This addresses the rfmd issue. pasted from raging bull.
TFN First Call
March 2, 2000
March 2, 2000
C O N E X A N T S Y S T E M S I N C .
Delivers Solid Presentation at the Robertson Stephens Technology
Conference; Business Guidance Remains Intact...
Arun Veerappan (415) 693-3391 arun_veerappan@rsco.com
Arif N. Karim (415) 248-4388 arif_karim@rsco.com
Robertson Stephens Robertson Stephens
CONEXANT SYSTEMS INC. CNXT
3/2/00
Industry: Semiconductor
CHANGE IN... YES/NO WAS IS
...Rating: No Buy
FYE: SEP 1999A 2000E 2001E
...EPS F1999 Actual $0.32
...EPS F2000 No $0.83
...EPS F2001 No $1.00
52-Week Range: $133 - 8 4Q $0.18 $0.21 $0.30
Shares Outstanding (MM): 229.0 Fiscal Year $0.32 $0.83 $1.00
Market Cap: 20,493.2 P/E 282.3x 108.1x 89.4x
Avg Daily Volume (000): 6,228.4 Cal Year $0.57 $0.81 N/E
12/99 Bk Value/Sh: $6.02 P/E 156.1x 110.0x N/A
12/99 Tot Debt/Tot Cap: 2%
Revs($M): 1999A 2000E 2001E
F2000 Est. ROE: 16% 1Q $294.7 $510.0 $588.9
Price/Book Value: 14.9x 2Q $316.9 $474.2 $590.2
12/99 Net Cash/Sh: ($0.37) 3Q $380.3 $500.2 $627.2
Dividend/Yield: $0.00 0.00% 4Q $452.2 $548.2 $685.1
3-Yr Sec Growth Rt: 20-25% Year $1,444.1 $2,032.7 $2,491.5
* Fully-taxed EPS shown
Equity Mkt/Rev
** Conexant management (Dwight Decker, CEO and Bala Iyer, CFO) presented at the
Robertson Stephens Technology conference yesterday.
** The company indicated that its guidance to the street for the March quarter
remains intact. We believe that our estimates of $474 million in revenue
for the March quarter falls in the range of street estimates as well.
** In the past week, the two main issues surrounding the company's stock have
been:
1. The impact of competition on the company's 'anyport' product line at
Lucent.
2. The impact of RF Micro Devices' announcement with Qualcomm regarding the
development of CDMA power amplifiers.
** Regards to the 'anyport' product line, we believe that it represents about
50% of the company's network access business. Conexant indicated that
Analog Devices could ship product to Lucent as the company had already been
shipping to Lucent with its voice capable products. Overall, Conexant
indicated that it expects to have a solid positioning at Lucent with its
multi-port data capable products. In addition,
**
Conexant indicated that its 'anyport' business also includes such major
customers as Cisco, Nortel and Alcatel. Our take is that the 'anyport'
business could prove to be flatish over the coming couple of quarters and
then register growth again in the second half of the year. Also with the
SDSL and fiber optic segments still growing at an attractive clip, we
believe that the network access business overall will be able to register
growth during the June quarter and beyond.
Figure 1: Revenue Analysis ($ in millions)
Q1:F00 % Of Sales
PC $190.1 37%
Imaging $31.2 6%
Network Access $118.5 23%
Digital Infotainment $67.1 13%
Wireless $103.0 20%
TOTAL $510.0 100%
Source: Company reports.
** Regarding, RF Micro Devices' announcement with Qualcomm, we believe that it
is not a design win at what used to be Qualcomm's cell phone business (that
business has been sold and Conexant shares the power amplifier socket there
along with Mitsubishi, in our view) but rather a technology alliance to
develop CDMA power amplifiers on the part of RFMD under the protective
umbrella (for now at least) of the CDMA giant. We believe that the PA
market is tremendously capacity constrained and further believe that
Conexant is working hard to ramp this business quickly. We expect that the
company's current capacity of 1000 4" wafers/week (up from about 250 4"
wafers/week in January 1999) could be ramped up by as much as 50% by the
June quarter.
** Overall, we believe that Conexant is poised to do slightly better that our
revenue and EPS estimates for the March quarter and expect the company to
provide an outlook for sequential revenue growth for the June quarter.
Given that the company's stock trades at 10x C00 total revenue and 14.5x C00
expansion platform business revenues (i.e., total revenue excluding the
modem business), we continue to rate Conexant stock as a Buy.
Investment Thesis:
communications IC player and could become a core holding for investors in this
space for the following reasons:
** Conexant has a single processing platform in mixed-signal and DSP design
that can be leveraged across a wide range of communications applications
including DSL, cable modem, ATM, SONET, and wireless systems. These markets
encapsulate many of the most attractive opportunities in communications, and
by diversifying across multiple segments the company also transitions out of
tougher PC modem markets, in our opinion. We believe Conexant is potentially
in a better position than some more vertically focused communications IC
companies to re-deploy its resources to the more profitable segments as they
emerge.
** The new diversity generated in Conexant's product line provides greater
insurance against potential volatility and downturns in the analog modem
market. The new platforms now represent 62% of revenues and have grown from
about 20% of revenue in F96. This has offset the declining revenues from
analog modems, which were 80% of revenues in F96. Indeed, revenues of $1.2B
in 1998 are down from $1.5B in 1996, due largely to decreases in modem
revenues. Increased product diversity has also generated a broad base from
which to return Conexant to revenue growth.
** Through its dominance as a supplier to the consumer OEM modem market,
Conexant has, we believe, the connections and the reputation to remain a
significant supplier to OEMs of digital broadband consumer products
including PC access products, multifunction peripherals and cordless
telephones.
** Conexant has quickly built its base as the leading supplier of low-voltage
power amplifiers for wireless applications and is well positioned to profit
from CDMA and GSM market growth as these new digital markets expand and
migrate into a 3G product cycle as the millennium approaches. Moreover, it
is only in markets such as wireless power amplifiers and high-speed SONET,
which are outside the capabilities of merchant CMOS foundries, that a
captive fabrication facility is desirable, in our view. Conexant has its own
captive GaAs HBT foundry that it can adapt to push the envelope in this
technology and help keep its products ahead of the market.
** The company is aggressively preparing itself for continued revenue growth by
focusing development on product lines that address Conexant's strongest
market positions and maximize 1999 margin contributions.
** Conexant inherits a $2B capital investment from Rockwell in capital, R&D and
acquisitions.
** The management team at Conexant is highly experienced, with an average of 19
years in industry, and is led by the former president of Rockwell's
Semiconductor Systems Division.
Investment Risks:
rapidly changing market requirements and short product cycles, and risks that a
specific to Conexant.
** The critical risk factor, in our view, remains the state of the business
transition from the difficult modem business to the highly profitable and
fast growing networking, telecom and wireless businesses. Should the price
pressure in the PC modem business re-accelerate in the F1999 before the
growth businesses have sufficiently replaced it, the company's recovery into
profitability could be delayed.
** Conexant is betting heavily on new technology. While significant headway has
been made by the company to launch credible and successful products in
growth businesses, the company's market presence in some of these businesses
remains fresh and vulnerable. As such, the timely delivery and appropriate
productization of new products on a consistent basis is absolutely critical
to maintaining Conexant's momentum in new markets. Should delivery problems
occur or products fail to find acceptance, the company's transition to a
richer business model could be delayed.
** While the company expects modem pricing to erode 25-30% year-to-year the
cuts may continue for longer and cut deeper than the company anticipates. In
this case, the growth in emerging markets will have to be greater to
compensate for any shortfall. With about 50% of revenues derived from modems
today, the company is also exposed to seasonal volatility in this market. |
