Competition from Altera (NASDAQ: ALTR) is taking a heavy toll on Xilinx (XLNX +0.00%). The two companies have been locked in a battle for supremacy in the field-programmable gate array, or FPGA, market, and Xilinx is probably losing ground. Its latest first-quarter results were downright bad, and the same can be said about the outlook. The LTE deployments in China by China Mobile (CHL +0.00%) are not providing any relief, either. As a result, the stock fell more than 9% after the bell.
Simply bad
Xilinx's revenue of $612 million was an improvement of 6% over last year, but was behind the consensus estimate of $630 million. Its net income increased at a faster pace of 11% from last year, and was one penny ahead of estimates. The guidance was even worse: Xilinx expected revenue in the range of $588 million-$612 million, while analysts were expecting $644 million.
As such, Xilinx seems to be losing its wheels. The company saw weakness in shipments of its 28-nanometer chips for base stations in China, while aerospace and defense also struggled due to the timing of certain programs. According to Xilinx, the aerospace and defense business should rebound in the current quarter, but the company's outlook states otherwise.
Altera's innovation is a thorn in the flesh
The weakness in shipments of 28-nm chips to China isn't surprising, as Xilinx rival Altera is aggressively tapping the Chinese LTE market. In fact, 43% of Altera's top line in the last fiscal year was driven by sales of 28-nm chips. The company is now pushing the envelope in terms of technological innovation by ramping up production of its 20-nm chip, and testing the 14-nm platform at the same time.
Xilinx was able to get its 20-nm chip to the market earlier than its rival, but Altera appears to have cut the advantage with its software expertise. In addition, Altera has partnered with Intel to manufacture its 14-nm platform using the Tri-Gate technology. The company expects this product line to start meaningfully contributing to its revenue from the second half of next year.
In fact, Altera believes that it will be able to capture half of the FPGA market on the back of its 14-nm technology, increasing Xilinx's problems in the process.
Losing China?
If Xilinx continues losing share to Altera in the Chinese LTE market, it stands to lose a big opportunity. China Mobile is spending aggressively on LTE deployments, and is expected to build around 500,000 base stations by the end of the year.
So far, China Mobile has issued two tenders, and another is expected later this year. Now, ZTE and Huawei have been the prime beneficiaries of these tenders, and both use Xilinx's chips. However, they also use chips from Altera. In fact, both Huawei and ZTE recognized Altera for its product innovation and technical support last year. As such, it is possible that both are favoring Altera over Xilinx.
According to ZDNet, it is expected that China Mobile will allocate approximately half of its 225.2 billion yuan ($36 billion) budget this year to build the LTE network. Hence, there is sizable opportunity in this market, but Xilinx might not be able to capitalize on it due to intense competition.
The bottom line
Xilinx's weak performance, and an equally bad outlook, are not surprising. There was uncertainty going into earnings, and the company's results prove that it will be facing difficult times going forward. The stock is the cheapest in the industry at 22 times last year's earnings, and it will get cheaper after first-quarter results. But, given its slowing revenue growth and probable loss of market share, Xilinx is a stock to avoid.
