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Conexant Systems (NASD:CNXT) beat Wall Street's expectations for its fiscal second quarter (March 31, 2006) and Robert W. Baird & Co. initiated coverage with an "Outperform" rating. All in one week.

The company, which makes semiconductors for modems and xDSL, has been in the doghouse for some time. A little under a year ago, the stock dropped to $.95. And, no wonder- in fiscal year 2004, which ended September 30, 2004, revenue hit $902 million, up 50% over the prior year. In fiscal 2005, however, revenue fell to $723 million. But by the December 31, 2005 quarter, revenue had recovered to $231 million and the company's operating loss was down to $16 million.

Fiscal Q2 seemed to be another breakout quarter. Revenue was $243 million, up 43% from a year earlier. Excluding special charges for litigation with Texas Instruments (NYSE:TXN), operating income was close to breakeven with a deficit of about $3 million. On the same basis a year ago, the operating loss was about $47 million.

The company also completed a $200 million convertible offering during the quarter and is using the proceeds to pay down debt due early next year.

Conexant guided that revenue for fiscal Q3 (June 30, 2006) would be up 3% to 5% over the March quarter.

The company's situation is improving, but is far from perfect. Current liabilities exceed current assets by $174 million. The company has $853 million of convertible subordinated notes. In the current litigation with Texas Instruments, TI was awarded $112 million in a jury verdict in February. Because there is a second phase to the litigation, the court has not entered a judgment with regard to the jury verdict which means there is still a great deal of risk.

Conexant has had some strong customer "wins" recently with companies like LG Electronics and Humax. It's period of shrinking revenue seems to be behind it. And the stock reflects it. Recently shares hit $3.59, near the 52-week high of $3.90.

But, Conexant is not out of the woods yet. The stock traded above $15 in early 2002, and to move beyond where it is now, the issue with TI has to be settled and the company has to demonstrate it can make consistent profits.

CNXT 1-yr chart:

Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He is also the former president of Switchboard.com, which was the 10th most visited site in the world at the time, according to MediaMetrix. He has been chief executive of FutureSource LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about. He can be reached at douglasamcintyre@gmail.com.

Source: Is Conexant Rolling Again? (CNXT)