Wolfson chief faces questions over high costs

Analysts will urge Mike Hickey to justify Wolfson's current overheads
Analysts will urge Mike Hickey to justify Wolfson's current overheads
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WOLFSON Microelectronics chief executive Mike Hickey will come under pressure from the City this week to justify the Edinburgh-based chip maker’s high overheads while the company’s losses widen.

Revenues for 2011 are expected to be flat at about $157 million (£99m) when the company posts its full-year results on Tuesday, but analysts at Peel Hunt think sales would need to be closer to $200m to justify the company’s current costs.

Hickey’s defence is expected to focus on the need to develop products that will help to grow the company’s profits, which requires upfront investment in paying design staff.

Pre-tax losses at Wolfson, which was spun out of Edinburgh University in 1984 and floated on the stock market in 2003, are expected to have widened to about $21m in 2011 from $11.2m in 2010.

The company was dealt a blow in April when one of its biggest customers – which, at the time, house broker Citi suggested was Samsung – ordered fewer chips than expected after choosing to promote a different smartphone.

Wolfson may also have suffered in the past year from the slowdown in sales at Research in Motion (Rim), the Canadian firm that makes the BlackBerry smartphone.

The firm is also unlikely to have benefited from last month’s bumper figures from Apple, because none of its chips are believed to have been included in the iPhone or the iPad.

A pair of profit warnings in the summer caused Wolfson’s share price to fall, even before the wider market turmoil took its toll in August.

Shares have risen from a low of 96p in late November to close at 160p on Friday amid bumper results from Apple, LG and Samsung, which is Wolfson’s biggest customer.

Rival chip designer ARM Holdings last week posted a 45 per cent rise in its first-quarter profits to £69m on the back of a 21 per cent increase in revenues to £137.8m, which also gave the sector a boost.

Analysts said Wolfson will have to reassure investors that it is worth the higher price.

“Cost-cutting or a clear underpinning for higher growth forecasts are required to support the current valuation,” analysts at Peel Hunt said.

The City will be looking for news from Hickey on how many of the company’s “design ins” – when its chips are chosen to feature inside electronic equipment – are being translated into solid orders and higher sales.

One area in which Wolfson is expected to succeed in its current financial year is “audio hubs” – chips in mobile phones that contribute to the quality of music and phone calls.

Analysts expect the firm to return to profit at the underlying operating level in 2012, but warned the Eurozone debt crisis may dent consumer spending and therefore sales of gadgets such as smartphones.

Wolfson made its name through its components for hi-fis and other audio equipment, and so analysts are also keen to find out more about its current sales of chips for noise-cancelling headphones and microphones for mobiles.

The company’s products feature inside devices as diverse as printers, televisions, Blu-ray disc players and electronic book readers.