AMD (NYSE:AMD) wasn't the only company to disappoint its investors recently. Conexant (NASDAQ:CNXT) also had bad news to report this week, announcing that revenue for the fiscal second quarter was a paltry $200 million -- far lower than last year's $243 million. Its guidance for the second quarter was originally a bit more than $220 million, so it came up more than 10% short. You have to wonder what the future holds.
Management spread around the blame for its stumble this quarter. It experienced weaker-than-expected demand (duh!) for its set-top box products, not to mention "program schedule delays with service providers." Its chips that go into multifunction peripherals suffered thanks to high inventories, and it brought out the old "average selling price pressure" excuse for its DSL products.
This last one, actually, is pretty worrisome. Conexant is a leader in DSL chips, so the fact that it is seeing price pressure is probably an indication that the competition is swarming around it. Broadcom (NASDAQ:BRCM), for one, is likely making inroads.
Things had been looking up for the firm, and it actually reported positive operating income during Q1 2007, so one has to be disappointed with this news. The sales shortfall is especially bad, because neither the balance sheet nor the expense structure is currently set up well to weather a downturn. While Conexant does have $618 million in cash, its debt load is greater than $1 billion.
Furthermore, research and development costs seem high (28% of sales) for a company that generated gross margins in the mid-40% range last year. In comparison, Cypress Semiconductor (NYSE:CY), which has gross margins just a couple of points lower than Conexant's, spent just 22% of sales on R&D. When it costs $0.55 out of every dollar of revenue to make your stuff, and R&D eats up another $0.28, there isn't much left to cover everything else. It desperately needs higher sales, but it's now heading in the wrong direction.
We'll have to wait until management provides full results for the quarter to know for sure how bad things look, but I expect an ugly report. This stock could appreciate tremendously if things turn around, but you should only take the chance if you have a very high tolerance for risk.
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Fool contributor Dan Bloom owns shares in Cypress Semiconductor. The Fool has a disclosure policy.
