Conexant issues earnings warning, announces layoffs

Conexant Systems, which produces semiconductor chipsets for communications applications, announced today that its second quarter 2001 revenues will be 35% to 40% less than the $410.4 million posted in the first quarter.

As a result, the company said it will slash 1500 jobs from its work force of 8800--a 20% reduction--during the next six months. The reductions will affect employees in all areas of the company, as well as 125 contractors.

Based on the revised revenue projections, the company now anticipates a pro forma loss per diluted share of 35 cents to 40 cents, excluding the impact of one-time charges associated with expense-reduction initiatives, restructuring measures, and significant additional inventory reserves.

Conexant blames the setback solely on the economy, citing weak demand and excess inventory for its woes. Revenues in its personal networking division are expected to be lower by 25% to 30% sequentially in the second quarter, as the markets for digital cellular handsets and set-top boxes deteriorate.

The news is even more grim from Conexant’s Mindspeed™ Internet infrastructure business, where second-quarter revenues are expected to be off 45% to 50% from the first quarter, driven by a steep decline in the division’s access product lines.

“The slowdown in the global economy and the ongoing inventory correction is impacting virtually all of the communications end markets we address,” said Dwight W. Decker, Conexant’s chairman and CEO in a statement. “As inventories are depleted, we expect ordering patterns to return to normal levels, but we see no clear indications of a recovery at this time.”

The good news for Conexant is that a partial recovery has begun, according to Kalpesh Kapadia, vice president and senior analyst for C.E. Unterberg, Towbin in San Francisco.

“The personal networking and Internet infrastructure markets will continue to be weak, but on the personal networking front--where they have a big push from digital cellular phones, set-top boxes, and modems--that could come back sooner than the networking side,” he said.

“The way the markets are going to come back is PCs first, wireless next and networking third. Personal networking started correcting last fall, and that correction should last for one more quarter.”

Kapadia suggested Conexant was overdue for an overhaul, of which the layoffs are a part. Another part is a restructuring that was announced last September. This strategy has been revamped and is now ready to be executed.

“They have had too much fat and lack of focus,” Kapadia said. “I think they are taking this time to reduce overhead and focus on the businesses that are growing. They were playing in too many markets, and they have been keeping some businesses--like analog modems--around because they have been cash cows.

“But what is happening now is a general weakness, and everything has been affected. So, every quarter, they have one market or another being down—big--and that has affected their overall revenue growth. [They should have recognized this and exited those businesses] or spun them into independent businesses, which they are doing now.”

In related news, Conexant also announced that its board of directors has approved what the company is calling a “one-step” process for separating the personal networking unit from Mindspeed. The difference between this approach and the plan announced last fall is that Conexant is now scuttling its plans for a Mindspeed IPO because of the weakened economy. Conexant expects to finalize the split by the end of its fiscal year, which concludes in September.

After the split, Decker will serve as chairman and CEO of the new Conexant, while Raouf Halim will become CEO of the new Mindspeed. Conexant will continue to be traded on the Nasdaq under the ticker symbol CNXT, while Mindspeed will trade on the Nasdaq under the symbol MSPD.