Shares in Wolfson Microelectronics dipped after the company’s fourth-quarter results prompted analysts to question the strength of its recovery.
The British audio chipmaker has made strides into the smartphone market but a fall in gross profit margin from 49.7 per cent to 47 per cent in the last three months of the year caused analysts to wonder whether the company could continue to meet its 50 per cent gross margin target as smartphones become more mass-market.
“Handsets tend to generate more revenue but they also have lower margins. You can argue the margin pressure [evidenced in the fourth quarter] isn’t necessarily going to go away,” said Nick James, an analyst at Numis Securities.
“If you were a bigger semiconductor company you wouldn’t mind having lower margins because the volumes are so good, but because Wolfson is [a relatively small] semiconductor group it doesn’t have those economies of scale. It needs a 50 per cent gross margin to pay for all the research and development it does.”
Concerns about Wolfson’s margins arose as the company seemed to have orchestrated a turnround following the loss of Apple as its biggest customer in 2009 and its worst financial year since its 2005 flotation.
The stock has more than doubled in the past year, as Wolfson began throwing its efforts into the smartphone and tablet markets, a move that lifted turnover by 30 per cent in the year to January 2 from £121m to £157m, and 67 per cent in the fourth quarter.
Wolfson said it expected its gross margin to recover to the target level of 50 per cent in 2011.
The company blamed the margin decline in the fourth quarter on a one-time issue with one of its suppliers, when the semiconductor wafers had yielded to less usable parts than normal.
Mike Hickey, chief executive, called the supplier yield issue “temporary” and said the company expected new product designs to lift margins again in 2011.
The company launched about 30 new products last year, many of which were in the tablet PC space, Mr Hickey said.
Wolfson reported a pre-tax loss of $11.2m (£6.9m) in 2010, down from $14.8m a year earlier, but Mr Hickey said the company’s biggest concern at the moment was focusing on new revenue growth and maintaining its full-year gross margin, as it did for the full year.
Losses per share narrowed from 8.88 cents to 5.71 cents.
The shares dropped 12p to 272p on Tuesday.
Get alerts on Technology sector when a new story is published