Conexant Exceeds Expectations and Delivers Double-Digit Core Operating Profitability Two Quarters Ahead of Schedule; Company Achieves Core Operating Margins of 10 Percent and Expands Core Gross Margins by 170 Basis Points

Business Wire, July 27, 2006

NEWPORT BEACH, Calif. -- Conexant Systems, Inc. (NASDAQ:CNXT), today reported financial results for the third quarter of fiscal 2006, which ended June 30, 2006. The results exceeded the company's prior expectations for improvements in both core gross margins and core operating margins. Conexant's highest-priority goal, established 18 months ago, had been to return to double-digit core operating margins by the end of this calendar year. By delivering core operating margins of 10.1 percent in the third fiscal quarter, the company achieved its goal two quarters ahead of schedule.

Conexant presents financial results based on generally accepted accounting principles (GAAP) as well as selected 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 non-cash and other non-core items as fully described in the GAAP to non-GAAP reconciliation in the accompanying financial data.

Third quarter fiscal 2006 revenues of $251.6 million increased 3.7 percent from second quarter fiscal 2006 revenues of $242.6 million, in line with prior expectations of a 3 to 5 percent sequential increase and up 27.4 percent from $197.5 million in the third quarter of fiscal 2005. Core gross margins in the third quarter of fiscal 2006 increased to 45.2 percent of revenues, up 170 basis points from 43.5 percent in the immediate-prior quarter and above prior expectations of approximately 44 percent.

Core operating expenses increased in the third quarter of fiscal 2006 to $88.4 million from $86.1 million in the prior quarter, primarily due to increased investments in new product development and in line with expectations at the beginning of the quarter. Core operating expenses in the year-ago quarter were $86.2 million.

Core operating income in the third quarter of fiscal 2006 was $25.5 million, a sequential increase of 31.7 percent from second quarter fiscal 2006 core operating income of $19.3 million and above prior expectations for a sequential improvement of approximately 15 percent. The core operating loss in the third quarter of fiscal 2005 was $11.2 million. Core net income for the third quarter of fiscal 2006 increased 42 percent sequentially to $18.6 million, or $0.04 per diluted share, compared to $13.1 million, or $0.03 per diluted share in the second quarter of fiscal 2006. In the year-ago quarter, the core net loss was $17.6 million, or $0.04 per diluted share.

On a GAAP basis, gross margins for the third quarter of fiscal 2006 increased to 52.3 percent of revenues, from 43.8 percent in the prior quarter. Third fiscal quarter gross margins included a gain of $17.5 million related to the termination of a wafer supply and services agreement with Jazz Semiconductor Inc. GAAP operating expenses decreased to $137.3 million in the third quarter of fiscal 2006 from $147.8 million in the prior quarter. As previously announced, the company settled its GlobespanVirata-derived litigation with Texas Instruments for $70.0 million. The company recorded $30.0 million of the total in the third quarter of fiscal 2006 and $40.0 million in the second quarter of fiscal 2006. The GAAP operating loss was $5.7 million in the third quarter of fiscal 2006 compared to a loss of $41.6 million in the previous quarter. The GAAP net loss for the third quarter of fiscal 2006 was $67.1 million, or $0.14 per diluted share, compared to a GAAP net loss of $10.1 million, or $0.02 per diluted share, in the second quarter of fiscal 2006. The company's third fiscal quarter 2006 GAAP results also included a $35.1 million decrease in the value of warrants in Mindspeed Technologies Inc. and an $18.5 million impairment of the value of its investment in Skyworks Solutions Inc. For the year-ago quarter, GAAP gross margins were 38.0 percent, GAAP operating expenses were $113.7 million, GAAP operating loss was $38.7 million, and GAAP net loss was $32.2 million, or $0.07 per diluted share.

"In our third fiscal quarter, we once again exceeded our overall performance expectations," said Dwight W. Decker, Conexant chairman and chief executive officer. "Most importantly, we delivered on our highest-priority goal, established 18 months ago, which was to return to double-digit core operating margins before the end of calendar 2006. The entire Conexant team deserves credit for achieving this final recovery-phase goal two full quarters ahead of our previously committed schedule.

"In achieving double-digit core operating profitability, we delivered core operating income of $25.5 million, a sequential increase of nearly 32 percent and double the 15 percent we expected entering the quarter," Decker said. "This above-plan performance was largely driven by a 170-basis-point improvement in core gross margins, which was more than twice what we anticipated at the beginning of the quarter and primarily attributable to our continuing success in reducing product costs and firmer-than-expected pricing.