First fiscal quarter 2005 revenues of $140.6 million decreased 34 percent from fourth fiscal quarter 2004 revenues of $213.1 million, and decreased 21 percent compared to first fiscal quarter 2004 revenues of $177.3 million. The first fiscal quarter 2005 pro forma operating loss was $85.9 million, compared to a pro forma operating loss of $9.6 million in the fourth quarter of fiscal 2004, and a pro forma operating profit of $17.2 million in the year-ago quarter. On a pro forma basis, net loss for the first fiscal quarter of 2005 was $0.20 per diluted share, compared to a net loss of $0.04 in the fourth fiscal quarter, and a net profit of $0.04 per diluted share in the first fiscal quarter of 2004.
Based on generally accepted accounting principles (GAAP), the net loss for the first quarter of fiscal 2005 was $120.7 million, or $0.26 per diluted share, compared to a net loss of $370.5 million, or $0.79 per diluted share, in the fourth quarter of fiscal 2004, and net income of $40.6 million, or $0.13 per diluted share, in the first 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.
"Our decision to aggressively reduce channel inventory to match revenues with end-customer demand as quickly as possible resulted in a reduction of approximately $50 million in total channel inventory during the first fiscal quarter," said Dwight W. Decker, Conexant's chairman and chief executive officer. "Our significant progress in reducing inventory and the achievement of our revised revenue target of $140 million reinforces our belief that end-customer demand for the quarter was approximately $190 million.
"We maintained gross margins of 40 percent of revenues, excluding the impact of previously announced inventory charges of $53 million," Decker said. "Through a sharp focus on collecting receivables and reducing our internal inventory levels, we significantly improved our working capital metrics and delivered a modest positive net cash flow from operations."
As expected, pro forma operating expenses for the quarter were $93 million, compared to pro forma operating expenses of $95 million for the fourth fiscal quarter of 2004. Pro forma cash flow from operations was approximately $4 million. This was offset by one-time and non-operating items; a $16 million decline in the value of the company's holdings in Skyworks Solutions, Inc. (NASDAQ:SWKS) and SiRF Technology (NASDAQ:SIRF); the $15 million acquisition of Paxonet Communications in India; $12 million in restructuring charges and other payments; an $8 million settlement of intellectual property litigation; and $2 million in capital expenditures. As a result, Conexant's cash, cash equivalents and investments declined by $49 million sequentially, from $440 million in the immediate prior quarter to $391 million at the end of the first fiscal quarter.
Second Fiscal Quarter 2005 Outlook
"Historically, the first calendar quarter is a period of reduced demand for our PC and set-top box related product lines," Decker said. "We expect this seasonal dynamic to result in an overall decline this quarter of approximately 5 percent in end-customer demand, to about $180 million. We also plan to drive the completion of our current inventory reduction initiative, which should result in the further consumption during the quarter of approximately $20 million in channel inventory. Subtracting inventory consumption from our demand estimate, we expect to deliver second fiscal quarter revenues of approximately $160 million, up approximately 15 percent sequentially from the $141 million in revenue we recorded in the just finished quarter.
"We expect to deliver gross margins between 38 percent and 40 percent of revenues for the second fiscal quarter," Decker continued. "We further anticipate that the previously announced cost-reduction actions will result in a decline in operating expenses from $93 million in the December-ending quarter to approximately $89 million in the current quarter. Given our outlook for revenue, gross margin, and operating expenses, we anticipate that our second fiscal quarter pro forma net loss per share will be $0.07 to $0.08, based on approximately 470 million fully diluted shares."
Note to Editors, Analysts and Investors
Conexant's conference call will take place on Wednesday, Jan. 26, 2005, at 2 p.m. Pacific time/5 p.m. Eastern 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: 49087300.
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 Dec. 31, Dec. 31, 2004 2003 Net revenues (See Note 1) $140,621 $177,333 Cost of goods sold (See Note 1) 133,465 98,196 Gross margin 7,156 79,137 Operating expenses: Research and development (including non-cash stock compensation of $2,245 and $23 for the three months ended Dec. 31, 2004, and 2003, respectively) 72,541 39,154 Selling, general and administrative (including non-cash stock compensation of $744 and $0 for the three months ended Dec. 31, 2004, and 2003, respectively) 30,006 22,809 Amortization of intangible assets 8,293 955 Special charges (See Note 2) 19,257 605 Total operating expenses 130,097 63,523 Operating income (loss) (122,941) 15,614 Other income, net (2,755) (25,281) Income (loss) before income taxes (120,186) 40,895 Provision for income taxes 532 248 Net income (loss) $(120,718) $40,647 Basic income (loss) per share $(0.26) $0.15 Diluted income (loss) per share $(0.26) $0.13 Number of shares used in per share computation - basic 468,369 277,190 Number of shares used in per share computation - diluted 468,369 307,545 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 $52.9 million of inventory charges during the period ending Dec. 31, 2004, consisting of $45.0 million of charges for internal inventory and approximately $7.9 million of channel inventory charges. Note 2 - 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 Dec. 31, Dec. 31, 2004 2003 Net revenues (See Note 3) $140,621 $177,333 Cost of goods sold (See Note 3) 133,465 98,196 Gross margin 7,156 79,137 Operating expenses: Research and development 66,665 39,131 Selling, general and administrative 26,361 22,809 Total operating expenses 93,026 61,940 Pro forma operating income (loss) (85,870) 17,197 Other expense, net 8,929 4,603 Pro forma income (loss) before income taxes (94,799) 12,594 Provision for income taxes 532 248 Pro forma net income (loss) $(95,331) $12,346 Basic income (loss) per share pro forma (non-GAAP) $(0.20) $0.04 Diluted income (loss) per share pro forma (non-GAAP) $(0.20) $0.04 Number of shares used in per share computation - basic 468,369 277,190 Number of shares used in per share computation - diluted 468,369 300,181 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 3 - Includes $52.9 million of inventory charges during the period ending Dec. 31, 2004, consisting of $45.0 million of charges for internal inventory and approximately $7.9 million of channel inventory charges. Conexant Systems, Inc. Reconciliation of Consolidated Statements of Operations to Pro Forma (Non-GAAP) Consolidated Statements of Operations (Unaudited, in Thousands, Except Per Share Amounts) Three months ended Dec. 31, Dec. 31, 2004 2003 Net income (loss) (unaudited) $(120,718) $40,647 Non-cash and special items: Amortization of intangible assets 8,293 955 IP litigation support costs 2,197 -- Special charges (See Note 4) 19,257 605 Stock compensation 2,989 23 Transitional salaries and benefits (See Note 5) 4,335 -- Equity in losses (earnings) of equity method investees 3,089 (10,165) Unrealized loss on note receivable from Skyworks -- 4,911 Unrealized gain on Mindspeed warrant (14,773) (24,630) Pro forma net income (loss) $(95,331) $12,346 Income (loss) per share, basic: Net income (loss) (GAAP) $(0.26) $0.15 Non-cash and special items 0.06 (0.11) Pro forma (non-GAAP) income (loss) $(0.20) $0.04 Income (loss) per share, diluted: Net income (loss) (GAAP) $(0.26) $0.13 Non-cash and special items 0.06 (0.09) Pro forma (non-GAAP) income (loss) $(0.20) $0.04 Note 4 - Special charges consist of asset impairments, restructuring charges, integration costs, and other special items. Note 5 - Transitional salaries and benefits of $4,335 for the three months ended Dec. 31, 2004, represent amounts earned by employees, from the beginning of the period presented, who have been notified of their termination as part of our restructuring activities. Included in the above amount is $296 of facilities-related costs. Conexant Systems, Inc. Consolidated Condensed Balance Sheets (Unaudited, in Thousands) Dec. 31, Sept. 30, 2004 2004 ASSETS Current assets: Cash and cash equivalents (See Note 6) $132,326 $139,031 Marketable securities (See Note 6) 135,597 163,040 Receivables, net 92,864 185,037 Inventories 136,438 194,754 Mindspeed warrant - current portion 5,634 3,599 Other current assets 17,521 20,768 Total current assets 520,380 706,229 Property, plant and equipment, net 53,266 55,741 Goodwill 714,852 708,544 Intangible assets, net 128,947 135,241 Mindspeed warrant 35,737 23,000 Marketable securities - long term (See Note 6) 123,266 137,604 Other assets 112,936 114,163 Total assets $1,689,384 $1,880,522 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $89,171 $141,533 Accrued compensation and benefits 44,511 40,423 Restructuring and reorganization liabilities 28,205 22,427 Other current liabilities 51,502 67,044 Total current liabilities 213,389 271,427 Convertible subordinated notes 711,825 711,825 Other liabilities 64,741 68,883 Total liabilities 989,955 1,052,135 Shareholders' equity 699,429 828,387 Total liabilities and shareholders' equity $1,689,384 $1,880,522 Note 6 - Total cash, cash equivalents and marketable securities at Dec. 31, 2004, and Sept. 30, 2004, are as follows: Dec. 31, Sept. 30, 2004 2004 Cash and cash equivalents $132,326 $139,031 Other short-term marketable securities (primarily mutual funds, domestic government agencies and corporate debt securities) 2,587 13,764 Long-term marketable securities (primarily domestic government agencies and corporate debt securities) 123,266 137,604 Subtotal 258,179 290,399 Equity securities - Skyworks Solutions, Inc. (6.2 million shares at Dec. 31, 2004 and Sept. 30, 2004) 58,305 61,767 Equity securities - SiRF Technologies, Inc. (5.9 million shares at Dec. 31, 2004 and Sept. 30, 2004) 74,705 87,509 Subtotal Skyworks and SiRF 133,010 149,276 $391,189 $439,675 Conexant Systems, Inc. Selected Other Data (Unaudited, in Thousands) Three months ended Dec. 31, Dec. 31, 2004 2003 Selected Data: Depreciation (See Note 7) $4,838 $3,155 Capital expenditures 2,082 4,857 Revenues By Region: Americas $18,439 $22,401 Asia-Pacific 105,472 140,362 Europe, Middle East and Africa 16,710 14,570 $140,621 $177,333 Note 7 - Does not include amortization of intangible assets, as applicable.