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Conexant Reports $199.6-Million Loss, Postpones Spinoff

High-tech: With quarterly revenue down 20%, Newport chip maker awaits better market to split off booming Internet business.


With slumping sales from a sharp slowdown in the personal computer market, Conexant Systems Inc. reported a steep fiscal first-quarter loss Thursday and postponed plans for a public offering to spin off its Internet equipment business.

The Newport Beach communications chip maker lost $199.6 million, or 85 cents a share, for the first quarter ended Dec. 31, compared with net income of $51.8 million, or 26 cents a share, for the same period a year earlier.

Excluding a $57.5-million charge for inventory reserves and acquisition costs, the loss would be $17.2 million, or 7 cents a share, meeting the average estimate of analysts polled by First Call/Thomson Financial. The estimate, though, came after Conexant revised its earnings outlook last month.

Quarterly revenue fell 20%, to $410.4 million, from the previous year's first three months.

Chief Executive Dwight W. Decker said Conexant expects to show a profit again in the last six months of the calendar year. He said that sales this quarter will fall 10% to 15% from the prior three months because of excess in customers' inventory, Decker said.

Conexant had planned to spin off its Internet infrastructure division, its fastest growing unit, through an initial public offering this month. The division, which makes Internet access chips, had revenue of $165.9 million, up 40% from the first quarter last year.

News of the spinoff in September sent the stock up 42%, though the price quickly began falling again. The company said Thursday that it will postpone the offering until business conditions and capital markets improve.

The stock dropped $1.06, or 5.36%, Thursday to $18.75 on Nasdaq, but rose as high as $20.50 in after-hours trading following the report. The stock has lost 86% of its value since setting a trading record of $132.50 last February.

The personal networking business, which consists of wireless communications, personal imaging, personal computing and digital entertainment products units, reported revenue of $244.5 million for the quarter, down 38% from last year's first quarter.

Conexant's steepest loss came in its personal computing products business, where revenue was down 60% to $75 million from last year's first quarter. Wireless sales were down 19% to $84 million, imaging products lost 21% to $25 million, and digital entertainment lost 9% to $61 million.

"There are many companies whose performance was similar to what we have announced, but that doesn't mean anybody is happy about it," Decker said. "We all feel the pressure to improve performance."

Arun Veerappan, an analyst at the investment bank Robertson, Stephens & Co., said Conexant's woes were to some extent a reflection of the market. "But if you look at their competitors," such as rival chip makers PMC-Sierra Inc. and Applied Micro Circuits Corp., "they are probably a lot more focused than Conexant," he said.

"The many disparate pieces that they have right now are dragging down" the value of Conexant's most promising businesses, Veerappan said. He advocated the sales of other units as well.

The spinoff is intended to focus the two divisions more sharply and unlock shareholder value from the promising infrastructure business, which has so far been obscured by the company's other business units. The plan called for selling 20% of the new company to the public this month and giving existing Conexant shareholders the rest of the stock later this year.

Decker said he continues to believe that the separation is in shareholders' best interests. "Just as soon as it gets to the point where it's not foolish," the plans will proceed, Decker said. He expects to complete the spinoff "as soon as business conditions and the equity markets improve."

Decker said the company also will consider proceeding with a one-step spinoff by distributing all of the new company's shares to Conexant shareholders.

Meantime, he said, the two divisions are being separated organizationally with different management teams and separate office space. The changes are expected to be complete by Feb. 1.


Changing Performance, Plans

Conexant Systems Inc. reported a deep first-quarter loss and postponed the spinoff of its Internet equipment business in a public offering. A look at quarterly sales growth of the fast-growing division and its larger personal networking business:

(Quarter ended Dec. 31)

Source: Conexant Systems Inc., Newport Beach.

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