Chip maker Xilinx (NASDAQ:XLNX) was struggling three months ago after its outlook for the recently concluded first quarter fell behind expectations. Weakness in the telecom, aerospace, and defense segments hurt Xilinx. The company cited slower orders from a couple of big customers in China, where China Mobile's (NYSE:CHL) LTE roll out is gaining steam, taking investors by surprise. Additionally, Xilinx rival Altera's (UNKNOWN:ALTR.DL) progress in field-programmable gate array, or FPGA, technology is another concern.
In such a scenario, will Xilinx be able to make a comeback when it reports its first-quarter results next week?
A brief slowdown
As mentioned earlier, Xilinx said that its revenue from the wired communications business will slow down in the first quarter. But, this looks like a short-term concern. Xilinx counts Huawei and ZTE, two key equipment suppliers to China Mobile, as customers. Both these equipment suppliers are right in the middle of China Mobile's LTE roll out, and have benefited handsomely from the telecom carrier's 4G tenders.
Last year, Huawei and ZTE won 50% of China Mobile's initial LTE tender that was worth $3.2 billion. In May, the two companies gained more traction at China Mobile by landing 65% of the second LTE tender for building 100,000 base stations. Now, China Mobile is expected to issue its next tender for about 160,000 base stations later this year. By the end of 2014, China Mobile intends to deploy around 500,000 base stations in the Middle Kingdom, so Xilinx can expect a bump in the telecom business as infrastructure spending speeds up.
Xilinx also cites base station deployments from other Chinese telecom companies such as China Telecom as tailwinds. According to management, China Telecom might build 100,000-200,000 base stations by the end of the year. As such, there is no dearth of opportunity in the Chinese telecom market, and this will help Xilinx in making a comeback.
Also, the chip maker had seen weakness in its aerospace, defense, and industrial segments last quarter, but a turnaround looks likely here. According to Xilinx, the segment suffered as a result of an inventory correction in the fourth quarter. The company had seen strong industrial sales over the last six quarters, but a few of its large customers adjusted their inventories.
However, Xilinx's customers resumed their purchases at the end of the quarter, and the company expects the situation to improve further.
Xilinx's performance has been driven by its 28-nanometer product family. This chip platform is in solid demand in China, seeing a 40% sequential jump in sales in the fourth quarter. However, rival Altera's 28-nm chips are also seeing strong adoption in the Chinese LTE market. The 28-nanometer chips contributed to 43% of Altera's top line last fiscal year.
Altera, however, believes that companies will shift to the 20-nm platform going forward, and finally to the 14-nm platform. The company is already shipping samples of its 20-nm products to customers, and it has started testing the 14-nm chips that are based on Intel's Tri-Gate technology.
In comparison, Xilinx started shipping its 20-nm platform last year, so it enjoys a lead in this segment. But then, Altera believes that its superior software configuration can help it get ahead of Xilinx. In addition, Altera is working on a smaller and more compact 14-nm platform as compared to Xilinx's 16-nm offering. The 14-nm platform is expected to drive its revenue in a "meaningful way" from the second half of 2015, while Xilinx will continue working on the 16-nm platform till next year.
Thus, Altera will have an advantage in terms of time to market with its 14-nm offering.
The bottom line
It is difficult to call out how Xilinx's outlook might look. While telecom might rebound as a result of accelerated LTE spending in China, competition from Altera might lead to loss of market share. Last year, Ericsson reportedly started preferring Altera over Xilinx, so the possibility of losing market share due to Altera's aggressive product development cannot be ruled out, making Xilinx a risky bet going into earnings.