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What: Shares of Integrated Device Technology (NASDAQ:IDTI) fell as much as 13.1% in Tuesday's early trading. The designer of mixed-signal semiconductors reported solid first-quarter earnings Monday night, meeting or beating analyst targets across the board. However, management also noted that major customer Huawei will turn elsewhere for communications chips in an updated high-speed network switch, reducing Integrated Device Technology's sales by $12 million per quarter.

So what: In the first quarter, sales rose 19.4% year over year to $192.1 million. Adjusted earnings increased by 16%, landing at $0.36 per diluted share. Analysts had no issue with any of these figures, and the revenue tally was actually a mildly positive surprise.

But the lost Huawei revenue is going to hurt. Revenue guidance for the second quarter pointed to $184 million, slowing Integrated's roll to just roughly 9% year-over-year sales growth. It's a big step back from the current trend.

Now what: Making matters worse, this was a product that was always assumed to have no real competition. Analysts and management agreed that it wouldn't make sense for anybody else to put in the research and development work to create a chip for this highly specific niche market -- but Huawei did exactly that, developing its own chip in-house.

Integrated doesn't see this move cascading into more lost contracts. The company is the sole provider of this specific chip type to many telecommunications equipment giants, but Huawei is not likely to start selling its own custom solution to direct competitors.

The market reaction to this unfortunate development seems appropriate. Integrated Device Technology is losing a good chunk of future revenues here, but it is not a fatal wound. Including Tuesday's haircut and a 29% single-day plunge on weak guidance in February, shares have now traded sideways over the last 52 weeks.

Expect the extreme volatility to continue from here, as the company finds its sea legs in a rapidly changing industry.

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