Another (a little older) story from street.com
thestreet.com
Post-Rockwell, Conexant Prospers
By Marcy Burstiner
Staff Reporter
3/31/99 10:51 AM ET
SAN FRANCISCO -- Last July, when Rockwell International (ROK:NYSE)
said it would spin off communications chipmaker Conexant Systems
(CNXT:Nasdaq), the idea was to turn Rockwell around. The chip market had
been hurting for two years. Last year alone, the division lost $262 million
thanks to slack demand for its core market of analog-modem chips.
By Jan. 4, when Conexant went public, things had changed. Three months
into a tech rally, the Philadelphia Semiconductor Index was a month
away from hitting its all-time high. Conexant was looking less like a maker of
stodgy analog-modem chips and more like a player in the hot market for
more cutting-edge communications chips. Conexant has since risen 54%,
closing at 26 7/16 Tuesday. And Rockwell? It closed Tuesday at 41 15/16,
barely above its level of 40 3/16 reached immediately before the spinoff.
"When Conexant went public, none of us knew how to value it," says Elias
Moosa, a communicatons industry analyst with Thomas Weisel
Associates. Weisel is not an underwriter of the company, and Moosa has
no rating on it. "Now it's a great turnaround story."
In the weeks after the IPO, Conexant had another surprise for investors. The
company's aggressive cost-cutting effort spurred the company to profits
faster than anyone had expected. The First Call consensus calls for a loss
of 1 cent a share in Conexant's March quarter, compared with a 17-cent loss
in the same quarter last year. Analysts forecast a 1-cent profit for the
company by the June quarter.
"We had taken up quite a lot of costs," says Conexant CEO Dwight Decker.
"It is a leaner business now. We are running with less people than we were
before."
The company also has an edge over competitors. Conexant's main strength
is its unique ability to integrate software and support components into its
chips, says Andy Fuertes, an analyst with Allied Business Intelligence.
By combining the two, Conexant can lower the chip costs for makers of
computers and related devices. That should help it take on Lucent
(LU:NYSE) unit Lucent Microelectronics, PMC-Sierra (PMCS:Nasdaq)
and Broadcom (BRCM:Nasdaq).
Broadcom has been especially popular, thanks to its dominance of the
cable-modem chip market. But next to Broadcom, Conexant looks like a
good value to fund managers these days. "I'm not a bargain-basement kind
of guy, but I think this is a real opportunity," says William Keithler, portfolio
manager of the $1.1 billion Invesco Strategic Technology fund, which now
owns about 750,000 Conexant shares.
Keithler has been betting on long-term growth from Conexant's other product
lines: semiconductors and transceivers for cable modems, DSL modems,
cell phones, network systems and digital imaging. These markets are
expected to soar in the next few years. The market for cable-modem chips
alone is expected to jump from $39 million in 1998 to at least $200 million
by 2002.
By moving into such markets, Decker must meet high expectations,
something he hadn't counted on so soon after independence from Rockwell.
He plans to shift business away from analog modems, which now account
for 50% of revenue to the higher-growth areas of network systems, digital
modems, wireless communications and digital imaging. Within three years,
he predicts, these products will account for 85% of sales. Just three years
ago, these products contributed just $150 million, and this year, that number
has soared to $700 million.
So far, Conexant's off to a good start. The company announced March 15
that it is coming out with the first integrated chip for cable modems, which
would cut costs for a modem maker by 25%. "It is stronger than anything
Broadcom has," says International Data analyst Kimberly Funasaki.
Conexant has also been leveraging relationships with modem-chip
customers to move into tangential markets. To grow in some areas, though,
the company will have to break through strong relationships its competitors
have secured with computer and device makers. In cable modems, for
instance, Broadcom owns the market. For Conexant to prosper there, it will
have to attract modem makers General Instrument (GIC:NYSE) and
Scientific-Atlanta (SFA:NYSE).
To pull this off, Conexant will have to move swiftly. "My biggest worry is to
get the Conexant momentum going as fast as possible over the next six
months, and the way to do that is through very clear accomplishments in
product delivery and design wins," Decker says. "I need to show clearly that
this strategy is working." |
