Conexant Systems, Inc. Business Information, Profile, and History

Company Perspectives:

Conexant is the world's largest independent company focused exclusively on providing semiconductor system solutions for communications electronics. With revenues of approximately $1.5 billion, Conexant has aligned its business to target the fastest-growing markets of the worldwide communications marketplace. The company's solutions are found in the wireline voice and data products that power the Internet, cordless and cellular wireless telephony systems, personal imaging communications equipment, and emerging cable and wireless broadband networks.

History of Conexant Systems, Inc.

As a unit of Rockwell International, the predecessor of Conexant Systems, Inc. has made semiconductors, or chips, since the 1960s. Although not its largest division, Rockwell Semiconductor Systems (RSS) was Rockwell International's fastest growing business in the 1990s, until demand for chips fell off in 1996 and the industry went through a period of excess supplies. In 1998 parent company Rockwell International decided to spin off RSS to its shareholders in a tax-free stock exchange in an effort to improve its profits and make its semiconductor business more competitive. The new company, Conexant Systems, Inc., began business in January 1999 with $1.2 billion in revenues and a workforce of about 6,300. Conexant quickly returned to profitability by focusing exclusively on developing semiconductors for the communications market.

Innovative Products from Rockwell's Semiconductor Division: 1960s--90s

The business unit of Rockwell International that later became its Microelectronics Division developed 4800bps/9600bps IC modems in the 1960s. In 1968 the company entered the commercial modem business, when the first modem market was fax machines. In 1971 it developed the first 4800bps LST modems. The Rockwell International Microelectronics Division was created in 1971 to fuel the development of microprocessor technology and computer products. In 1977 it was renamed the Electronic Devices Division and became the largest producer of the R6502 microprocessor. In 1978 it began shipping high-speed OEM (original equipment manufacturer) modems (4800bps and 9600bps) to facsimile (fax) manufacturers.

The division was renamed Semiconductor Products Division in 1982. During the 1980s it introduced a series of OEM fax, data, and VLSI modems and in 1985 began its fax-modem chipset business that it would subsequently dominate. It also helped create the analog modem market for desktop computers. In 1988 it opened its European Design Center in Sophia Antipolis, France.

In 1990 the division was again renamed, this time as the Digital Communications Division, with headquarters in Newport Beach, California, as part of Rockwell International's reorganization of its semiconductor and communications business. It opened its Japanese Design Center in Tokyo, Japan, and introduced the world's first integrated, low-speed data and fax modem as well as the first high-speed, single-device fax modem operating at 14,400bps transmission.

The division continued to introduce innovative data and fax modem products throughout the decade. In 1993 the division became Rockwell International's Telecommunications business unit as part of the firm's reorganization of its digital communications and switching systems business. In 1994 it completed a $200 million expansion of its wafer fabrication facility in Newport Beach.

Rockwell, Focusing on Multimedia and Wireless Communications: 1995--98

In 1995 the division was renamed Rockwell Semiconductor Systems (RSS) and focused on multimedia and wireless communications. Another $200 million expansion of the Newport Beach fabrication facility was begun. During the year RSS introduced several new products, including the industry's first single-package 28.8Kbps modem-chip family integrating speakerphone/data/fax/telephone answering machine functions. RSS was not Rockwell International's largest business, but it was the fastest growing. It dominated the fax modem market, selling 80 percent of the chips used in fax machines. From 1992 through 1995 RSS enjoyed a compound annual growth rate of about 35 percent.

In 1996 RSS opened a semiconductor systems design center in Israel. Early in the year it broke ground for a new wafer fabrication facility in Colorado Springs on land that it had acquired from United Technologies. The plant was scheduled to open in mid-1997. In addition to its plant in Newport Beach, Rockwell had another chipmaking plant in Newbury Park, California. Later in the year Rockwell announced that it would delay the opening of the Colorado Springs plant until early 1998. The delay reflected a change in the overall semiconductor industry, which was experiencing a slump in demand that made it cheaper for Rockwell to purchase wafers rather than make its own. Chip manufacturers with excess capacity were selling wafers at significant discounts in the face of a falloff in demand.

Later in 1996 parent company Rockwell International sold its military and aerospace business to Boeing Co. in a deal valued at $3.2 billion. Boeing assumed $2.17 billion in debt and other Rockwell liabilities and gave Rockwell shareholders about $860 million in Boeing stock. The deal would leave Rockwell virtually debt-free and in a position to expand through acquisitions. Rockwell International would keep its four commercial electronics and automation businesses. At the time of the sale, semiconductors accounted for about 16 percent of Rockwell's revenues. The semiconductor division planned to focus on higher margin products and not concentrate on commodity semiconductors. These products included personal communications chipsets for sale to OEMs, global positioning system (GPS) receivers, and wireless systems devices.

Around this same time Rockwell acquired chipmaker Brooktree Corp. for $275 million in stock. The acquisition of Brooktree, a San Diego-based firm with 575 employees and operations in Colorado and Texas as well as San Diego, gave RSS the technology to expand its high-speed digital communications and multimedia product lines.

Also in 1996 RSS and Lucent Technologies agreed to make their 56Kbps modem chipsets interoperable, even though industry standards had not yet been determined. RSS introduced several new products, including new modem technology enabling Internet connections at rates up to 56Kbps across standard phone lines. RSS also introduced the first in a family of 56Kbps digital modem devices for central-site equipment at the fall 1996 Comdex industry trade show and exhibition. At the time Rockwell was proposing 56Kbps as the new industry standard for Internet modems, almost twice as fast as the then current rate of 28.8Kbps of most high-end modems.

RSS planned to begin volume production of the 56Kbps chipsets in the first quarter of 1997, but a problem discovered by Motorola in field tests delayed full production until April. By May Rockwell was shipping a million units per month. Rockwell's primary competitor was U.S. Robotics, which had signed major Internet service providers (ISP) America Online and Compuserve (later merged into AOL), while Rockwell had received commitments from hundreds of smaller ISPs. U.S. Robotics was subsequently acquired by 3Com Corp. Rockwell and 3Com used different standards, and their modems could only talk to each other at speeds up to 33.6Kbps.

Toward the end of 1997 inventor Brent Townshend, a consulting electrical engineering professor at Stanford University, claimed that RSS had illegally acquired the technology and fundamental concepts behind its 56Kbps modems. Townshend claimed he disclosed his ideas to Rockwell in a series of 1995 meetings aimed at reaching a licensing agreement. When no agreement was reached, Townshend later granted an exclusive, worldwide license to U.S. Robotics.

In December 1996 RSS acquired Pacific Communications Sciences, Inc., a subsidiary of Cirrus Logic that specialized in wireless semiconductor products, for $18.1 million. The acquisition added about 125 employees and enabled RSS to produce a line of chips for pagers and cellular and cordless telephones.

In 1997 RSS reorganized into five divisions based on strategic product platforms: Personal Computing, Personal Imaging, Digital Infotainment, Wireless Communications, and Network Access. It acquired the Hi-Media broadband communications chipset business of ComStream Corporation. It also licensed microprocessor technology from Advanced Risc Machines Inc.

Toward the end of 1997 RSS introduced a new high-speed modem technology called consumer digital subscriber line (CDSL). CDSL was designed to ease the transition for consumers from analog modems to higher speed digital formats. CDSL technology would enable modem manufacturers to combine DSL and traditional modem technology in a single device. The CDSL chips were expected to be ready for shipment to OEMs in the spring of 1998. As part of its CDSL initiative, RSS entered into a joint development agreement with Orckit Communications for high bit rate DSL products (HDSL) and with Northern Telecom (Nortel) to make Rockwell's CDSL format interoperable with Nortel's similar one-megabyte modem system. At the same time RSS announced its first chipset to support high-speed cable modems, which were considered the primary competition for xDSL lines in the consumer market. The company also reached a tentative agreement with 3Com Corp. to produce 56Kbps modems using a common standard before the end of 1997.

Continuing Business As Conexant Systems, Inc.: 1998--2000

In mid-1998 Rockwell International Corp. announced that it would spin off Rockwell Semiconductor Systems as a separate company, which would subsequently be called Conexant Systems, Inc., by the end of 1998. For fiscal 1998 RSS was expected to show an operating loss, due in part to a weak PC modem market and a work stoppage at its Newport Beach facility. Parent company Rockwell International's quarterly results were also well below analysts' expectations, and the company planned to cut 3,800 jobs from its workforce after spinning off RSS to its shareholders. RSS had about 7,000 employees and would have about $1.3 billion in revenues for fiscal 1998.

Before the spinoff was completed, RSS laid off 700 employees, about ten percent of its workforce, and closed its wafer fabrication plant in Colorado Springs. For fiscal 1998 ending September 30, RSS posted a loss of $275 million, including charges of about $90 million to close its Colorado Springs facility and reduce its workforce. The semiconductor industry was going through a period of weak demand and faced a worldwide glut of semiconductors.

In its first formal filing regarding the spinoff, RSS estimated that it had 70 percent of the worldwide market for fax chips and was the largest single maker of modem chips. Approximately 45 percent of its revenues came from Asia, which was going through a financial crisis. The company had experienced 18 months of declining sales as weak demand and excess inventories buffeted the semiconductor sector.

In January 1999 Conexant Systems, Inc. was launched as an independent entity after Rockwell International Corp. completed the spinoff of Rockwell Semiconductor Systems to shareholders. The new name was announced at the fall Comdex show in Las Vegas in November 1998. Dwight Decker, president of RSS, would continue as chairman and CEO of Conexant. Conexant's stock began trading on the NASDAQ stock exchange on January 4 at $17 to $18 a share. Conexant began operations with nearly 6,300 employees and annual revenues of about $1.2 billion.

Conexant would continue to share some resources with Rockwell International, including the Rockwell Science Center, where technologies such as gallium arsenide chips and CMOS imaging technology were invented. Conexant would provide some funding for the lab, which employed 280 researchers, and share in technology research focused on the communications market. Rockwell International also would remain a customer for Conexant's avionics and automotive products.

In March 1999 Conexant announced that it had developed a single chip for cable modems that could handle digital data, audio, and video signals--functions that were currently being performed by four to six chips. The same month Conexant also unveiled its interactive digital television (DTV) set-top box (STB) platform.

With its strategy firmly focused on semiconductors for the communications market, Conexant returned to profitability ahead of schedule in its second quarter ending March 30, 1999, with net income of $7.6 million on revenue of $316.9 million. Its third quarter results exceeded analysts' expectations. Conexant was the largest semiconductor company in the world focused exclusively on communications semiconductors, and it had the broadest product portfolio of communications products of any similar company. It had achieved twice the market share of its nearest competitor in 56K modems. The company's wireless communications and network access divisions were growing faster than expected. In addition, the personal computing division was experiencing a reversal of declining demand for PC modems. In July 1999 Conexant became part of the NASDAQ 100 Index. Later in the year Conexant announced a two-for-one stock split.

Acquisition of New Technologies: 1999--2000

Before the end of 1999 Conexant announced plans to acquire smaller technology firms over the next several months. Rival chip makers Intel Corp. and Broadcom Corp. had recently acquired communication-technology companies as demand fueled by Internet communications exploded. In August Conexant invested $10 million in Entridia Corp., a 1997 privately held start-up that designed chips that route voice, video, and data transmissions from a server to a workplace computer. In December it acquired Maker Communications Inc. of Framingham, Massachusetts, for $942.8 million in stock. The company developed software that enabled engineers to create semiconductors for Internet communications. Conexant also opened a design center in Portland, Oregon, to attract talent in the area known as Silicon Forest.

At the end of 1999 Broadcom and Conexant both announced competing versions of a tuner chip to replace the bulky channel-switching device in cable boxes and televisions. An inexpensive tuner chip would make multiple functions like Internet access over a television screen and features like picture-in-picture more commonplace. Conexant also was seeking industry certification for its cable modem, which failed the first test. Broadcom was considered the industry leader in cable modems.

At the start of 2000 Conexant acquired British chip maker Microcosm Communications Ltd. for about $128 million in stock. The acquisition of the high-volume chip producer was expected to boost revenue in Conexant's fiber-optic networking business. In acquiring smaller firms, Conexant was focusing on companies that already had products and were generating revenue.

In January 2000 Conexant was chosen to replace Consolidated Natural Gas Co. in the Standard & Poor's 500 Index. The company's stock rose 18 percent in one day. At the end of February, though, it dropped about 16 percent in one day when an investment banker downgraded the stock from 'strong buy' to 'buy.' In early March analysts were concerned about one of Conexant's major customers, Lucent Technologies, and the possibility Conexant had been designed out of some of Lucent's next-generation products. One analyst estimated Lucent accounted for six percent of Conexant's revenues and as much as ten percent of its profits. Conexant was also facing new competition from companies such as RF Micro Devices in the power amplifier business for cell phones, which accounted for 12 percent of Conexant's revenues. On the positive side, analysts noted that Conexant seemed to be making a successful transition from its older analog modem business to digital technology and cable. After initial problems getting its cable modem design certified, Conexant received industry certification in July 2000 for a single-chip cable modem that would allow consumers to purchase PCs with always-on, high-speed cable modems.

In April 2000 Conexant acquired Philsar Semiconductor Inc. of Ottawa, Canada, for stock worth from $166.5 million to $186 million. Philsar designed chips that enabled wireless devices to connect to one another and change functions quickly. Another acquisition involved Illinois-based Applied Telecom Inc., a supplier of telecommunications software and hardware. In May Conexant bought Sierra Imaging Inc. for about $43.6 million in stock. Sierra made software and semiconductors for digital cameras.

In June 2000 Conexant acquired high-speed network chip maker HotRail Inc. for about $394 million in stock. The acquisition strengthened Conexant's network offerings. The acquired technology would enable the company to deliver complete systems for next-generation Internet infrastructure, including high-speed routers, Internet protocol and Ethernet switches, and optical networking equipment.

Conexant continued its acquisitions in July with the purchase of two companies. One was NetPlane Systems of Dedham, Massachusetts, which developed software for network control and other functions. The technology would facilitate Conexant's entry into network switching and complemented the HotRail acquisition. Conexant acquired NetPlane for 2.4 million shares of stock valued at about $120 million. The second company was Novanet Semiconductor, a designer of high-speed physical layer networking solutions based in Israel. Conexant acquired Novanet for 2.7 million shares of stock valued at about $140 million. Both companies became part of Conexant's Network Access division.

Facing an inevitable decline in its core dial-up PC modem business, Conexant's acquisition strategy was designed to strengthen its Network Access and Wireless divisions. For its third quarter ending June 30, 2000, Conexant's record revenues of $530.5 million broke down as follows: $155.3 million (30 percent) from Network Access; $92.6 million (17 percent) from Wireless Communications; $71.0 million (13 percent) from Digital Infotainment; $27.6 million (five percent) from Personal Imaging; and $184.0 million (35 percent) from Personal Computing. In the newer wireless and broadband technologies, Conexant was facing a host of new competitors that were focused on specific sectors of the market. The company's goal, however, was to be the number one communications semiconductor company.

Principal Divisions: Network Access; Personal Computing; Personal Imaging; Wireless Communications; Digital Infotainment.

Principal Competitors: C-Cube Microsystems Corporation; uniView Technologies Corporation; Broadcom Corporation; Intel Corporation; International Business Machines Corporation; Lucent Technologies Inc.; Texas Instruments Inc.; STMicroelectronics Inc.; Anadigics Inc.; RF Micro Devices; Triquint Semiconductor Inc.; Alpha Industries Inc.; Network Device Inc.; Analog Devices Inc.

Chronology

• Key Dates:

• 1971: The Rockwell International Microelectronics Division is created to fuel the development of microprocessor technology and computer products.
• 1977: The division is renamed the Electronic Devices Division and becomes the largest producer of the R6502 microprocessor.
• 1982: The division is renamed the Semiconductor Products Division.
• 1990: The division becomes the Digital Communications Division, with headquarters in Newport Beach, California.
• 1995: The division is renamed Rockwell Semiconductor Systems and focuses on multimedia and wireless communications.
• 1996: Parent company Rockwell International divests its military and aerospace businesses.
• 1998: Rockwell International announces it will spin off Rockwell Semiconductor Systems into a new company, Conexant Systems, Inc.
• 1999: Conexant Systems begins operation as a public company.