Programmable-logic-device maker Xilinx (NASDAQ:XLNX) posted record revenue in the fiscal year ending this March, and at its 2014 Investor Day, it laid out a plan for annual growth of 8%-12% for the next two years. Can the company manage its current and future technology portfolio to deliver on these ambitious goals, or will competitors like Altera (NASDAQ:ALTR) and Intel (NASDAQ:INTC) thwart the company's efforts?
Xilinx's current flagship products are its 28-nanometer FGPAs. They were the first 28-nm chips on the market when they were launched in 2010, and they dominate at the 28-nm geometry with 70% share. It's taken several years for client prototypes to make it to volume production, but last year, Xilinx finally earned a substantial $380 million from 28-nm, exceeding its target of $350 million.
For the next year, Xilinx has set a more ambitious goal of $700 million in revenue from 28-nm. It seems likely the company will achieve this number, considering the 40% sequential growth of 28-nm chip revenue in the most recent quarter. Also, given the nature of the market, the company has good visibility into many current customers who will be ramping up production with 28-nm FPGAs.
In particular, the Kintex-7 FPGA, which Xilinx states was explicitly developed to be attractive in the wireless market, is expected to do increasingly well thanks to the continued rollout of 4G LTE. Even though the LTE rollout in China has been a hot topic in the technology market for quite some time now, Xilinx management claims that it is still only in the very beginning stages and should benefit the company for several more years.
The next generation
Starting last December, Xilinx began to unveil the new generation of its products, which it calls UltraScale. The mid-range Kintex and high-end Virtex products, built on 20-nm nodes, were the first to be announced and are already shipping. Like the 28-nm generation before it, the UltraScale products will likely take several years to generate significant revenue, but they are the future of the company.
But, there is where things get interesting. Xilinx's main competitor in FGPAs, Altera, is developing its own next-generation products in an exclusive partnership with Intel. Intel recently opened its world-class foundry to third parties, and so far, Altera has been its biggest foundry customer. The big news is that Intel and Altera will be manufacturing FPGAs on the 14-nm node, a generation ahead of Xilinx.
Who will win the next generation? When asked about the tendency of Xilinx and Altera to trade off the dominant position at subsequent geometries, Xilinx CEO Moshe Gavrielov answered that he doesn't "think there is a physical rule of nature that says that you need to swap leadership." He also reiterated that he is very confident about his company's position for the next generation of chips. Still, with Xilinx's foundry, and TSMC only rolling out its 16-nm node late this year or early next year, Xilinx might find itself a year or more behind Altera.
Taking on the ASIC market
The fight for the next generation of FPGAs is especially important, as Xilinx and Altera hope that their addressable markets will increase drastically in coming years. Both companies have claimed that FPGAs are becoming more competitive relative to application-specific chips, known as ASICs or ASSPs, with Altera estimating that FPGAs could eventually take almost $50 billion from ASICs and ASSPs.
The change seems to be happening slowly at the 28-nm geometry, with one-third of 28-nm design wins coming against incumbent ASICs and ASSPs. But, this is likely to accelerate rapidly with the new generation of FPGAs. It is becoming economically infeasible to continue to produce limited-applicability ASICs and ASSPs using the most advanced technological processes, and this will give new FGPAs more of an edge.
Xilinx is well-positioned to keep benefiting from the success of its 28-nm chips in the ongoing LTE rollout. However, success down the line is not guaranteed, as competitor Altera seems to have a momentary advantage in the development of the next generation of FPGAs. Keep watching for design win announcements to find out who will take charge of the expanding FPGA market over the next several years.
Srdjan Bejakovic has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.