All hasn't been rosy for chipmaker Xilinx (NASDAQ:XLNX) this year. Sales are being pressured by the U.S.-China trade war, specifically the White House's trade restriction on sales to China's telecom giant Huawei, and the global economy has tapped the brakes. As a result, the company's year-over-year sales notched another slowdown during its fiscal 2020 second quarter (three months ended Sept. 28, 2019).

Nevertheless, sales were still up 12% from a year ago, and Xilinx's field-programmable gate arrays (FPGAs) and other hardware and software platforms are still gaining in adoption. The going is tough at the moment, which is usually the time to start eyeing companies with a winning track record.

The quarter in numbers

Q2 sales came in at $833 million, near the upper end of guidance provided a few months ago. Paired with the first quarter of fiscal 2020, Xilinx is still putting up double-digit gains on the top and bottom lines. It may be a slowdown from the north-of-20% growth in the recent past, but it's still more than respectable given the economic worry and cautious stance many businesses are taking at the moment.  

Metric

Six Months Ended Sept. 28, 2019

Six Months Ended Sept. 29, 2018

Change

Revenue

$1.68 billion

$1.43 billion

17%

Gross profit margin

65.5%

69.3%

(3.8 pp)

Operating expenses

$649 million

$544 million

19%

Adjusted earnings per share

$1.91

$1.62

18%

Data source: Xilinx. Pp = percentage point.  

What's behind this chipmaker's unlikely advance despite adversity? Multiple industries continue to warm up to field-programmable gate array (FPGA) computer chips and the flexibility they provide versus other chip types. The data center industry, automotive, and telecom specifically have been pushing revenues higher. Data center buildout has been slow this year but is expected to pick up again in 2020, as is the automotive industry, where Xilinx CEO Victor Peng said advanced driver assist systems (ADAS) are utilizing his company's flexible components.

As for telecom, that has been a particular sore spot for reasons we'll address in a moment, but ongoing 4G mobile network enhancements and the early launch of 5G are still increasing demand for FPGAs as well. Over the summer, a new unified software platform to help accelerate cloud and edge computing development, called Vitis, was also launched. Xilinx believes its work in this area, as well as ongoing (and rising) demand for new computing needs, will foster further FPGA adoption in the years ahead.  

A Xilinx Zynq chip displayed on a green circuit board.

Image source: Xilinx.

Huawei hurts a bit, and new competition might be looming

All isn't perfect, though, and some of that can be blamed on the sales ban on Huawei. Xilinx had previously said about 6% to 8% of total revenues during the current fiscal year would come from the Chinese tech and telecom titan, but Peng said the management team has reduced its outlook on revenues from Huawei going forward down to zero as new trade licenses from federal regulators still haven't come through.

That is putting pressure on the company's 5G network expectations in the short run, at least until a resolution is reached. Huawei plays in other markets outside of telecom as well, so there's going to be some pain from losing such a significant customer. The good news? Huawei isn't the only Chinese client, so there are other ways for Xilinx to participate in China's economic development if the ban lasts a long time.

Another side point, not addressed during this trade-war focused earnings call, was chip designer NVIDIA's announcement earlier in the week that it is also entering the telecom industry. The company thinks its graphics processing units are particularly well suited to helping 5G-based computing reach its full potential, powering technology like artificial intelligence and industrial robotics. Xilinx could thus find itself with some serious competition for its FPGAs.

It all adds up to a disappointing short-term outlook. For Q3, management said to expect sales of $710 million to $740 million -- as much as an 11% year-over-year decline. Full-fiscal-year 2020 sales were forecasted to be $3.21 billion to $3.28 billion, representing at least a 5% increase over 2019 and sharply lower than the pace set so far this year.

However, it is worth noting that management could be playing it safe with its estimates, and positive development with the Huawei situation could help lift current expectations. Either way, though, the longer-term outlook remains positive. Xilinx's advanced products category was up 29% during Q2 and now makes up 74% of total sales -- with automotive and data center end markets leading the charge. Though headwinds remain, this chipmaker still holds a lot of promise.