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All's Well or Better for 2 O.C. Tech Giants

Conexant Meets Expectations but Sees Short-Term Trouble


Newport Beach chip maker Conexant Systems Inc. met Wall Street's earnings target for its fourth quarter, but warned Wednesday that sluggishness in two critical markets could sabotage its next three months.

Investors clobbered the company's stock before and after executives made their pessimistic projections. The stock lost $7.31 in regular trading and an additional $4.31 after hours, ending at $22 a share. Conexant has lost 60% of its value this year.

"We have five market areas and see clear weakness in two of them," cellular phones and personal computers, Chief Executive Dwight W. Decker said bluntly. Though parts of Conexant are growing briskly, he said he expects his company's overall sales to decline 5% to 7% in its next quarter.

Similar predictions by other semiconductor companies, particularly Intel Corp., have sent a shiver through the stock market. "Everybody sort of jumps on," Decker said.

Excluding charges, net income for Conexant's fourth quarter, ended Sept. 30, increased 10% to $43.5 million, or 18 cents a share, meeting analysts' expectations. It earned $39.4 million, or 18 cents a share, in last year's final quarter, when there were 14% fewer shares outstanding.

Folding in accounting write-offs for acquisition, legal and other one-time expenses, the company lost $57.1 million, or 25 cents a share, for its last quarter. Quarterly revenue rose 24% to $561 million from $452 million.

The sales results barely met Conexant's self-stated goals. And chinks in the company's armor emerged unmistakably in the fourth quarter when revenue for its personal computing division were flat and wireless communications sales grew just 5% compared with the same period last year.

"We were sort of expecting weakness in wireless and PCs and we got it," said Jeffrey K. Lipton, an analyst at Chase H&Q in San Francisco. "On the margin, it was probably a little worse than we expected."

Excluding one-time charges, Conexant's profit for the year almost quintupled to $195.5 million, or 84 cents a share, from $41.4 million, or 20 cents a share, in its previous fiscal year.

Adding in accounting write-offs for Conexant's 10 acquisitions, the company lost $190.9 million, or 90 cents a share, for the year, compared with earnings of $12.9 million, or 6 cents a share, for the previous year.

Its annual revenue grew 46% to $2.1 billion from $1.4 billion.

Conexant has struggled since the spring to persuade investors of the long-term value embedded in its expansive product line of semiconductors.

Its boldest bid for attention came in September when it announced it would spin off its fast-growing Internet equipment business into a separate public company. Conexant's results largely seemed to validate that strategy: Year over year, the division's revenue has more than doubled.

"That business has some jewels inside of it, and I'd rather have the jewels stand alone than within a larger entity," said Arun Veerappan, an analyst at Robertson Stephens brokerage in San Francisco.

But the spurt of enthusiasm generated by the spinoff didn't last. The move also put the temporary troubles facing the company's other divisions into a brighter light.

Still, Decker said, Conexant's personal networking business--four divisions that make chips for products like cable modems, mobile phones, digital cameras and video games--has strong long-term growth prospects. Most analysts agree with him.

"The management may have gotten ahead of itself on expectations and so did the financial community, but there's going to be great demand for these products," said Mike Paxton, a market researcher for Cahners In-Stat Group in Scottsdale, Ariz.

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