Last updated: June 27, 2011 11:17 pm

Wolfson warning sends shares plunging

Shares in Wolfson Microelectronics fell by a quarter on Monday after the Edinburgh-based chipmaker lowered its full-year sales expectations, citing new product delays and weaker demand from key customers.

“Last year...everyone was trying to get parts as quickly as they could. This year people are being more cautious [about consumer spending],” said Mike Hickey, chief executive.

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“We don’t sell any products directly to end consumers...so we try to get as many design-in slots as possible,” he added. “But it’s hard to determine which one’s going to win in the market place.”

The company, which supplies audio chips for use in smartphones and other devices, said its second-quarter turnover would be between $37m and $39m, compared with its prediction of $37m-$45m in April. Full-year sales growth would be 10-20 per cent, compared with analysts’ previous forecast of 32 per cent.

Since it lost a contract to supply Apple iPhones three years ago, Wolfson has relied heavily on rival smartphone producers such as LG, Samsung and Research in Motion. It has not made a profit since 2008, but was hoping that a raft of new product launches, of both smartphones and tablet devices, would boost its fortunes this year.

However, there have been delays to the launch of the version of Samsung’s Galaxy SII phone supplied by Wolfson, and it has been hurt by RIM’s delay in rolling out a new range of smartphones.

Wolfson’s gross margin for the year would still be around the company’s benchmark of 50 per cent, it said.

Analysts said that Wolfson’s management could do little in the face of difficulties at its major clients. “This is a hair-trigger sector...they are at the mercy of the cycle,” said Lee Simpson at Jefferies.

Although RIM and Nokia have upset investors with recent profit warnings, Mr Simpson said that Wolfson’s statement strengthened the suspicion that “there is a cyclical slowdown happening under all of this” in the smartphone industry as a whole.

Vishal Gupta, at Espirito Santo, identified “two halves” of the mobile phone market: successful manufacturers such as Apple and Taiwan’s HTC, and struggling companies like RIM and LG. Wolfson was over-exposed to the latter category, he said.

The share price rise to a peak of 312p in February “was driven by their success in getting design-ins into multiple products”, Mr Gupta added. “But now there are question marks being raised about whether they can translate these design wins into the revenue line.”

The shares closed 26 per cent down at 175p.

FT Comment

Wolfson continues to feel the effects of its exclusion from Apple’s product suite. Its chips are used in all the major rivals to the iPad, but the challenge by non-Apple tablets has been weaker than hoped, while delays to smartphone launches have also hurt Wolfson. The shares have now fallen 42 per cent since their February peak, but at 14 times next year’s projected earnings, they still look fully priced. Gladder tidings from Wolfson’s customers could yet spur a rally in its shares later in the year; until then, expect them to slide further.

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