A couple of Newport Beach chipmakers have hit a rough patch in their turnaround efforts.
Conexant Systems Inc. and its spinoff, Mindspeed Technologies Inc., both recently forecast disappointing sales for the current quarter after posting several quarters that showed some progress.
The companies are dealing with softness in key markets, not unlike many other chipmakers.
Both companies operate broadly in the communications market. Conexant makes chips for modems and set-top boxes, among other things, while Mindspeed makes Web-based communication and networking chips.
Both stocks entered 2006 on a run, with stock prices about double from their 2005 lows. Their shares continued to climb until spring. Although Conexant has fared a little better, both have seen shares plummet by more than 50% in the past three months.
An overall downturn in the technology sector has dragged down the stocks, but chip stocks have been hit particularly hard. In the past three months, the Philadelphia Semiconductor Index, a broad measure of chip stocks, has fallen about 20%.
Nevertheless, some analysts say the companies’ prospects,especially Conexant’s,are solid.
Conexant Concerns
Conexant recently said it beat its own margin forecast by two quarters, hitting double-digit core operating margins of 10.1% in the quarter ended June 30.
The company said sales rose 3.7% to $252 million from the previous quarter, in line with expectations and up 27.4% from a year earlier. Conexant beat estimates with adjusted earnings of $18.6 million. A year ago the company lost $17.6 million.
But the bad news was revenue guidance of $249 million for the current quarter. That’s lower than a prior forecast.
Part of the reason is a slowdown in sales for older chips it sells into the slowing PC sector, including fax/modem chips.
Credit Suisse analyst Jeff Loff downgraded the stock from “neutral” to “underperform.”
“Revenue growth will be muted,” he wrote. “Our revenue forecast for the June 2007 quarter is only 5% higher than June 2006 quarter reported revenue.”
Another concern: Profit margin growth is likely to slow after a nice run-up during the past year.
The balance sheet also worries some. Loff expects Conexant to raise more debt to meet its obligations.
And a shaky stock market has made it more difficult for a Conexant spinoff, Jazz Semiconductor Inc., to go public. Conexant wants to sell its estimated 40% stake in the contract chipmaker to help pay down debt.
While acknowledging the debt issue, Gary Mobley, an analyst with A.G. Edwards Inc., rates the stock a “buy” and sees healthy sales growth ahead for the chipmaker.
Conexant had a market value of about $800 million at recent check.
Mindspeed Slowdown
Mindspeed’s quarter was supposed to be a celebration as it posted break-even income after years of red ink.
Yet the party was short-lived because of a weak outlook.
The company reported an adjusted operating profit of $73,000 for the quarter ended June 30, versus a loss of $7.9 million a year ago. Mindspeed said quarterly revenue rose 29% to $35.9 million compared to last year.
But Mindspeed expects revenue in the current period to fall 5% to 10% from the June quarter. Analysts were looking for a gain of nearly 6%. Mindspeed forecasts its unadjusted operating loss to be about $3.1 million in the quarter.
Mindspeed’s market value is about $150 million.
The company said its current quarter sales shortfall is a product of customers ordering too much in past quarters,and now they have to work through their inventory.
“We continue to recommend investors stay on the sidelines,” wrote Daniel Amir, analyst with W.R. Hambrecht & Co, in a note
