SAN FRANCISCO -- Last July, when Rockwell International (ROK) - Get Report said it would spin off communications chipmaker Conexant Systems (CNXT) - Get Report, the idea was to turn Rockwell around. The chip market had been hurting for two years. Last year alone, the division lost $262 million thanks to slack demand for its core market of analog-modem chips.

By Jan. 4, when Conexant went public, things had changed. Three months into a tech rally, the

Philadelphia Semiconductor Index

was a month away from hitting its all-time high. Conexant was looking less like a maker of stodgy analog-modem chips and more like a player in the hot market for more cutting-edge communications chips. Conexant has since risen 54%, closing at 26 7/16 Tuesday. And Rockwell? It closed Tuesday at 41 15/16, barely above its level of 40 3/16 reached immediately before the spinoff.

"When Conexant went public, none of us knew how to value it," says Elias Moosa, a communicatons industry analyst with

Thomas Weisel Associates

. Weisel is not an underwriter of the company, and Moosa has no rating on it. "Now it's a great turnaround story."

In the weeks after the IPO, Conexant had another surprise for investors. The company's aggressive cost-cutting effort spurred the company to profits faster than anyone had expected. The

First Call

consensus calls for a loss of 1 cent a share in Conexant's March quarter, compared with a 17-cent loss in the same quarter last year. Analysts forecast a 1-cent profit for the company by the June quarter.

"We had taken up quite a lot of costs," says Conexant CEO Dwight Decker. "It is a leaner business now. We are running with less people than we were before."

The company also has an edge over competitors. Conexant's main strength is its unique ability to integrate software and support components into its chips, says Andy Fuertes, an analyst with

Allied Business Intelligence

. By combining the two, Conexant can lower the chip costs for makers of computers and related devices. That should help it take on

Lucent

(LU)

unit

Lucent Microelectronics

,

PMC-Sierra

(PMCS)

and

Broadcom

.

Broadcom has been especially popular, thanks to its dominance of the cable-modem chip market. But next to Broadcom, Conexant looks like a good value to fund managers these days. "I'm not a bargain-basement kind of guy, but I think this is a real opportunity," says William Keithler, portfolio manager of the $1.1 billion

Invesco

(FTCHX) - Get Report

Strategic Technology fund, which now owns about 750,000 Conexant shares.

Keithler has been betting on long-term growth from Conexant's other product lines: semiconductors and transceivers for cable modems, DSL modems, cell phones, network systems and digital imaging. These markets are expected to soar in the next few years. The market for cable-modem chips alone is expected to jump from $39 million in 1998 to at least $200 million by 2002.

By moving into such markets, Decker must meet high expectations, something he hadn't counted on so soon after independence from Rockwell. He plans to shift business away from analog modems, which now account for 50% of revenue to the higher-growth areas of network systems, digital modems, wireless communications and digital imaging. Within three years, he predicts, these products will account for 85% of sales. Just three years ago, these products contributed just $150 million, and this year, that number has soared to $700 million.

So far, Conexant's off to a good start. The company announced March 15 that it is coming out with the first integrated chip for cable modems, which would cut costs for a modem maker by 25%. "It is stronger than anything Broadcom has," says

International Data

analyst Kimberly Funasaki.

Conexant has also been leveraging relationships with modem-chip customers to move into tangential markets. To grow in some areas, though, the company will have to break through strong relationships its competitors have secured with computer and device makers. In cable modems, for instance, Broadcom owns the market. For Conexant to prosper there, it will have to attract modem makers

General Instrument

(GIC)

and

Scientific-Atlanta

(SFA)

.

To pull this off, Conexant will have to move swiftly. "My biggest worry is to get the Conexant momentum going as fast as possible over the next six months, and the way to do that is through very clear accomplishments in product delivery and design wins," Decker says. "I need to show clearly that this strategy is working."