,781 $310,359 $421,114 Note 10 - Does not include amortization of intangible assets, as applicable.