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Conexant Aims to Clear Debt; Pushes Audio, Video

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Newport Beach-based chipmaker Conexant Systems Inc. plans to address burdensome debt as it moves further away from legacy business lines in its second year as a private company.

Conexant, which was taken private in April 2011, carried more than $175 million in debt from its days as a public company. The overhang has put a damper on growth in the company’s emerging audio and video segments, which now account for about half of its $166 million in annual revenue.

“That’s the last major roadblock to really setting the long-term course of the company,” Chief Executive Sailesh Chittipeddi said of the debt. “That’s something I expect to take care of in the next several months.”

The debt is held by Soros Fund Management LLC, a New York-based hedge fund owned by billionaire George Soros.

Chittipeddi declined to discuss specifics on plans, but some prior moves by Conexant to rework debt or pay off debt offer indicators.

The company in 2010 sold nearly $250 million in bonds and stocks to pay off debt due in 2026, about a year before it went private. It sold off a 25-acre parcel of land next to its headquarters, plus two buildings, in a $23.5 million deal that year.

The company has renegotiated debt to get better terms from lenders and refinanced convertible notes in the past. It also has raised cash by selling some patents, tapping into an emerging asset class for technology companies, which are wringing revenue from legacy technologies and research and development.

Operations

Conexant employs about 450 people companywide, with about 200 workers in Newport Beach. It also has operations in San Diego, China, India and Taiwan. Some 96% of its customers were in China, Taiwan and other countries in the manufacturing-heavy Asia-Pacific region.

The company was once the largest chipmaker based in Orange County, but it began to slip when the tech bubble burst in the late 1990s. It steadily lost ground to competitors such as Irvine-based Broadcom Corp. and others. Conexant has spun off four businesses—including Mindspeed Technologies Inc. in Newport Beach—since then.

Leases

Conexant faces other obstacles on leased offices around the world, many of which date back 10 years or more.

“I have to contend with 15- to 20-year leases across the globe,” Chittipeddi said.

That includes land in the U.K. leased through 2022, and a building in San Diego leased through 2017, among others.

“That’s not the kind of footprint you want for a company our size and scale,” Chittipeddi said. “Are we structured right? The answer is absolutely not.”

One lease that’s not expected to change is the one for the company’s 10-story headquarters at 4000 MacArthur, where it has its name on top of the building.

“There is no imminent plan,” he said.

The deal is set through 2015, according to Chittipeddi.

Conexant has been moving away from its legacy technologies for chips used in set-top boxes and the DSL market in favor of more direct plays in the consumer market, particularly in the growing audio and video segments.

San Francisco-based Golden Gate Private Equity Inc., which acquired Conexant in a $282 million buyout, has funded the transition.

That included revamping the management team with the additions of Chief Financial Officer Carl Mills; Saleel Awsare, vice president and general manager of Conexant’s audio division; and Darron Ma, vice president and general manager of its video product lines.

In July it completed the last phase of construction of its anechoic chamber, a testing lab on the first floor of its headquarters that provides acoustic isolation and features panels that control reverberation. Conexant worked with Luxembourg-based Skype Communications SARL on the $500,000 lab. It plans to roll out new voice-processing chips certified by Skype.

In the last year it has struck deals with some of the largest players in the TV and computer markets, including Samsung Electronics Co., LG Electronics Co., Dell Inc. and Lenovo Group Ltd.

Aakash Tablet

It made a splash at the 2012 International Consumer Electronics Show in January after disclosing its chips were embedded in the highly touted Aakash tablet that sells for less than $50 in India, thanks in part to government subsidies.

The Android-based tablet, manufactured by Canadian-based Datawind Ltd., has garnered worldwide attention since it was announced in late 2011 and sparked plenty of other low-cost competitors to enter the fray.

Conexant also makes chips for digital picture frames, PC speakers and other devices.

The emerging video and audio business lines carry higher margins than the maturing set-top box and modem business; that should boost profits.

“We have to increase our profitability to service all the land and interest obligations we have,” Chittipeddi said.

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