Conexant Looking at Options

Earlier today, Conexant Systems, Inc. (CNXT - Snapshot Report) announced its filing of a universal shelf registration statement with Securities and Exchange Commission (SEC). After the shelf registration statement is declared effective by the SEC, Conexant will have the option to offer and sell up to $20 million of its common stock, preferred stock, warrants, or any combination of such securities.

Conexant designs and develops semiconductor solutions that enable consumers to access the digital world. The company intends to use the net proceeds from the sale of securities for repaying, redeeming, or repurchasing existing debt. Conexant can also use these proceeds for working capital, capital expenditures and acquisitions.

The balance sheet of the company is highly leveraged. Conexant ended the second quarter with a total debt of $421.1 million against cash balance of $110.3 million. The company operates in an intensely competitive market with big players like Analog Devices (ADI - Analyst Report), Broadcom (BRCM - Analyst Report) and Texas Instruments (TXN - Analyst Report). Conexant is quite small compared to its rivals.

While Conexant’s business continues to face challenges in its eroding business segments (WLAN, a flattening ADSL market and declining revenues in its modem business), we expect the new management to make drastic changes to overhaul the company’s strategic positioning and hasten the return to profitability. The company sold off its Broadband business in April 2009 and plans to use the cash for repaying debt.

FY2008 appeared to be a period of consolidation and recovery for Conexant, which may extend all the way into fiscal 2009. Meanwhile, OEM inventory levels have normalized and there is evidence of inventory replenishments, which combined with a seasonal build-up ahead of the second-half, has led to a re-acceleration in revenue trends for semiconductor companies in Q3/Q4.

However, we would look for more comfort in the direction of the company and confidence in the sustainability of recent results. We maintain a Hold on the stock ahead of the third quarter results, expected on July 30, 2009.

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