Sharp Drop-Off in Demand Leads Conexant to Cut Earnings Forecast
Conexant Systems Inc. said Monday that plummeting demand will cut sales of networking equipment at its most-promising unit by as much as 50% this quarter, while overall weaker demand will lead to much lower-than-expected sales and earnings.
The Newport Beach communications chip maker, which also confirmed that it would lay off more than 1,500 employees, or nearly 20% of its work force, was joined by rival PMC-Sierra Inc. and others in announcing lower expectations.
“It’s an industrywide problem,” said analyst F. Drake Johnstone of brokerage Davenport & Co. “For the past 18 months, growth in the whole communications market evidently was at an artificially high level.”
Easy access to capital meant Internet companies were going public or receiving heavy investments, which allowed them to spend the resulting funds on equipment, Johnstone said.
The downturn in Internet-related investments has meant fewer orders from large telecommunications and computer-networking equipment companies such as Cisco Systems Inc., Lucent Technologies Inc. and Nortel Networks Corp.--all of which are major customers of both Conexant and PMC. Those companies already have announced losses and layoffs.
PMC, based in Santa Clara, Calif., also said Monday that it would eliminate 230 jobs, or 13% of its 1,740 employees, starting immediately.
Conexant shares, already battered by Wall Street, lost 63 cents Monday to close at $10.50 on Nasdaq. PMC-Sierra stock lost $1.68 to close at $32.26 a share, also on Nasdaq.
With inventory generally backing up in the industry, other companies also revised their financial forecasts Monday. Vitesse Semiconductor Corp. said fiscal second-quarter sales and profit will lag behind already reduced forecasts on weaker demand and canceled orders. And TranSwitch Corp., a Shelton, Conn., maker of chips for networking equipment, also cited lower orders in reducing its forecast.
“The companies are flying a bit blind,” Johnstone said.
Conexant expects revenue for the three months ending March 31 to be down 35% to 40% from the previous quarter’s revenues of $410.4 million. The company said it expects to lose 35 cents to 40 cents a share, not including certain charges and costs.
PMC-Sierra lowered its expected earnings per share to 2 cents to 3 cents for the quarter, down from the 12 cents a share previously expected by analysts. The forecast does not include certain charges. Sales will be $118 million to $120 million, down from $232 million last quarter, the company said.
Vitesse, based in Camarillo, said it expects operating profit of 10 cents or 11 cents a share, half of a March 5 forecast of 21 cents to 22 cents. Revenue will total $120 million to $125 million, rather than an earlier estimate of $150 million to $160 million, Vitesse said. Shares of Vitesse fell $2.31 to $33.94 on Nasdaq before its warning was released. Vitesse makes chips that speed data traffic on fiber-optic networks.
Conexant also said its most promising unit, Mindspeed Technologies, which makes networking equipment, also will see its sales drop 45% to 50% from the previous quarter because of a sharp decline in orders. Conexant plans to spin off from Mindspeed by next fall, if shareholders approve.
The steep drop in revenue at Mindspeed is the most dramatic example of a contracting market for such components. The unit has been considered Conexant’s crown jewel, and analysts believe that separating it from Conexant is key to the parent’s survival. Mindspeed’s sales doubled in each of the last three years.
Although the drop is alarming, Conexant’s chief executive, Dwight W. Decker, said the fact that PMC-Sierra also revealed a precipitous decline in the same arena “indicates that this was a market situation.
“It doesn’t make anybody feel better,” Decker said. “But what you worry about when you see this kind of decline in your own company is: Are you losing relative market share? . . . As bad as it is, we’re not losing market share.”
In its personal networking business, which makes chips for mobile phones, cable set-top boxes, modems and video game consoles, Conexant said sales will be 25% to 30% lower than last quarter.
As reported Monday, Conexant said it would cut nearly 20% of its work force over the next six months, including about 500 jobs in Southern California, as it strives to cut costs in the face of lower sales. In addition, it said its senior managers will take a 10% pay cut.
The company said it also will attempt to take its digital imaging unit private.
Whether the steps will be adequate to stem the bleeding remains to be seen, Johnstone said.
“The company is doing what they think is needed at this point in time to restore profitability,” he said. “It may be enough, but I wouldn’t say that with any great deal of confidence yet.”
One positive outcome, however, is that Conexant is being forced to restructure its business, making difficult decisions now that “might position it to rebound sooner,” Johnstone said.
Conexant said it expects to save more than $200 million in operating costs annually as a result of the layoffs and restructuring. The company anticipates $50 million in charges associated with the changes, about $7 million of which will be taken in the current quarter.
In addition to the layoffs, Conexant plans to temporarily shut down its chip fabrication plants in Newport Beach and Newbury Park and its Mexicali, Mexico, assembly and test plant to save cash. The furlough will take place April 7-21 and again for two weeks over the summer, Decker said.
Also on Monday, credit rating agency Standard & Poor’s put Conexant on CreditWatch, a warning that its rating could be lowered.
The company has about $700 million in long-term debt, for which it is paying 4% to 4.25% interest. At the beginning of the current quarter, Conexant had about $600 million in cash, Decker said.
