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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." |
