Decline in Consumer Demand to Put Conexant Into the Red

Conexant Systems Inc. in Newport Beach said Wednesday that it expects to report a loss in the latest quarter on sharply lower revenue than previously forecast.

Shares of the communications chip maker fell $1.06 to $20.38 on the Nasdaq Stock Market, but the stock dropped as low as $14 in after-hours trading.

Conexant’s revised outlook calls for a loss of 5 cents to 10 cents a share for its fiscal first quarter ending this month. Conexant had been expected to earn 11 cents a share, the average estimate of analysts polled by First Call/Thomson Financial.

Revenue will be $400 million to $425 million, the company said, about 20% less than its previous forecast. If that holds, it would be Conexant’s lowest sales in six quarters.

Economy’s Slowdown Cutting Sales

The “steep drop” in consumer demand for personal computers, fax machines and satellite set-top boxes caused the sales shortfall, Conexant said. A slowing U.S. economy has hurt demand for computers and other products that use Conexant chips.

“This isn’t a complete surprise,” said Karl Motey, an analyst at C.E. Unterberg, Towbin. “What it surprising is the magnitude of the shortfall.” He rates Conexant shares a “strong buy.”

Dwight Decker, Conexant’s chief executive, attributed the earnings shortfall largely to the company’s exposure to the personal computers market, which accounts for about a third of the firm’s business. Only three years ago, PCs represented as much as 85% of Conexant’s business, he said.

The soaring cost of power has also gnawed away at the bottom line in recent months, Decker said in an interview Wednesday. Conexant operates under a voluntary agreement with the power company, paying significantly higher fees for energy to power its semiconductor fabrication plant in times of great demand.

While soaring power bills are not the driving factor in this current earnings shortfall, the charges are not insignificant, Decker said. “We’re going to pay $2 million more this quarter in utilities bills than we were planning to pay,” he said.

The Internet infrastructure business, Conexant’s fastest-growing unit, will also be down modestly because networking companies such as Cisco Systems Inc. have placed fewer orders this quarter, Decker said. Conexant’s top customers are Cisco, Lucent Technologies Inc. and Nortel Networks Corp.

Decker said the announcement would not have any effect on Conexant’s plans to spin off its Internet infrastructure unit into a separate company in late January. Conexant is moving forward with the spinoff, even with the slower-than-expected sales growth in the division, Decker said.

Conexant’s latest profit forecast excludes one-time costs associated with increased inventory reserves, the company said.

“We’re disappointed with our performance, but gee, we’re not alone with people who are disappointed these days,” Decker said. “We believe this is temporary, and our current thinking is that we’re going to see it through. We are confident about the intermediate and long-term prospects of our business.”

Although Conexant will be watching its spending closely in the coming quarters, Decker said he did not anticipate there would be any layoffs.

“We’re going to see this through without those kinds of cost cutting,” he said. “We’ve been growing our head count pretty significantly through this year, and we will be prioritizing future additions” and expenditures on capital equipment carefully.

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Bloomberg News contributed to this report.