Conexant on the Recovery Circuit
Amid a stubborn recession in the semiconductor industry, communications chip maker Conexant Systems Inc. took a dose of harsh medicine and is mounting a comeback.
With industrywide sales plummeting 30% last year and its own losses totaling $1.9 billion over the last two years, Conexant shook off the lethargy of its staid past, moving most manufacturing overseas, firing nearly 25% of its work force and replacing its all-things-to-all-people strategy with a new plan to break the company into separate, better-focused pieces.
Conexant’s original plan was to split into three independent companies, focusing on chips for commercial Internet equipment, cell phones and computer modems. Last week, it disclosed a fourth spinoff that will handle high-end chip manufacturing.
The company’s remaining specialty manufacturing plant at Conexant headquarters in Newport Beach will be sold to Carlyle Group Inc. as a joint venture.
The Washington buyout firm will own 55% of the operation, which Conexant executives will manage.
After months of decline, Conexant’s financial picture has begun to brighten. Its revenue has grown in the last two quarters since its low of $200million in the April-to-June period. The company pulled in $230million last quarter. Conexant’s quarterly losses also have begun to shrink, from $745million in June to $205million in the quarter that ended in December.
“I think the company is doing everything right,” said Kalpesh Kapadia, senior analyst at C.E. Unterberg Towbin in San Francisco. “The numbers are improving across the board.”
The company still faces daunting odds in an extremely competitive industry dominated in fast-growing markets by heavyweights Intel Corp. in Santa Clara, Calif., and Broadcom Corp. in Irvine.
But analysts said Conexant’s efforts over the last year have positioned it to move forward when demand returns for its vast array of communications semiconductors.
A key part of the company’s strategy is developing new chips for cell phones, high-speed modems and television set-top boxes--still-growing markets that offset the company’s lagging business in networking chips for Internet routers and switches.
Cell phone makers, particularly major customer Samsung Electronics Ltd., already are buying an expanded range of Conexant chips, giving the Orange County company a bigger share of the wireless market. And new chips for high-speed access, or broadband, will enable cheaper access through computers, televisions and other so-called smart electronics.
After sales hit bottom in June, revenue for the company’s wireless unit grew 41% last quarter from the previous three months. Sales for its broadband unit increased 8%.
The one sour note for the company is its once-soaring business for commercial-grade Internet switches and routers. The division’s revenue fell to $14.2million last quarter from a peak of $180million in the quarter ended September 2000.
Conexant Chairman and Chief Executive Dwight W. Decker said sales in all three divisions will be flat or up slightly for the first three months of this year, a quarter in which industrywide sales are expected to drop 10%.
As a sign of the company’s resolve to turn around its fortunes, Decker and 75 top managers took a 10% pay cut last year and won’t receive raises until the company posts two straight quarters of profit.
“That’s one thing that helps us keep our minds on the matters at hand,” Decker said.
If sales for Conexant continue to grow and the company returns to profitability this year, as Decker predicts, it would be quite a turnaround for a company that ran low on cash last year and still is shaking off an image as slow-footed and unfocused.
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Company’s Stock Is Lagging
The company’s stock had soared to more than $124 a share in 1999 through mid-2000. But when the tech downturn struck in earnest in late 2000, Conexant’s stock plummeted.
Despite the upturn in operations, Decker is frustrated that the stock continues to lag behind others in the industry on average, analysts said. On Friday it rose 73 cents to $10.97 on Nasdaq.
Some analysts said that even though Conexant is on the rebound, Wall Street wants to see whether it can sustain its recent performance, which beat projected goals.
In the past, “executives had created a set of expectations among investors that they could not meet,” said Charles Boucher of Bear, Stearns & Co. “The company had a significant amount of losses and fell short in the markets it wanted to grow.”
A big part of Conexant’s struggles stems from its past as a part of former aerospace and defense contractor Rockwell International Corp., which spun off its chip-making unit in December 1998.
Just as Rockwell had become a conglomerate able to serve the wide-ranging needs of its military and aerospace customers, Conexant wanted to make all kinds of communication chips for the civilian and government markets.
“If it’s communications, it’s Conexant. We wanted to get that message into people’s minds,” said Decker, who ran the division when it was part of Rockwell.
At the time, modem chips for personal computers and fax machines were the company’s bread and butter, accounting for half its revenue.
The business was a cash cow that gave Conexant the money to develop high-speed modem, wireless and Internet chips, said analyst Mark Lipacis of Merrill Lynch & Co.
The broad range of products and the manufacturing operation, though, became the company’s Achilles’ heel.
The wireless, broadband and Internet equipment businesses did not mesh, and manufacturing facilities had been costly: Conexant has more than twice the employees of Broadcom, yet it rang up only 10% more sales--$1.1 billion--last year.
Conexant executives realized they were spread too thin, Decker said. Salespeople were pulled in different directions, trying to meet seasonal demands and deadlines of computer makers such as Compaq Computer Corp. and big networking companies such as Cisco Systems Inc.
In addition, executives began to see the units as increasingly complex and different, Decker said.
“In wireless, for instance, we want very low-power chips. In Internet [equipment], we want speed and care less about power.”
So in late 2000, the company said it would spin off its then-fast-growing Internet equipment chip maker, Mindspeed Technologies.
The timing of the spinoff couldn’t have been worse. Not only was Conexant going into a tailspin, but the entire industry was falling into its most disastrous period.
Overly optimistic manufacturing and sales in 1999 and 2000, coming as the explosion in Internet companies fizzled, created a glut of chips on the market.
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Drastic Changes Reduce Company’s Costs
Luckily for Conexant and others in the industry, sales of cell phones and personal computers picked up by mid-year, but Internet equipment makers are still working off inventory. Conexant put Mindspeed’s spinoff on hold, probably until late this year.
Meanwhile, managers had much more work to do to right the company. Maintaining its manufacturing operations and a high level of research soaked up fistfuls of dollars.
In a six-month period last year, the company sent most manufacturing overseas, fired nearly 2,000 of its 8,800 employees, cut overall costs by one-third, reduced spending and raised available cash to $436 million by the end of December. As many as 200 more employees are being let go this quarter, and 650 others will be leaving to work at the manufacturing spinoff.
By July, small emergency orders for both modem and cell phone chips began trickling in, giving Conexant executives hope that customers had worked through much of their surplus. Early this year, Mindspeed finally saw orders pick up, Decker said.
In December, Conexant said it will spin off its wireless unit, probably in May or June, and merge it with Alpha Industries Inc. in Woburn, Mass., to create the largest maker of complete chip sets for mobile communications.
In addition, the new company will pay Conexant $150 million for a plant in Mexicali, Mexico. Separately, Conexant is picking up another $150 million in cash from a deposit being returned by a foundry partner. Both deals will boost Conexant’s once-shaky cash situation.
Analysts say that once the wireless and Mindspeed divisions are spun off, the remaining Conexant business still will have a solid business in chips for high-speed modems and set-top boxes.
“When Conexant is split up into separate companies focused on key areas, ultimately each will be more successful,” said analyst F. Drake Johnstone of Davenport & Co. in Richmond, Va. He estimates the units are worth a total of as much as $21 a share, a price Conexant’s stock hasn’t hit in more than a year.
But even now, he said, “it’s so much better a business today in terms of financial health than it was a year ago.”
