Newport Beach-based chipmaker Conexant Systems Inc. still is shedding the last vestiges of a two-year turnaround.
The company surprised Wall Street a few weeks ago with a weaker-than-expected outlook for the current quarter as it winds down sales of product lines it’s sold off or stopped investing in.
For the three months through September, Conexant said it expects to see sales of $56 million to $57 million, roughly flat from a year earlier and below the $62 million analysts had been expecting.
The company projected profits of $3.3 million to $4.1 million, down about 35% from a year earlier and below the $5.7 million Wall Street had been looking for.
The two analysts that cover the company since have lowered their forecasts to match Conexant’s tempered outlook.
“That decline is completely driven by our legacy businesses,” Chief Executive Scott Mercer said. “The outlook for us looks somewhat weaker because of the businesses we’ve exited and are making no new investments in.”
Conexant’s legacy chips include those for old-school modems for computers, fax machines and other communication gear. The business took a hit after Japanese regulators recently ended a requirement that digital TVs made there include modems.
The company’s older chips also include those for digital subscriber lines and wireless chips that have become outdated by newer technology standards.
Conexant’s legacy businesses made up about 20% of its $61 million in sales for the three months through June. Mercer said he sees that dwindling over time.
In other cases, Conexant has sold off chips.
In 2009, Conexant sold its DSL and broadband chip products to Fremont-based Ikanos Communications Inc. for $54 million.
In 2008, it sold its business making chips for set-top TV boxes to NXP Semiconductors, the former chip arm of Royal Philips Electronics NV, for up to $145 million.
Wall Street Reaction
Still, Wall Street wasn’t prepared for the steep sales drop off predicted for the September quarter.
Investors likely were “tripped up by an accelerated decline in legacy revenues,” said Rick Schafer, an analyst at Oppenheimer & Co. in New York.
Schafer lowered his profit estimate for the 12 months through September to $24 million from $25 million. He also knocked down his profit forecast for the 12 months through September 2011 to $21 million from $30 million.
The analyst didn’t give a price target on the stock and said he will “remain on the sidelines with respect to shares.”
Schafer said he doesn’t expect Conexant’s shares—which trade at about $2—to fall.
“The disappointing guidance is largely priced in,” Schafer said in a note to clients.
Conexant’s shares are off 15% since the start of the year on a recent market value of about $160 million.
The shedding of older products comes amid a bigger overhaul by Mercer, who has focused on whipping Conexant’s balance sheet into shape since he took the top post two years ago.
“During the quarter we also completed the financial restructuring of our company, which was one of our highest priorities,” he said in a call with analysts. “Two years ago we were carrying $432 million of debt. Since then, using the proceeds from asset sales, debt and equity offerings … we have reduced our debt burden to a very manageable $186 million.”
During the June quarter, Conexant retired some $116 million in debt.
New Markets
The company is targeting new markets with prospects for growth, including multifunction office machines that fax, scan, copy and print, interactive kiosks used in stores, digital picture frames, Bluetooth headsets and computer speakers.
“We are addressing a total available market worth more than $1 billion,” Mercer said.
The company has announced a handful of design wins for its imaging and audio chips with customers that it hasn’t named.
Sales from audio chips made up some $35 million of Conexant’s sales during the June quarter and now make up nearly 60%.
“Embedded audio doubled sequentially during the June quarter, albeit from a relatively small base,” analyst Schafer said. “We believe, however, that Conexant continues to expand design wins and penetration in its core audio and imaging markets.”
One of its customers is believed to be Sony Corp. in Japan and a South Korean maker of office devices.
Most of the design wins are expected to start bringing in revenue later this year and next.
