Conexant Exceeds Guidance for Fourth Quarter of Fiscal 2009

October 29, 2009 4:30 PM EDT

Imaging and Audio Businesses Deliver Sequential Growth of 18 Percent, Account for 58 Percent of Total Revenues

NEWPORT BEACH, Calif.--(BUSINESS WIRE)-- Conexant Systems, Inc. (NASDAQ: CNXT) today announced that financial results for the fourth quarter of fiscal 2009 exceeded the guidance provided at the beginning of the quarter. The company also said that its imaging and audio businesses grew 18 percent on a sequential basis and accounted for 58 percent of total revenues.

Fourth Fiscal Quarter Financial Results

Conexant presents financial results based on Generally Accepted Accounting Principles (GAAP) as well as select non-GAAP financial measures intended to reflect its core results of operations. The company believes these core financial measures provide investors with additional insight into its underlying operating results. Core financial measures exclude certain non-cash and other non-core items as fully described in the GAAP to non-GAAP reconciliation in the accompanying financial data.

On August 24, 2009 Conexant announced the completion of the sale of its Broadband Access product lines to Ikanos Communications, Inc. for $54 million. The financial results of the Broadband Access business unit have been classified as discontinued operations in Conexant's fourth fiscal quarter financial statements.

Conexant's core net revenues for the fourth quarter of fiscal 2009 were $56.2 million. Core gross margins were 60.2 percent of revenues. Core operating expenses were $25 million, and core net income was $3.5 million, or $0.07 per share.

On a GAAP basis, net revenues for the fourth quarter of fiscal 2009 were $56.2 million. GAAP gross margins were 60.4 percent of revenues. GAAP operating expenses of $37 million included restructuring charges of $5.6 million associated with unutilized leases and a previously announced reduction in force, and asset impairments of $5.6 million. GAAP loss from continuing operations was $7.7 million. GAAP loss from discontinued operations was $5.5 million, offset by a gain of $36.7 million on the sale of the Broadband Access business. GAAP net income was $23.5 million, or $0.47 per diluted share.

The company ended the quarter with $125.4 million in cash and cash equivalents, compared to $123.4 million in the previous quarter. Fourth fiscal quarter cash and cash equivalents included the initial proceeds of $18.4 million from a public offering of common stock that raised a total amount of $21.2 million. During the quarter, the company retired an aggregate amount of $80 million of its senior secured notes due in November 2010.

Financial-performance and Business Perspective

"For the fourth fiscal quarter, the Conexant team again delivered performance that exceeded our expectations on all financial metrics," said Scott Mercer, Conexant's chairman and chief executive officer. "Fourth quarter revenues of $56.2 million were better than the $54 million we anticipated entering the quarter and increased 10 percent from third quarter revenues of $50.8 million. Fourth quarter core gross margin of 60.2 percent was 40 basis points higher than core gross margin of 59.8 percent in the previous quarter. Core operating expenses of $25 million were lower than the approximately $27 million we anticipated and compared to $26.8 million in the third quarter. Core operating income of $8.8 million was above the $6 million we expected and compared to $3.6 million in the prior quarter. Core net income was $3.5 million, or $0.07 per share, rather than the $0.01 to $0.02 per share we anticipated entering the quarter.

"In our imaging and audio businesses, where we have focused our product-development and acquisitions efforts, we delivered fourth quarter sequential growth of 18 percent," Mercer said. "Together, these two businesses accounted for 58 percent of our total revenues.

"The recent sale of our Broadband Access business represented the completion of our restructuring strategy, which included the termination of new investments in wireless networking, the divestiture of our Broadband Media Processing business, and the strengthening of our product portfolio with targeted acquisitions," Mercer said. "Conexant today is a company transformed. We are now a smaller, more profitable enterprise focused on delivering operational excellence and innovative solutions for imaging, audio, embedded-modem, and video applications. In each of these areas, we have established leadership positions.

"With a proven team, an outstanding IP portfolio, and a customer list that includes worldwide industry leaders, we plan to grow by capturing market share with existing designs and delivering new products for the areas we currently serve. In addition, we plan to apply our core capabilities in analog and mixed-signal design and firmware and software development to capitalize on new opportunities in adjacent markets."

First Fiscal Quarter Business Outlook

Conexant expects revenues for the first quarter of fiscal 2010 to be approximately $60 million. Core gross margins for the first quarter are expected to be about 60 percent of revenues. The company anticipates that core operating expenses will be approximately $25 million, which includes reinstatement of performance-based employee incentive plans. As a result, the company expects that first quarter core operating income will be approximately $11 million, with core net income of approximately $0.11 per share based on approximately 60 million shares outstanding.

Conference Call Today

Financial analysts, members of the media, and the public are invited to participate in a conference call that will take place today at 5:00 p.m. Eastern Time (ET)/ 2:00 p.m. Pacific Time (PT). Conexant senior management will discuss fourth quarter fiscal 2009 financial results and the company's outlook. To listen to the conference call via telephone, dial 866-650-4882 (in the U.S. and Canada) or 706-679-7338 (from other international locations); participant pass code: Conexant; Conference ID number: 35114866.

To listen via the Internet, visit the Investor Relations section of Conexant's Web site at www.conexant.com/ir. Playback of the conference call will be available shortly after the call concludes and will be accessible on Conexant's Web site at www.conexant.com/ir or by calling 800-642-1687 (in the U.S. and Canada) or 706-645-9291 (from other international locations); Conference ID number: 35114866.

About Conexant

Conexant's comprehensive portfolio of innovative semiconductor solutions includes products for imaging, audio, embedded-modem, and video applications. Conexant is a fabless semiconductor company headquartered in Newport Beach, Calif. For more information, visit www.conexant.com.

Safe Harbor Statement

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: This release includes forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally can be identified by phrases such as Conexant or its management "believes," "expects," "anticipates," "foresees," "forecasts," "estimates" or other words or phrases of similar import. Similarly, statements in this release that describe our business strategy, outlook, objectives, plans, intentions, or goals are also forward-looking statements. All such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.

These risks and uncertainties include, but are not limited to: The availability of manufacturing capacity; changes in our product mix; pricing pressures and other competitive factors; our ability to timely develop and implement new technologies and to obtain protection for the related intellectual property; the cyclical nature of the semiconductor industry, which is subject to significant downturns that may negatively impact our business, financial condition, cash flow, and results of operations; the cyclical nature of the markets addressed by our products and our customers' products; volatility in the technology sector and the semiconductor industry; the risk that capital needed for our business and to repay our indebtedness will not be available when needed; our successful development of new products; the timing of our new product introductions and our product quality; demand for and market acceptance of our new and existing products; our ability to anticipate trends and develop products for which there will be market demand; product obsolescence; the ability of our customers to manage inventory; our ability to identify and execute acquisitions, divestitures, mergers or restructurings, as deemed appropriate by management; the financial risks of default by tenants and subtenants in the space we own or lease; the risk that the value of our common stock may be adversely affected by market volatility or failure to meet all applicable listing requirements of the NASDAQ Global Market; the substantial losses we have incurred; the uncertainties of litigation, including claims of infringement of third-party intellectual property rights or demands that we license third-party technology, and the demands it may place on the time and attention of our management and the expense it may place on our company; general economic and political conditions and conditions in the markets we address; and possible disruptions in commerce related to terrorist activity or armed conflict, as well as other risks and uncertainties, including those detailed from time to time in our Securities and Exchange Commission filings.

CONEXANT SYSTEMS, INC.

GAAP Condensed Consolidated Statements of Operations

(unaudited, in thousands, except per share amounts)

                  Fiscal Quarter Ended                Twelve Fiscal Months Ended

                  October 2,  July 3,     October 3,  October 2,   October 3,

                  2009        2009        2008        2009         2008

Net revenues      $ 56,155    $ 50,844    $ 81,115    $ 208,427    $ 331,504
(Note 1)

Cost of goods       22,265      20,533      34,161      86,674       137,251
sold

Gross margin        33,890      30,311      46,954      121,753      194,253

Operating
expenses:

Research and        12,568      12,450      15,072      51,351       58,439
development

Selling, general
and                 13,001      14,813      19,172      62,740       77,905
administrative

Amortization of
intangible          429         690         1,383       2,976        3,652
assets

Gain on sale of
intellectual        -           -           -           (12,858 )    -
property

Asset               5,629       43          23          5,672        277
impairments

Special charges     5,373       1,017       3,026       18,983       18,682
(Note 2)

Total operating     37,000      29,013      38,676      128,864      158,955
expenses

Operating (loss)    (3,110 )    1,298       8,278       (7,111  )    35,298
income

Interest expense    5,514       5,035       5,982       21,148       27,804

Other (income)      (1,570 )    (3,567 )    2,457       (5,025  )    9,223
expense, net

Loss from
continuing
operations
before income       (7,054 )    (170   )    (161   )    (23,234 )    (1,729   )
taxes and (loss)
gain on equity
method
investments

Provision for       52          176         488         871          849
income taxes

Loss from
continuing
operations
before (loss)       (7,106 )    (346   )    (649   )    (24,105 )    (2,578   )
gain on equity
method
investments

(Loss) gain on
equity method       (641   )    (485   )    (808   )    (2,807  )    2,804
investments

(Loss) income
from continuing     (7,747 )    (831   )    (1,457 )    (26,912 )    226
operations

Gain on sale of
discontinued        36,653      -           6,268       36,653       6,268
operations, net
of tax

(Loss) income
from
discontinued        (5,450 )    3,557       (3,894 )    (15,004 )    (306,670 )
operations, net
of tax

Net income        $ 23,456    $ 2,726     $ 917       $ (5,263  )  $ (300,176 )
(loss)

(Loss) income
per share from
continuing        $ (0.15  )  $ (0.02  )  $ (0.03  )  $ (0.54   )  $ 0.00
operations --
basic and
diluted

Gain per share
on sale of
discontinued      $ 0.73      $ 0.00      $ 0.13      $ 0.73       $ 0.13
operations --
basic and
diluted

(Loss) income
per share from
discontinued      $ (0.11  )  $ 0.07      $ (0.08  )  $ (0.30   )  $ (6.21    )
operations --
basic

(Loss) income
per share from
discontinued      $ (0.11  )  $ 0.07      $ (0.08  )  $ (0.30   )  $ (6.18    )
operations --
diluted

Net income
(loss) per share  $ 0.47      $ 0.05      $ 0.02      $ (0.11   )  $ (6.08    )
-- basic

Net income
(loss) per share  $ 0.47      $ 0.05      $ 0.02      $ (0.11   )  $ (6.05    )
-- diluted

Shares used in
computing basic     50,146      49,867      49,565      49,856       49,394
per-share
computations

Shares used in
computing
diluted             50,146      49,867      49,565      49,856       49,653
per-share
computations

Note 1 -  Net revenues for the twelve fiscal months ended October 3, 2008
          includes $14.7 million for the buyout of a future royalty stream.

          Special charges consist primarily of restructuring charges. Special
          charges in the twelve fiscal months ended October 2, 2009 also include
Note 2 -  a $3.5 million charge related to a legal settlement. Special charges
          in the twelve fiscal months ended October 3, 2008 include a $6.3
          million charge related to the termination of our voluntary early
          retirement plan.

CONEXANT SYSTEMS, INC.

Reconciliation of GAAP Financial Measures to Non-GAAP Core Financial Measures

(unaudited, in thousands, except per share amounts)

                  Fiscal Quarter Ended                Twelve Fiscal Months Ended

                  October 2,  July 3,     October 3,  October 2,   October 3,

                  2009        2009        2008        2009         2008

GAAP net          $ 56,155    $ 50,844    $ 81,115    $ 208,427    $ 331,504
revenues

Royalty buyout      -           -           -           -            (14,700 )
(n)

Non-GAAP Core
net revenues      $ 56,155    $ 50,844    $ 81,115    $ 208,427    $ 316,804
less impact of
royalty buyout

GAAP cost of      $ 22,265    $ 20,533    $ 34,161    $ 86,674     $ 137,251
goods sold

Stock-based         (51    )    (77    )    (60    )    (247    )    (370    )
compensation (a)

Other (f)           145         -           (459   )    (466    )    349

Non-GAAP Core
cost of goods     $ 22,359    $ 20,456    $ 33,642    $ 85,961     $ 137,230
sold

GAAP gross        $ 33,890    $ 30,311    $ 46,954    $ 121,753    $ 194,253
margin

Gross margin
adjustments         (94    )    77          519         713          21
(a,f)

Non-GAAP Core       33,796      30,388      47,473      122,466      194,274
gross margin

Royalty buyout      -           -           -           -            (14,700 )
(n)

Non-GAAP Core
gross margin      $ 33,796    $ 30,388    $ 47,473    $ 122,466    $ 179,574
less impact of
royalty buyout

GAAP operating    $ 37,000    $ 29,013    $ 38,676    $ 128,864    $ 158,955
expenses

Stock-based         (449   )    (440   )    (2,032 )    (4,605  )    (11,910 )
compensation (a)

Amortization of
intangible          (429   )    (690   )    (1,383 )    (2,976  )    (3,652  )
assets (b)

Gain on sale of
intellectual        -           -           -           12,858       -
property (c)

Asset               (5,629 )    (43    )    (23    )    (5,672  )    (277    )
impairments (d)

Special charges     (5,466 )    (1,033 )    (2,426 )    (18,591 )    (17,895 )
(e)

Other (f)           -           -           (800   )    -            (800    )

Non-GAAP Core
operating         $ 25,027    $ 26,807    $ 32,012    $ 109,878    $ 124,421
expenses

GAAP operating    $ (3,110 )  $ 1,298     $ 8,278     $ (7,111  )  $ 35,298
(loss) income

Gross margin
adjustments         (94    )    77          519         713          21
(a,f)

Operating
expense             11,973      2,206       6,664       18,986       34,534
adjustments
(a-f)

Non-GAAP Core       8,769       3,581       15,461      12,588       69,853
operating income

Royalty buyout      -           -           -           -            (14,700 )
(n)

Non-GAAP Core
operating income  $ 8,769     $ 3,581     $ 15,461    $ 12,588     $ 55,153
less impact of
royalty buyout

GAAP other
(income)          $ (1,570 )  $ (3,567 )  $ 2,457     $ (5,025  )  $ 9,223
expense, net

Unrealized gain
(loss) on           2,746       1,166       (2,312 )    4,508        (14,974 )
Mindspeed
warrant (g)

Gain on sale of
equity              -           1,802       21          1,855        896
securities (h)

Loss on
impairment of       -           -           -           (2,770  )    -
investments (i)

Loss on
impairment of       -           -           (1,435 )    -            (1,435  )
facility (j)

Loss on
termination of      (1,087 )    -           -           (1,087  )    -
swap (k)

Non-GAAP Core
other expense     $ 89        $ (599   )  $ (1,269 )  $ (2,519  )  $ (6,290  )
(income)

GAAP (loss)
income from       $ (7,747 )  $ (831   )  $ (1,457 )  $ (26,912 )  $ 226
continuing
operations

Gross margin
adjustments         (94    )    77          519         713          21
(a,f)

Operating
expense             11,973      2,206       6,664       18,986       34,534
adjustments
(a-f)

Loss (gain) on
equity method       641         485         808         2,807        (2,804  )
investments (l)

Other (income)
expense             (1,659 )    (2,968 )    3,726       (2,506  )    15,513
adjustments
(g-k)

Interest expense    380         -           -           380          1,344
adjustments (m)

Non-GAAP Core
income (loss)       3,494       (1,031 )    10,260      (6,532  )    48,834
from continuing
operations

Royalty buyout      -           -           -           -            (14,700 )
(n)

Non-GAAP Core
income (loss)
from continuing   $ 3,494     $ (1,031 )  $ 10,260    $ (6,532  )  $ 34,134
operations less
impact of
royalty buyout

Basic and
Diluted (loss)
income per share
from continuing
operations:

GAAP Basic and    $ (0.15  )  $ (0.02  )  $ (0.03  )  $ (0.54   )  $ 0.00
Diluted

Non-GAAP Basic    $ 0.07      $ (0.02  )  $ 0.21      $ (0.13   )  $ 0.99

Non-GAAP Diluted  $ 0.07      $ (0.02  )  $ 0.21      $ (0.13   )  $ 0.98

Royalty buyout    $ 0.00      $ 0.00      $ 0.00      $ 0.00       $ (0.30   )
(n)

Non-GAAP Basic
less impact of    $ 0.07      $ (0.02  )  $ 0.21      $ (0.13   )  $ 0.69
royalty buyout

Non-GAAP Diluted
less impact of    $ 0.07      $ (0.02  )  $ 0.21      $ (0.13   )  $ 0.68
royalty buyout

Shares used in
basic and
diluted
per-share
computations:

Basic               50,146      49,867      49,565      49,856       49,394

Diluted             50,146      49,867      49,565      49,856       49,653

See "GAAP to Non-GAAP Core Adjustments" below

GAAP to Non-GAAP Core Adjustments:

     Stock-based compensation expense is based on the fair value of all stock
(a)  options and employee stock purchase plan shares in accordance with SFAS No.
     123(R).

(b)  Amortization of intangible assets resulting from business combinations.

(c)  Gain on sale of intellectual property which is not part of our core,
     on-going operations.

     Asset impairments in the fiscal quarter and twelve fiscal months ended
(d)  October 2, 2009 consist primarily of $5.0 million for impairment of a
     patent license with Freescale.

     Special charges consist primarily of restructuring charges. Special charges
     in the twelve fiscal months ended October 2, 2009 also include a $3.5
(e)  million charge related to a legal settlement. Special charges in the twelve
     fiscal months ended October 3, 2008 include a $6.3 million charge related
     to the termination of our voluntary early retirement plan.

     The fiscal quarter and twelve fiscal months ended October 2, 2009 and
     October 3, 2008 include the impact of environmental remediation charges and
     a charge to inventory acquired through the purchase of the "SigmaTel"
(f)  multifunction printer imaging product lines. The fiscal quarter and twelve
     fiscal months ended October 3, 2008 includes purchase accounting expense of
     in-process research and development acquired through the purchase of the
     "SigmaTel" multifunction printer imaging product lines.

     Unrealized gain and loss associated with the change in the fair value of
(g)  our warrant to purchase 6 million shares of Mindspeed Technologies, Inc.
     common stock, which is accounted for as a derivative instrument.

(h)  Gain on sale of equity securities and on the liquidation of companies in
     which we held equity securities.

(i)  Losses from other than temporary impairment of marketable securities and
     cost based investments.

(j)  Loss incurred on a non-cancelable lease obligation related to a facility.

(k)  Loss incurred upon termination of our interest rate swap in connection with
     repurchase of $80.0 million of floating rate senior notes.

(l)  Loss (gain) on equity method investments.

     Other interest expense which is not part of our on-going operations. For
     the fiscal quarter and twelve fiscal months ended October 2, 2009, the
     adjustment relates to the accelerated amortization of debt issuance costs
(m)  related to the repurchase of $80.0 million of floating rate senior notes.
     For the twelve fiscal months ended October 3, 2008, the adjustment relates
     to the accelerated amortization of debt issuance costs related to the
     repurchase of $53.6 million of floating rate senior notes.

     The twelve fiscal months ended October 3, 2008 includes $14.7 million of
(n)  non-recurring revenue that resulted from the buyout of a future royalty
     stream.

Non-GAAP Financial Measures:

We have presented non-GAAP net revenues, non-GAAP cost of goods sold, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP other expense (income), non-GAAP income (loss) from continuing operations, and non-GAAP basic and diluted income (loss) per share from continuing operations, on a basis consistent with our historical presentation to assist investors in understanding our core results of operations on an on-going basis. These non-GAAP financial measures also enhance comparisons of our core results of operations with historical periods. We are providing these non-GAAP financial measures to investors to enable them to perform additional financial analysis and because it is consistent with the financial models and estimates published by analysts who follow our company. Management believes that these are important measures in the evaluation of our results of operations. Investors should consider non-GAAP financial measures in addition to, and not as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. The non-GAAP financial measures presented by us may be different than non-GAAP financial measures presented by other companies.

GAAP Guidance:

We do not present GAAP guidance due to our inability to project (i) future market prices of the common stock of a third party underlying a derivative financial instrument, (ii) realized gains or losses from the sale of equity securities in third parties, and (iii) the financial results of investments accounted for using the equity method of accounting.

CONEXANT SYSTEMS, INC.

Condensed Consolidated Balance Sheets

(unaudited, in thousands)

                                             October 2,    October 3,

                                             2009          2008

ASSETS

Current assets:

Cash and cash equivalents                    $ 125,385     $ 105,883

Restricted cash                                8,500         26,800

Receivables, net                               30,110        48,997

Inventories, net                               9,216         19,372

Other current assets                           26,148        37,938

Current assets held for sale                   -             29,730

Total current assets                           199,359       268,720

Property, plant and equipment, net             15,299        17,410

Goodwill                                       109,908       110,412

Other assets                                   26,284        49,861

Total assets                                 $ 350,850     $ 446,403

LIABILITIES AND SHAREHOLDERS' DEFICIT

Current liabilities:

Current portion of long-term debt            $ -           $ 17,707

Short-term debt                                28,653        40,117

Accounts payable                               24,553        34,894

Accrued compensation and benefits              8,728         13,201

Other current liabilities                      33,978        43,189

Current liabilities to be assumed              -             3,995

Total current liabilities                      95,912        153,103

Long-term debt                                 311,400       373,693

Other liabilities                              62,089        56,341

Total liabilities                              469,401       583,137

Shareholders' deficit                          (118,551 )    (136,734 )

Total liabilities and shareholders' deficit  $ 350,850     $ 446,403

Selected Other Data

(unaudited, in thousands)

                   Fiscal Quarter Ended              Twelve Fiscal Months Ended

                   October 2,  July 3,   October 3,  October 2,  October 3,

                   2009        2009      2008        2009        2008

Revenues By
Region:

Americas           $ 2,011     $ 1,251   $ 4,788     $ 9,084     $ 18,900

Asia-Pacific         53,693      48,989    75,190      196,536     305,835

Europe, Middle       451         604       1,137       2,807       6,769
East and Africa

                   $ 56,155    $ 50,844  $ 81,115    $ 208,427   $ 331,504

Cash Flow Data:

Depreciation of    $ 1,603     $ 1,936   $ 2,532     $ 8,198     $ 19,311
PP&E

Capital            $ 168       $ 208     $ 1,718     $ 723       $ 5,958
expenditures

Cash provided by
(used in)          $ 7,534     $ 4,773   $ (3,813 )  $ 8,216     $ (18,350 )
operations

    Source: Conexant Systems, Inc.

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