NEWPORT BEACH, Calif. -- Analysts say they believe Conexant Systems Inc.'s bold new plan to split itself into two separate chip companies is a daring, innovative move to accelerate growth in the communications IC business. The company here on Wednesday announced it will divide itself next year into two companies, which will share some resources under a multi-year alliance, to serve Internet infrastructure and "personal networking" applications (see Sept. 13 story).
But questions still remain unanswered about the plan, said Conexant managers during a conference call with analysts and the press after announcing the plan on Wednesday afternoon.
Which company will be called Conexant? Not yet determined, said company officials.Who will run the two companies? That hasn't yet been determined either, said officials, who hope that most of the management for the new companies will come from Conexant's existing staff.
How many employees will be in the two new companies? Not yet determined either, responded managers in the conference call.
But what has been determined is that Conexant's fast-growing communications chip businesses are being driven by different forces in Internet infrastructure--such as wide area networks, switches, and routers--and in other products targeted at wireless devices and home broadband applications--such as cable modems, personal imaging, and PC connections.
"We believe that separating Conexant into two strong and competitive communications semiconductor companies is a strategic imperative for us to achieve our objective of building leadership across both the Internet infrastructure and the personal networking markets," said Dwight W. Decker, chairman and CEO of Conexant. "In spinning off our Internet infrastructure business, we will immediately create a new industry powerhouse positioned to lead the semiconductor revolution in global networking," he added during the conference call.
The Internet infrastructure chip company will be a new fabless semiconductor house, using wafer-processing services from Conexant's existing foundry suppliers and its own chip-making plants, which will be owned by the new personal networking chip company. Decker told analyst that the new Internet infrastructure company will be made up of Conexant's Network Access Division, which is expected to generate more than $550 million in revenue in the current fiscal year (ending Sept. 30).
"We believe this business is capable of approaching $1 billion in revenue over the next calendar year 2001," Decker told analysts during the financial call.
The new personal networking company is expected to have revenues of about $1.5 billion when it is formed, according to Decker. Technically, the Internet infrastructure company is being spun out of Conexant, although it is not yet determined which company will retain the Conexant name.
When asked how many employees will be in the new Internet infrastructure company, Decker said management is still working on the details, but that it will most likely be more than 1,000 but less than 1,500. Conexant managers were fairly certain that the Internet infrastructure company would be based in the Newport Beach area, but that has not officially been determine.
Most of the products for Conexant's Network Access Division are made by wafer foundries, said Balakrishnan (Bala) S. Iyer, senior vice president and chief financial officer. He said the Internet infrastructure company will continue to "benefit from our long-term foundry supply agreements."
"Following the separation, the personal networking company will retain Conexant's existing wafer fabrication, assembly, and test facilities," he said, during Wednesday's conference call.
"As part of the plan for a multi-year marketing and technology alliance between the two companies, the Internet infrastructure company will contract with the personal networking company for the continued manufacture, test, and assembly of products," Iyer said. "At this point it is too early to address many of the logistical issues surrounding the separation of Conexant into the two new companies," he added.
Iyer estimated that about 70% of Conexant's Network Access Division products are made by third-party manufacturers. "The intent is for wafer manufacturing on the CMOS side to go almost entirely outside to foundries and that's the direction it has been headed for sometime," he told one analyst, responding to a question about outsourcing. "Much of what will be contracted from Conexant will be specialty processes--silicon germanium and gallium arsenide--that are used for high-end Sonet products."
Decker said the Internet infrastructure chip company's businesses will initially focus on three main areas: WAN transport, multi-service access, and broadband access products. Currently, Conexant's Network Access Division has product ranging from "physical-layer access devices at the edge of the Internet up through switch fabric and network processor products with high-speed optical cores," said the CEO.
And Conexant intends to keep a strong link between the two companies after they are separated. Under a multi-year marketing and technology alliance, the two new companies will continue to leverage each other's products and services, said Decker and Iyer. In fact, employee stock options and bonuses will be tied to the performance of both companies.
And the two will continue to share R&D. "There will be a number of key areas, like digital signal processor (DSP) core roadmaps--for example--and some signal processing algorithms that are common on both the client and on the infrastructure side," Decker noted. "It is our intention to put in place relationships that would permit those R&D investments to be leveraged between the two new companies."