Xilinx (NASDAQ:XLNX) has had to deal with some serious collateral damage from the U.S.-China trade war the last couple of years. Trade tensions devolved into lost sales for the field programmable chip (FPGAs) leader after tech giant Huawei got blacklisted in 2019, and the current state of world affairs brought on by you-know-what put the kibosh on other segments (like 5G mobile network rollout), which otherwise could have offset the loss of the large customer. Late in 2019, it was deduced that Huawei revenue was a high single-digit percentage of Xilinx's total revenue.
But even though not much has happened since a phase one trade agreement was signed between the U.S. and China at the end of last year, Xilinx provided an update to the just-concluded spring 2020 quarter with some good news.
A big bump-up in sales
As originally reported by Reuters, in mid-June the U.S. Commerce Department signed off on some rule changes that would allow U.S. firms to begin doing business with Huawei again, specifically pertaining to the setting of 5G wireless network standards. Since 5G is part of a greater tech trend involving everything from the "Internet of Things" to autonomous cars to AI, any reduction of tensions is a big deal for the semiconductor industry.
And as it turns out, the change would have some very quick and drastic effects on Xilinx. The company's FPGA chips are being put to use in all sorts of tech, including 5G infrastructure equipment, cars, and consumer electronics, and China was a big customer. The reduction of restrictions, along with what CEO Victor Peng called "stronger than expected revenues" during the quarter that ended June 27, 2020, prompted a big upgrade in the company's outlook ahead of the actual quarterly report (which isn't due out until July 30). As some of its fellow chip companies have also reported, Xilinx saw particularly strong growth in its data center and networking end-markets, fueled by demand amid shelter-in-place and work-from-home orders.
Xilinx's revenue is now expected to be $720 million to $734 million, compared with previous guidance for $660 million to $720 million, representing a 5% increase in sales from the previous midpoint to the current midpoint. Peng pointed out that part of the higher-than-anticipated revenue was due to accelerated orders springing specifically from "recent changes to the U.S. government restrictions on sales of certain of our products to international customers."
Coincidence? I think not.
Not out of the woods yet
Not surprisingly, the day after the press release, Xilinx stock rallied 7% higher. However, shares remain some 30% down from all-time highs set in early 2019. Even with a rosier-looking spring quarter, the new revenue guidepost still represents as much as a 15% decline from a year ago when the company was firing on all cylinders and reported $850 million in revenue. This chip maker still has quite a hole to dig out of.
Nevertheless, getting China back as a 5G customer could be a big deal, and Peng said strength in data center and networking more than offset weakness in the auto industry, broadcasting, and other consumer electronics end-markets for its FPGAs. Stay tuned for the earnings release at the end of July, when shareholders will get an update on where a fast-evolving business environment is expected to take Xilinx for the rest of 2020. My guess -- and this is just a guess -- is this: 5G, cloud computing, and business networking demand for semiconductors isn't going to ebb anytime soon given the ongoing effects from the lockdown.