Conexant Systems, Inc. F2Q10 Earnings Call Transcript

Conexant Systems, Inc. F2Q10 Earnings Call Transcript
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Conexant Systems Inc. (CNXT)

F2Q10 Earnings Call

April 27, 2010 05:00 a.m. ET

Executives

Scott Allen - SVP, Communications, and IR

Scott Mercer - Chairman and CEO

Christian Scherp - Co-President

Jean Hu - CFO and SVP, Business Development

Analysts

Dan Morris - Oppenheimer

Blayne Curtis - Jefferies

Presentation

Operator

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I would like to introduce Scott Allen, Senior Vice President of Communications and Investor Relations for Conexant Systems Inc., who will chair this afternoon's conference call.

Scott Allen

Thank you, operator. Good afternoon everyone, and welcome to Conexant's second quarter fiscal 2010 earnings conference call. Joining me today are Scott Mercer, our Chairman and Chief Executive Officer; Christian Scherp, Co-President; Sailesh Chittipeddi, Co-President; and Jean Hu, Chief Financial Officer.

Scott will begin today's call with introductory remarks. Jean will review our second quarter financial highlights, and Christian will provide business highlights. Scott will then return with our outlook for the third fiscal quarter, and we'll open the call for questions.

Please note that our comments today will include statements relating to future results that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ substantially from those projected as a result of certain risks and uncertainties, including but not limited to those noted in our earnings release and those detailed from time-to-time in our SEC filings.

The financial information we will discuss today is based in part on non-GAAP financial measures. The company believes that these financial measures, which we term core financial measures, provide an enhanced understanding of our underlying operating performance. A reconciliation of core to GAAP measures is included in our earnings release, a copy of which is available on our website at www.conexant.com.

I will now turn the call over to Scott.

Scott Mercer

Thank you, Scott. I'm pleased to report that the Conexant team once again delivered outstanding performance, meeting our exceeding the guidance we provided on every core financial metric, including gross margin, operating expenses, and operating income. We also exceeded expectations on revenue, and for the second consecutive quarter we delivered core operating margins in excess of 20% of revenues.

During the quarter, we completed the financial restructuring of our company, which was one of our highest priorities, by successfully executing new debt and equity transactions designed to raise the capital required to retire our convertible debt, "puttable" in March 2011, replaced $175 million of senior secured notes due 2015, and we completed a secondary offering of common stock that included the exercise of the over-allotment options, raising $50 million.

With the proceeds from our debt and equity offerings and available cash, we made a tender offer for the balance of our $232 million of convertible debt and retired $105 million of the notes. The remaining note-holders elected to maintain their position, leaving us with the option of calling the rest of the convertible notes in March of next year.

Prior to the completion of our successful effort to strengthen our capital structure, several of our most important customers have excluded us from competing for certain new designs because of our financial situation. I'm pleased to report that with our capital structure issues behind us, we are once again competing for designs at these accounts, and we expect to win our fair share of the business.

We remain focused on capturing market share for the existing products and delivering new solutions for imaging, audio, embedded modem, and video surveillance applications. Our company is addressing a total available market with more than $1 billion today. We have an outstanding IP portfolio and a motivated workforce, and our customer list includes worldwide leaders.

We also 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.

Before I turn the call over to Jean for overview of our second quarter results, I'd like to note that our imaging and audio businesses, where we have focused the majority of our investment dollars, once again accounted for well over half of quarterly revenues. Jean.

Jean Hu

Thank you, Scott. Before I discuss our financial results in detail, I'd like to note that reconciliation of core to GAAP measures is included in our earnings release. Second quarter revenues of $61.9 million were above our high end guidance of 6k to %61 million, and approximately flat sequentially.

Second quarter core gross margins were $38 million, 61.5% of revenues, 50 basis points better than our guidance of 61%, because of product mix and our team's ongoing effort to improve manufacturing cost.

Core operating expenses were $25 million and in line with our expectations. R&D expenses were $13.6 million, and SG&A expenses totaled $11.4 million.

Second quarter core operating income was $13 million, or 21% of revenue compared to expectations, entering the quarter of a range of $11.6 million to $12.5 million. Net interest expense of $4.1 million was $1.3 million higher than our guidance implied, because of additional interest expense associated with our new senior secured debt.

Other expenses were $365,000, (due primarily) to foreign exchange, and the taxes were $332,000. Our net income was $8.3 million, or $0.12 per share based on average yield for 70.5 million shares outstanding during the quarter.

Based on all the expectations entering the quarter and prior to the issuance of new debt and equity, which resulted in a increased expense and higher share count, our earnings per share for the quarter would have been $0.15, better than the $0.13 to $0.14 we anticipated.

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