What could be an encore to the Vienna Philharmonic’s performance of Tchaikovsky’s “1812 Overture”?
A similar question faces Conexant Systems Inc., which still plans to spin off its fastest growing business to shareholders later this year. What’s left of any value at the old company?
The answer may be the Newport Beach-based chipmaker’s wireless unit.
Company insiders say that after Conexant sells off Mindspeed Technologies,a maker of networking chips,the wireless division will be its new rising star.
For now, the unit is slumping like other parts of Conexant’s businesses. But company officials say sales at the division will pop once consumers start shelling out money for wireless phones again.
“Timing is right for us,” asserted Moiz Beguwala, vice president of Conexant’s wireless unit. “We are positioned correctly to grow.”
After all, the division, which makes a series of components that do everything from increasing battery life to converting analog signals into digital ones, has started to flex more muscle on Conexant’s financial reports,and just in time, too.
Until now, Conexant made its name selling chips for modems inside personal computers. But as PC sales slowed and modems began to get faster, Conexant’s sales from the personal computing chip division faltered, declining 64% year-to-year in the latest quarter.
And, as a portion of Conexant’s overall sales, the personal computing division fell from 40% to 38% in the quarter ended June 30. By as early as next year, Conexant’s wireless division stands to take over as its dominant business, analysts say.
“Oh yeah, the wireless portion will grow faster than the personal computing side,” said Cody Acree of Dallas-based Frost Securities. “It will eventually take it over.”
It’s clear that wireless at least has the potential to be big business for Conexant. In the last quarter, sales from the division were 26% of revenue, compared with 18% in the year-ago quarter. The digital infotainment division, which makes chips for electronics like set-top boxes, produced nearly 18% of the company’s revenue in the most recent quarter, up from 13% last year.
The networking gear business that Conexant is spinning off accounted for the remaining percentage of revenue in the recently concluded quarter.
But how much faster Conexant’s wireless business will grow and how soon it will mature are uncertain. While wireless’ percentage of sales has increased, revenue at the unit fell drastically in real-dollar terms,nearly 43%,from a year ago.
And Conexant forecasts flat sequential sales this quarter as a declining economy, exacerbated by the recent terrorist attacks, could continue to trip up wireless phone sales.
“Wireless communications product revenues reflect softer global demand for digital cellular handsets,” the company said in a Securities and Exchange Commission filing. “The company also experienced lower sales volume from … digital cordless telephone chipsets.”
And the competition could get tighter. Irvine-based Broadcom Corp. acquired two companies in June that were working on wireless technology. And Valence Semiconductor, also based in Irvine, is working feverishly on wireless chips.
Texas Instruments Inc., Motorola Inc. and other big names already dominate the wireless chip market.
For its part, Conexant has dumped research and development money into wireless, according to Beguwala.
“It’s true, we do spend a substantial amount in wireless as a company,” he said.
Conexant has increased,in both real dollar terms and as a percentage of sales,its total research spending. Last quarter, Conexant spent $76 million on research, or 38% of sales, compared to $71 million, or 13% of sales, in the same quarter last year.
Conexant hopes the research spending can land the company a berth with wireless phone makers that are developing third generation,or 3G,phones, which are supposed to transfer more data at faster rates.
The company’s wireless scheme goes something like this: more phone makers are outsourcing production of their phones to third-party manufacturers, many of which are in Asia. Conexant says it wants to develop not only the main chips, but also the chipsets,companion chips that allow the main chip to do its job,and the associated software. Conexant then hopes to pitch itself as a one-stop shop for phone makers hunting for chip companies to do business with.
“Companies can come to us and say, ‘Produce me one of these chips,'” Beguwala said. “We help them get to market faster than if they had to go out and find another company to make the chipset.”
The only problem is the huge number of chips sitting on shelves. With the general economic slowdown and concerns about recession, consumers have slowed buying of new phones. And with 3G phones coming out in a year, many consumers wanting a phone may wait for the new models.
“But inventories are slowly getting out of the way and all those companies that are doing things in wireless will end up growing faster,” analyst Acree said. “Conexant is one of those.” n
