Twelve months ago, investors interested in communications chips could have made a lot of money,unless they invested in Conexant Systems Inc.
As the Newport Beach chip maker’s stock continues another month on the slide, Conexant investors and analysts alike grumble: there needs to be some big changes.
Conexant faces a range of issues,the delayed spinoff of its chip business for Internet equipment, poor forecasting that led to back-to-back earnings warnings, and eroding market share. Analysts contend Conexant has lost out on opportunities and privately say that nothing short of a management shakeup might help the company get back on its feet.
To be sure, few chip makers are doing well these days. From heavy- weights such as Intel Corp. and Texas Instruments Inc. to Irvine-based Broadcom Corp., the sector is reeling from reduced demand from computer and networking gear makers as well as other customers.
But Conexant has fallen harder on Wall Street than most chip makers. The company’s shares have been sliding for a year now. Back in September, when shares of Broadcom and PMC-Sierra Inc. were at their peaks, Conexant already was halfway through its current spiral. Analysts charge that Conexant’s troubles transcend those of the industry.
Last July, Conexant’s executives predicted strong performance across the company’s entire business for their fiscal year 2000 ended Sept. 30. Even then, Conexant’s stock price had steadily declined 50% from its high six months earlier.
Then the bottom fell out from under all technology stocks in the fall, and Conexant shareholders got a double whammy with another six months of losses. In December, Conexant warned that sales would fall 20% short of earlier forecasts, which compounded the stock’s slide. The company again warned investors last month that sales would fall short of projections.
Meanwhile, Conexant filed to spin off its Internet infrastructure division and subsequently delayed the offering. While Conexant’s management attributed the delay to soured market conditions, analysts question whether the Internet business could have been spun off earlier to take advantage of a market hot on networking chips.
Analysts concede souring market conditions have played a role in Conexant’s decline. But most agree that there are some specific problems at Conexant that fall squarely on the company’s management. The No. 1 complaint: lost market share. Some also grumble that Chief Executive Dwight Decker lacks a vision for where the company is going. Instead, he’s simply piecemealed the company together through acquisitions “to make it float altogether,” in the words of one analyst who declined to be named.
“Obviously, people have pointed fingers,” said Sean Lavey, an analyst with market researcher International Data Corp. “But Dwight Decker is still doing a good job.”
Indeed, where analysts and investors give Decker his share of knocks, they also praise him for guiding the company in the early days.
“Conexant remains well-positioned,” said Arun Veerappan, an analyst with Robertson Stephens Inc. “We believe that it remains a key player in the communications semiconductor industry.”
Despite critics, Conexant has no plans to replace Decker, according to a source close to the company’s board of directors. Investors and analysts shouldn’t forget Decker helped Conexant come out on top of the analog modem market when it was a hotly competitive area, the source said, and he’s looking to do it again with the spinoff of Mindspeed, Conexant’s Internet business.
Similarly, analysts credit Decker with driving the effort to spin off Conexant from Rockwell International Corp. in 1998 and guiding the independent company’s growth. At the time, Conexant had a healthy business selling analog modem chips for dial-up Internet access,a business that now comprises 18% of Conexant’s sales. Decker guided the company into newer markets such as chips for set-top boxes and wireless gear.
Under his stewardship, Conexant has grown annual sales to $2.1 billion from $1.4 billion, acquired seven companies and geared up Mindspeed to be the company’s first spinoff. As California’s power crisis threatened millions of dollars in fines for Conexant, Decker took the extra step of traveling to Sacramento to lobby legislators.
“Dwight’s still our CEO and our leader, and the CEO provides vision and motivation,” said Conexant spokesman Scott Allen.
And Decker is undertaking restructuring, taking steps to cut costs by $200 million a year in a bid to offset a projected sales shortfall of as much as 40% in the recently concluded quarter vs. the prior. Additionally, Conexant said it would sell off Mindspeed directly to Conexant shareholders instead of going through a public offering.
The moves are a step in the right direction, analysts say, but more needs to be done. Conexant has to keep shifting its business away from the modem market and into hotter areas. Additionally, while the entire communications chip industry has had difficulty seeing how business will shape up, Conexant needs to do a better job of forecasting for all its business groups.
Conexant faces a challenge with its varying business units. Last year, Conexant’s Internet business,now Mindspeed,propped up sales. As revenue from the personal systems group continued to decline,combined with an inventory correction hurting sales in the Internet division,it became clear to analysts that Conexant was in trouble.
“There is no doubt that visibility has diminished in many of the end markets that Conexant addresses,” A.G. Edwards Inc. analyst Peter Andrew said in a report. “While we are not at all surprised by the decline in the company’s personal networking business, we were surprised by the decline in the Internet infrastructure business.”
A slide in the Internet business doesn’t dissuade investors and company insiders from the idea that Mindspeed could be huge. Still, most observers agree Decker faces his biggest challenge yet: turning around already-battered Conexant in the face of a hastening industry downturn. n
