Conexant turns around on IPO, Nokia news

A previous version of this story reported that Conexant was planning to spin off two IPOs. In fact, the company is spinning off only its Network Access division. A corrected version follows. ZDNet Inter@ctive Investor regrets the error.

Shares of Conexant Systems Inc. (Nasdaq: CNXT) endured a 25 percent swing after its earnings release Wednesday night. After falling to around $19 a share in after hours trading, the wireless components maker began to gain on positive news from Nokia and news of a potential IPO in January.

Shares were up up 1.94 to 28.25 Thursday morning after the company said earnings had met expectations, but sales were slowing down.

While SG Cowen analyst Rick Billy downgraded the stock to "buy" from "strong buy" following the earnings news, analyst F. Drake Johnstone at Davenport & Co reiterated a "strong buy" rating and set a 12-month target price of $90 on the stock.

There were three components to the stock's turnaround, Drake said. First, Nokia's (NYSE: NOK) positive results; "people just assumed the wireless industry was going to hell in a handbasket" because of dour news from Motorola (NYSE: MOT) and Ericsson (Nasdaq: ERICY), Drake said. "Now its clear its just a temporary phenonmenon."

More importantly, the IPO of 10 percent of Conexant's Network Access division should provide a significant catalyst to Conexant shares, Drake wrote in a report. The Internet division should grow revenue 50 percent to $830 million in fiscal 2001. The company first announced plans for its infrastructure IPO in September, which boosted shares.

Drake also speculated the company could spin-off its Digital Infotainment division, which is expected to grow revenue 53 percent in fiscal 2001 to attain $457 million, and could be worth $16-$23 per share.

Also, Conexant's wireless division should resume 25 percent revenue growth by the latter half of 2001, and should generate revenue of $425 million and be worth at least $10-$15 per share.

"People are waking up to the fact that, here's the cheapest way to get shares in the IPO," Drake said.

The company's fourth quarter results included revenue of $561.4 million, up 24 percent over 1999's fourth-quarter revenue, and up 6 percent from the third quarter. Revenue for fiscal 2000 was $2.1 billion, up 46 percent over fiscal 1999 revenue of $1.4 billion.

Pro forma net income was $43.5 million, or 18 cents per diluted share, on target with First Call's consensus estimate, but lower than income of $39.4 million in the fourth quarter of fiscal 1999, and $51.5 million in the third quarter. Pro forma net income for fiscal year 2000 totaled $195.5 million, or 84 cents per share, almost a fivefold increase over pro forma net income of $41.4 million in fiscal 1999.

The company warned revenues will be down 5 to 7 percent sequentially this quarter, with gross margins maintained in the range of 46 to 47 percent, due to weakening demand in digital cellular handsets and consumer PCs. Even with expected double-digit sequential revenue growth in its Digital Infotainment Division, the company said the aggregate revenues of its personal networking business will be down about 10 percent sequentially.