Wednesday, November 15, 2006

Calls of Note Part 1

- Merrill Lynch comments on Conexant (NASDAQ:CNXT) saying they think it's time to close the door on WLAN.

CNXT's WLAN business has been losing money for the past few years, and they think a meaningful turnaround for the company in this market is unlikely. In firm's view, CNXT doesn't have the available resources to support its endeavors in this market, and believe that the company is better off investing its limited cash flow in other businesses where it has leadership positions, such as DSL and set top box silicon, as well as into de-levering its balance sheet. By their estimates, if Conexant exits WLAN, the net result would be a 160bps benefit to operating margin and a $0.03 increase in EPS on CY07 estimates. In fact, they view their estimates as conservative because they assume that Conexant spends about a quarter of the amount that Atheros (more or less a WLAN pure play) invests in its business.

With WLAN sales down 80% from its peak, estimated market share down to 5% in 2006 from 13% in 2004, and the company playing catch-up in 802.11n development, the firm doesn't see how Conexant can regain meaningful share in this market or if it can be profitable in this business. Atheros, Broadcom, and Marvell are far too efficient competitors in WLAN in their view, and they think the company is better off partnering than competing in 802.11n.

Maintains Buy on CNXT.

Notablecalls: Not actionable but good to know category.

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