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Conexant Systems Inc. (NASDAQ: CNXT)

Conexant Systems Inc. (CNXT) designs, develops and sells semiconductor system solutions consisting of semiconductor devices, software and reference designs, for imaging, video, audio and modem applications. These include a portfolio of imaging solutions for multifunction printers (MFPs), fax platforms and digital photo frame market segments. The Company’s video solutions are targeted at personal computer television (PCTV) applications that enable consumers to watch broadcast television on a personal computer and the video surveillance and security market. In addition, it provides audio solutions that are targeted at personal computer (PC) audio, speakers, and audio subsystems.

On August 11, 2008, the Company completed the sale of certain assets related to its Broadband Media Processing (BMP) business to NXP B.V. (NXP). The company also offers broadband access products, including digital subscriber line and passive optical network technologies that enables broadband data traffic over twisted pair copper telephone lines and optical cables. It enables services, such as high-speed Internet access, voice and telephone services, real-time video distribution and gaming applications. The company also provides various products, including combinations of digital signal processors, network processors, integrated software, analog front-ends and line drivers. It markets and sells its products and system solutions to original equipment manufacturers of communication electronics products through electronic components distributors, as well as to third-party electronic manufacturing service providers. The Company operates in the Americas, the Asia-Pacific region, Europe, the Middle East, and Africa.

Conexant Systems Inc. was founded in 1996 and is headquartered in Newport Beach, California.

Source:https://trading.scottrade.com/quotesresearch/ScottradeResearch.aspx?symbol=CNTX, http://www.reuters.com/finance/stocks/incomeStatement?symbol=CNXT.O , http://www.conexant.com/

Financial Summary

The global economic recession severely dampened semiconductor industry sales in the first nine fiscal months of fiscal 2009. Weakening demand for the major drivers of semiconductor sales, which includes automotive products, personal computers, cell phones and corporate information technology products, resulted in a sharp drop in semiconductor industry sales. More than 50% of semiconductor demand and the fortunes of the semiconductor industry are increasingly linked to macroeconomic conditions such as gross domestic product, consumer confidence, and disposable income.

Demand for all of CNXT’s products has experienced significant decline in line with the industry decline. Revenues in the nine fiscal months ended July 3, 2009, were lower compared to the nine fiscal months ended June 27, 2008, as a result of the effects of the overall economic environment. Facing these challenges, the Company has been working to reduce operating costs and actively manage working capital, while continuing to focus on delivering innovative products to gain market share. Management believes it reached the bottom of its revenue cycle in the fiscal quarter ended April 3, 2009, and sees signs of market stabilization, evidenced by stronger quarter-over-quarter orders, that support this belief.

CNXT’s net revenues decreased 31% to $50.8 million in the fiscal quarter ended July 3, 2009, from $73.9 million in the fiscal quarter ended June 27, 2008. This decline was driven by a 14% decrease in unit volume shipments and a 20% decrease in average selling prices (“ASPs”). The revenue decreases are primarily attributable to the Company’s personal computer modem business, due to deteriorating global economic conditions and the modem de-bundling trend in the computer segment, and to its legacy wireless components business.

CNXT’s net revenues decreased 39% to $152.3 million in the nine fiscal months ended July 3, 2009, from $250.4 million in the nine fiscal months ended June 27, 2008. The nine fiscal months ended June 27, 2008, included approximately $14.7 million of non-recurring revenue from the buyout of a future royalty stream. The decline in net revenues, excluding the impact of the non-recurring revenue, was driven by a 26% decrease in unit volume shipments and a 13% decrease in ASPs. The revenue decreases are primarily attributable to the global economic recession and the modem de-bundling trend in the computer segment, and to its legacy wireless components business.

CNXT’s gross margin percentage for the fiscal quarter ended July 3, 2009, was 59.6% compared with 56.3% for the fiscal quarter ended June 27, 2008. The 3.3 point gross margin percentage increase in the fiscal quarter ended July 3, 2009, is primarily attributable to lower manufacturing costs and lower excess inventory provisions related to improvement in inventory turnover management.

CNXT’s gross margin percentage for the nine fiscal months ended July 3, 2009, was 57.7% compared with 58.8% for the nine fiscal months ended June 27, 2008. CNXT’s gross margin percentage for the nine fiscal months ended June 27, 2008 included a $14.7 million royalty buy-out, which contributed 2.5% to its gross margin percentage for the nine fiscal months ended June 27, 2008. The remaining gross margin percentage increase in the nine fiscal months ended July 3, 2009 is primarily attributable to a shift in product mix and lower manufacturing costs.

R&D expense increased $2.1 million, or 20%, in the fiscal quarter ended July 3, 2009 compared to the fiscal quarter ended June 27, 2008. The increase is due primarily to CNXT’s acquisition of the Sigmatel imaging product line and engineering team and the Company’s continued investment in its product roadmap and innovation.

R&D expense decreased $4.6 million, or 11%, in the nine fiscal months ended July 3, 2009 compared to the nine fiscal months ended June 27, 2008. The decrease is due to lower non-cash stock compensation of $1.3 million and a correcting adjustment of $1.4 million in the nine fiscal months ended June 27, 2008, representing the unamortized portion of the capitalized photo mask costs as of September 29, 2007. Based upon an evaluation of all relevant quantitative and qualitative factors, and after considering the provisions of APB 28, paragraph 29, and SAB Nos. 99 and 108, the Company believes that this correcting adjustment is not material to its full year results for fiscal 2008. In addition, CNXT does not believe the correcting adjustment is material to the amounts reported in previous periods.

Source: http://www.conexant.com/ir/sec_filings.html

Analyst Consensus

This is the consensus forecast amongst 4 polled investment analysts. Against the Conexant Systems Inc. company.

The 3 analysts offering 12 month price targets for CNXT have a median target of 3.00, with a high estimate of 5.00 and a low estimate of 0.80. The median estimate represents a 22.95% increase from the last price of 2.44.

Source: Financial Times.com

Source: http://www.reuters.com/finance/stocks/estimates?symbol=CNXT.O

Investment Highlights

CNXT recently introduced a new family of audio system-on-chip (SoC) solutions for embedded audio and voice applications. The CX2070X SoCs are targeted at growing audio opportunities in multimedia IP phones, personal navigation devices, portable media players and mobile Internet devices. Additional applications include MP3 player docking stations, PC speaker systems, audio headsets and unified communications systems that support services such as voice-over-IP telephony, speakerphone and audio conferencing functionality. The highly integrated SoCs can also be used to enable audio capabilities in intercom and door phone applications. The new audio solutions are shipping in pre-production quantities to customers now.

CNXT also recently announced the availability of a new video “frame grabber” reference design that enables users to capture and transfer older-technology analog video files from camcorders and VCRs to personal computers via an integrated universal serial bus (USB) interface. This allows consumers to digitize, edit, archive and share video content on the Internet more easily. The reference design is based on the Company’s CX23102 audio/video (AV) decoder and CX23417 A/V encoder. Key features include on-board, real-time MPEG-2 compression, which frees up the PC processor for other tasks.

The new solution is shipping to consumer video electronics manufacturers in China now. The CX23102 has several features that improve video quality. These include 10-bit video analog-to-digital converters (ADCs), a full 10-bit video data path, a multi-tap horizontal and vertical scaler, and hue, brightness, saturation and contrast controls. The highly integrated device eliminates the need for additional components including broadcast decoding and processing chips, and external sound demodulation chips. The low-power CX23417 incorporates the functionality of up to three different chips. Video-enhancing features include built-in noise filters that dynamically improve images in the pre-processing stage, an increased motion search range, the de-coupling of motion estimation from encoding, and an adaptive quantization scheme. The high level of integration in both devices allows manufacturers to reduce product size and bill-of-material costs without compromising audio and video performance.

Source: Scottrade.com, Reuters.com, http://www.conexant.com

Technical Analysis

Moving Average Price Compare

CNXT is trading below its 50-day moving average. However, this moving average is trending higher which suggests that there has been buying interest in this stock.

Bollinger Bands

CNXT is trading within its Bollinger Bands. This is a normal condition and suggests that the stock is neither overbought nor oversold relative to the recent price action.

MACD

The MACD for CNXT currently indicates a strong bearish signal for two reasons. First, the MACD is below the signal line, a 9-day moving average. Second, the MACD is below the critical level of 0, which implies that the underlying moving averages are trending lower.

Comparative Analysis

Source: Reuter.com, Nasdaq.com

Insider Trading Activity

Net Share Purchase Activity

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