Conexant presents financial results based on generally accepted accounting principles (GAAP) as well as selected non-GAAP financial measures intended to reflect its core results of operations. The company believes these core financial measures provide investors with additional insight into its underlying operating results. Core financial measures exclude non-cash and other non-core items as fully described in the GAAP to non-GAAP reconciliation in the accompanying financial data.
Second quarter fiscal 2006 revenues of $242.6 million increased 5.1 percent from first quarter fiscal 2006 revenues of $230.7 million, and 42.9 percent from $169.7 million in the second quarter of fiscal 2005. Core gross margins in the second quarter of fiscal 2006 increased 190 basis points to 43.5 percent of revenues from 41.6 percent in the immediately prior quarter.
Core operating expenses increased in the second quarter of fiscal 2006 to $86.1 million from $83.1 million in the prior quarter, primarily due to higher employee compensation costs and increased investments in new product developments. Core operating expenses in the year-ago quarter were $89.1 million.
Core operating income in the second quarter of fiscal 2006 was $19.3 million, up 48.9 percent from first quarter fiscal 2006 core operating income of $13.0 million. The core operating loss in the second quarter of fiscal 2005 was $29.2 million. Core net income for the second quarter of fiscal 2006 increased 79.9 percent sequentially to $13.1 million, or $0.03 per diluted share, compared to $7.3 million, or $0.02 per diluted share in the first quarter of fiscal 2006. In the year-ago quarter, the core net loss was $36.5 million, or $0.08 per diluted share.
On a GAAP measures basis, gross margins for the second quarter of fiscal 2006 increased by 230 basis points to 43.8 percent of revenues, from 41.5 percent in the prior quarter. GAAP operating expenses increased from $111.8 million in the prior quarter to $147.8 million in the second quarter of fiscal 2006, primarily due to a $40.0 million charge related to ongoing litigation with Texas Instruments, Inc. The GAAP operating loss was $41.6 million in the second quarter of fiscal 2006 compared to a loss of $16.0 million in the previous quarter. The GAAP net loss for the second quarter of fiscal 2006 was $10.1 million, or $0.02 per diluted share, compared to a GAAP net loss of $24.3 million, or $0.05 per diluted share, in the first quarter of fiscal 2006. The company's second fiscal quarter 2006 GAAP results also included an increase of $35.6 million in the value of warrants in Mindspeed Technologies, Inc., and a favorable property tax settlement of $8.9 million. For the year-ago quarter, GAAP gross margin was 35.3 percent, GAAP operating expenses were $120.6 million, GAAP operating loss was $60.7 million, and GAAP net loss was $73.2 million, or $0.16 per diluted share.
"In the second fiscal quarter, we once again exceeded expectations on our major financial metrics," said Dwight W. Decker, Conexant chairman and chief executive officer. "Entering the quarter, we anticipated revenue of approximately $240 million, core gross margins in a range of 41.5 to 42.5 percent of revenues, and a sequential increase of 25 percent in core operating income. Instead, we delivered revenue of $242.6 million, driven by another quarter of double-digit sequential growth in our satellite set-top box business. We also improved core gross margins to 43.5 percent, primarily due to accelerated progress on our gross-margin expansion initiatives and a stable pricing environment, and we delivered a sequential increase in core operating income of approximately 50 percent.
"During the quarter, we successfully completed a financially attractive $200 million convertible debt offering," Decker said. "We used a portion of the proceeds to repurchase $59 million of our existing convertible debt due in February 2007, and we exited the quarter with $595 million in cash, cash equivalents, and investments. We are also expecting the exercise this quarter of a 'green shoe' option associated with the convertible debt offering, which would generate approximately $50 million of additional proceeds. Overall, we are in a solid position to effectively manage our scheduled debt repayments for this year and next.
"As we clearly stated in December of last year, our highest-priority performance objective is to return double-digit core operating margins before the end of calendar 2006," Decker said. "Considering our above-plan second fiscal quarter performance, we are increasingly confident in our ability to achieve this milestone on schedule."
Third Fiscal Quarter 2006 Outlook
"Entering the third fiscal quarter, customer demand is solid across all our businesses, and in particular we expect our satellite set-top box solutions to continue their strong growth," Decker said. "As a result, we anticipate that third fiscal quarter revenues will increase between 3 and 5 percent sequentially. We expect to again improve our core gross margins, to a level of approximately 44 percent. We plan to continue to grow our investments in selected new product development, with core operating expenses targeted in the range of $88 to $89 million.
"We expect that the achievement of our third fiscal quarter revenue and gross-margin targets will deliver a further improvement in core operating income of approximately 15 percent sequentially," Decker said. "Finally, we expect our core net income to be $0.03 per share, based on approximately 505 million diluted shares outstanding."
Note to Editors, Analysts and Investors
Conexant's conference call will take place on Thursday, April 27, 2006, at 5:00 p.m. Eastern Time / 2:00 p.m. Pacific Time. To listen to the conference call via telephone, dial 866-650-4882 (in the US and Canada) or 706-679-7338 (from other international locations); 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 800-642-1687 (in the US and Canada) or 706-645-9291 (from other international locations); pass code: 7771435.
About Conexant
Conexant's innovative semiconductor solutions are driving broadband communications 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 802.11-compliant WLAN chipsets, software and reference designs, as well as solutions for applications based on HomePlug(TM) 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 with an annual revenue run-rate in excess of $900 million. The company has approximately 2,500 employees worldwide, and is headquartered in Newport Beach, Calif. To learn more, please visit www.conexant.com.
Safe Harbor
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: This release includes forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally can be identified by phrases such as Conexant or its management "believes," "expects," "anticipates," "foresees," "forecasts," "estimates" or other words or phrases of similar import. Similarly, statements in this release that describe our business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. All such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those in forward-looking statements.
These risks and uncertainties include, but are not limited to: the uncertainties of litigation, including claims of infringement of third-party intellectual property rights or demands that we license third-party technology and the demands it may place on the time and attention of our management and the expense it may place on the company; the risk that capital needed for our business and to repay our convertible notes will not be available when needed; the risk that the value of our common stock may be adversely affected by market volatility; general economic and political conditions and conditions in the markets we address; the substantial losses we have incurred; the cyclical nature of the semiconductor industry and the markets addressed by our products and our customers' products; continuing volatility in the technology sector and the semiconductor industry; demand for and market acceptance of our new and existing products; our successful development of new products; the timing of our new product introductions and our product quality; our 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 our product mix; product obsolescence; the ability of our customers to manage inventory; our ability to develop and implement new technologies and to obtain protection for the related intellectual property; and possible disruptions in commerce related to terrorist activity or armed conflict, as well as other risks and uncertainties, including those detailed from time to time in our Securities and Exchange Commission filings.
The forward-looking statements are made only as of the date hereof. 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 Condensed Consolidated Statements of Operations
(unaudited, in thousands, except per share amounts)
Three Months Ended Six Months Ended
----------------------------- --------------------
March 31, Dec. 31, March 31, March 31, March 31,
2006 2005 2005 2006 2005
--------- --------- --------- --------- ----------
Net revenues (Note
1) $242,583 $230,706 $169,738 $473,289 $310,359
Cost of goods sold
(Note 2) 136,373 134,953 109,766 271,326 243,231
--------- --------- --------- --------- ----------
Gross margin 106,210 95,753 59,972 201,963 67,128
Operating expenses:
Research and
development 64,831 64,359 70,539 129,190 143,080
Selling, general
and
administrative 36,320 38,601 28,362 74,921 58,368
Amortization of
intangible
assets 7,758 7,907 8,140 15,665 16,433
Special charges
(Note 3) 38,854 915 13,596 39,769 32,853
--------- --------- --------- --------- ----------
Total operating
expenses 147,763 111,782 120,637 259,545 250,734
--------- --------- --------- --------- ----------
Operating loss (41,553) (16,029) (60,665) (57,582) (183,606)
Interest expense 10,052 8,802 8,463 18,854 16,894
Other (income)
expense, net (42,208) (1,276) 3,429 (43,484) (7,757)
--------- --------- --------- --------- ----------
Loss before income
taxes (9,397) (23,555) (72,557) (32,952) (192,743)
Provision for
income taxes 735 716 630 1,451 1,162
--------- --------- --------- --------- ----------
Net loss $(10,132) $(24,271) $(73,187) $(34,403) $(193,905)
========= ========= ========= ========= ==========
Basic and diluted
net loss per share $(0.02) $(0.05) $(0.16) $(0.07) $(0.41)
========= ========= ========= ========= ==========
Shares used in
basic and diluted
per-share
computations 477,480 474,043 470,189 475,761 469,279
========= ========= ========= ========= ==========
Note 1- Includes $9.6 million and $17.5 million of charges for channel
inventory during the three and six months ended March 31,
2005, respectively.
Note 2- Includes $45.0 million of charges for internal inventory
during the six months ended March 31, 2005.
Note 3- Includes a $40.0 million charge related to ongoing litigation
with Texas Instruments, Inc. during the three and six months
ended March 31, 2006.
CONEXANT SYSTEMS, INC.
Reconciliation of GAAP Financial Measures to
Non-GAAP Core Financial Measures
(unaudited, in thousands, except per share amounts)
Three Months Ended Six Months Ended
----------------------------- --------------------
March 31, Dec. 31, March 31, March 31, March 31,
2006 2005 2005 2006 2005
--------- --------- --------- --------- ----------
GAAP gross margin $106,210 $95,753 $59,972 $201,963 $67,128
Stock-based
compensation (a) 131 298 -- 429 --
Other (i) (883) -- -- (883) --
--------- --------- --------- --------- ----------
Non-GAAP Core gross
margin $105,458 $96,051 $59,972 $201,509 $67,128
========= ========= ========= ========= ==========
GAAP operating
expenses $147,763 $111,782 $120,637 $259,545 $250,734
Stock-based
compensation (a) (12,621) (14,018) (3,019) (26,639) (6,008)
Transitional
salaries and
benefits (b) (685) (217) (4,600) (902) (8,935)
IP litigation
support costs (c) (7,233) (5,657) (2,148) (12,890) (4,345)
Amortization of
intangible assets
(d) (7,758) (7,907) (8,140) (15,665) (16,433)
Special charges
(e) (38,854) (915) (13,596) (39,769) (32,853)
Other (i) 5,515 -- -- 5,515 --
--------- --------- --------- --------- ----------
Non-GAAP Core
operating expenses $86,127 $83,068 $89,134 $169,195 $182,160
========= ========= ========= ========= ==========
GAAP operating loss $(41,553) $(16,029) $(60,665) $(57,582) $(183,606)
Cost of goods
sold adjustments
(a, i) (752) 298 -- (454) --
Operating expense
adjustments
(a-e, i) 61,636 28,714 31,503 90,350 68,574
--------- --------- --------- --------- ----------
Non-GAAP Core
operating income
(loss) $19,331 $12,983 $(29,162) $32,314 $(115,032)
========= ========= ========= ========= ==========
GAAP net loss $(10,132) $(24,271) $(73,187) $(34,403) $(193,905)
Cost of goods
sold adjustments
(a, i) (752) 298 -- (454) --
Operating expense
adjustments
(a-e, i) 61,636 28,714 31,503 90,350 68,574
Losses of equity
method
investments (f) 584 2,071 3,371 2,655 6,460
Unrealized (gain)
loss on Mindspeed
warrant (g) (35,642) 4,311 13,492 (31,331) (1,281)
Gain on sale of
equity securities
(h) (577) (3,837) (11,112) (4,414) (11,112)
Other (i) (2,010) -- (600) (2,010) (600)
--------- --------- --------- --------- ----------
Non-GAAP Core net
income (loss) $13,107 $7,286 $(36,533) $20,393 $(131,864)
========= ========= ========= ========= ==========
Basic net income
(loss) per share:
GAAP $(0.02) $(0.05) $(0.16) $(0.07) $(0.41)
========= ========= ========= ========= ==========
Non-GAAP Core $0.03 $0.02 $(0.08) $0.04 $(0.28)
========= ========= ========= ========= ==========
Diluted net income
(loss) per share:
GAAP $(0.02) $(0.05) $(0.16) $(0.07) $(0.41)
========= ========= ========= ========= ==========
Non-GAAP Core (j) $0.03 $0.02 $(0.08) $0.04 $(0.28)
========= ========= ========= ========= ==========
See "GAAP to Non-GAAP Core Adjustments" below
GAAP to Non-GAAP Core Adjustments:
(a) Stock-based compensation expense for the three months ended March
31, 2006 and December 31, 2005 and the six months ended March 31,
2006 is based on the fair value of all stock options and employee
stock purchase plan shares in accordance with SFAS No. 123(R),
which we adopted on October 1, 2005. Stock-based compensation
expense for the three and six months ended March 31, 2005 is based
on the intrinsic value of acquired or exchanged unvested stock
options in business combinations, which is in accordance with
previous accounting standards.
(b) Transitional salaries and benefits represent amounts earned by
employees who have been notified of their termination as part of
the Company's restructuring activities, from the date of their
notification. Included in the amounts for the three months ended
March 31, 2006, December 31, 2005, and March 31, 2005 and the six
months ended March 31, 2006 and 2005 are $43, $9, $632, $52, and
$928, respectively, of facilities related costs.
(c) IP litigation support costs related to one of the Company's
intellectual property litigation matters.
(d) Amortization of intangible assets resulting from the Company's
previous business combinations.
(e) Restructuring charges, asset impairments, integration costs and
other special items, including a $40.0 million charge related to
the Company's ongoing litigation with Texas Instruments, Inc.
during the three and six months ended March 31, 2006.
(f) Gains and losses resulting from the Company's equity method
investments.
(g) Unrealized gains and losses associated with fair value changes in
the Company's ownership of the Mindspeed warrant accounted for as
a derivative instrument.
(h) Gains on the sale of equity securities.
(i) Other gains and losses which are not part of the core ongoing
operations of the Company. For the three and six months ended
March 31, 2006, these adjustments primarily relate to a property
tax settlement.
(j) In periods of non-GAAP core net income, the dilutive effect of
stock options and warrants under the treasury stock method and the
dilutive effect of shares issuable upon conversion of convertible
subordinated notes under the if-converted method are added to
basic weighted average shares to compute diluted weighted average
shares. For the three months ended March 31, 2006, the three
months ended December 31, 2005 and the six months ended March 31,
2006, 15.6 million, 8.7 million and 9.9 million shares,
respectively, have been added to basic weighted average shares to
arrive at diluted weighted average shares for purposes of
computing non-GAAP core diluted net income per share.
Non-GAAP Financial Measures:
The Company has presented non-GAAP gross margin, non-GAAP operating
expenses, non-GAAP operating income (loss), non-GAAP net income (loss)
and non-GAAP basic and diluted net income (loss) per share, on a basis
consistent with its historical presentation to assist investors in
understanding the Company's core results of operations on an ongoing
basis. These non-GAAP financial measures also enhance comparisons of
the Company's core results of operations with historical periods. The
Company is providing these non-GAAP financial measures to investors to
enable them to perform additional financial analysis and because it is
consistent with the financial models and estimates published by
analysts who follow the Company. Management believes that these are
important measures in the evaluation of the Company's results of
operations. Investors should consider non-GAAP financial measures in
addition to, and not as a substitute for, or superior to, measures of
financial performance prepared in accordance with GAAP. The non-GAAP
financial measures presented by the Company may be different than
non-GAAP financial measures presented by other companies.
GAAP Guidance:
The Company does not present GAAP guidance due to its inability to
project (i) future market prices of the common stock of a third party
underlying a derivative financial instrument, (ii) realized gains or
losses from the sale of equity securities in third parties, and (iii)
the financial results of investments accounted for using the equity
method of accounting.
CONEXANT SYSTEMS, INC.
Condensed Consolidated Balance Sheets
(unaudited, in thousands)
March 31, Dec. 31, Sept. 30,
2006 2005 2005
----------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents (Note
4) $454,795 $299,228 $202,704
Marketable securities (Note 4) 140,347 115,570 139,306
Restricted cash 8,800 7,500 --
Receivables 103,085 84,586 87,240
Inventories 87,302 78,831 95,329
Other current assets 32,762 14,910 14,701
----------- ----------- -----------
Total current assets 827,091 600,625 539,280
Property, plant and equipment 55,519 50,322 50,700
Goodwill 714,786 714,786 717,013
Intangible assets 91,046 98,803 106,709
Mindspeed warrant 64,468 28,826 33,137
Marketable securities-long term
(Note 4) -- 51,288 38,485
Other assets 102,007 93,441 96,200
----------- ----------- -----------
Total assets $1,854,917 $1,638,091 $1,581,524
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt $653,325 $196,825 $196,825
Short-term debt 80,000 76,568 --
Accounts payable 134,335 108,041 108,957
Accrued compensation and
benefits 27,465 30,085 27,505
Other current liabilities 106,135 75,625 63,197
----------- ----------- -----------
Total current liabilities 1,001,260 487,144 396,484
Long-term debt 200,000 515,000 515,000
Other liabilities 89,490 95,837 100,947
----------- ----------- -----------
Total liabilities 1,290,750 1,097,981 1,012,431
----------- ----------- -----------
Shareholders' equity 564,167 540,110 569,093
----------- ----------- -----------
Total liabilities and
shareholders' equity $1,854,917 $1,638,091 $1,581,524
=========== =========== ===========
Note 4- Cash, Cash Equivalents and Marketable Securities
March 31, Dec. 31, Sept. 30,
2006 2005 2005
--------- --------- ---------
Cash and cash equivalents $454,795 $299,228 $202,704
Short-term marketable debt securities
(primarily domestic government agencies
and corporate debt securities) 98,427 84,099 95,902
Long-term marketable debt securities
(primarily domestic government agencies
and corporate debt securities) -- 51,288 38,485
--------- --------- ---------
Subtotal 553,222 434,615 337,091
--------- --------- ---------
Marketable equity securities- Skyworks
Solutions, Inc. (6.2 million shares at
March 31, 2006, December 31, 2005, and
September 30, 2005) 41,920 31,471 43,404
--------- --------- ---------
Total cash, cash equivalents and
marketable securities $595,142 $466,086 $380,495
========= ========= =========
CONEXANT SYSTEMS, INC.
Selected Other Data
(unaudited, in thousands)
Three Months Ended Six Months Ended
----------------------------- -------------------
March 31, Dec. 31, March 31, March 31, March 31,
2006 2005 2005 2006 2005
--------- --------- --------- --------- ---------
Revenues By Region:
Americas $23,849 $19,210 $21,267 $43,059 $39,706
Asia-Pacific 203,232 196,864 132,585 400,096 238,057
Europe, Middle East
and Africa 15,502 14,632 15,886 30,134 32,596
--------- --------- --------- --------- ---------
$242,583 $230,706 $169,738 $473,289 $310,359
========= ========= ========= ========= =========
Cash Flow Data:
Depreciation of PP&E $4,671 $4,433 $4,692 $9,104 $9,530
Capital expenditures $7,359 $5,780 $10,280 $13,139 $12,362
Contact:
Conexant Systems, Inc., Newport Beach Gwen Carlson (Editorial), 949-483-7363 or Bruce Thomas (Investor Relations), 949-483-2698