Sales surge looks set to push Wolfson back into the black

WOLFSON Microelectronics, the Edinburgh-based maker of chips for smartphones, hi-fi gear and tablet computers, is expected to swing back into the black this year on the back of strong sales momentum.

The company yesterday posted a 30 per cent rise in turnover to $157.3 million (97.6m) for the year to 2 January on the back of a 52 per cent rise in revenue from mobile phones and 76 per cent from smartphones.

Pre-tax losses narrowed from $14.3m to $11.2m with the firm returning to underlying profitability in the second half.

But shares fell 4.2 per cent to 272p after analysts were disappointed with fourth-quarter margins, which had taken a dent due to a production problem at one of Wolfson's suppliers.

Chief executive Mike Hickey told The Scotsman: "We saw revenue growth of 67 per cent in the fourth quarter, which has given us great momentum.

"That has continued into this year and we're encouraged by receiving a record number of 'design-ins' in 2010, on the back of a record year in 2009."

Design-ins occur when manufacturers choose Wolfson chips to form part of larger components, which consumer electronics companies then select to place inside their products.

The global smartphone market was worth about $100 billion last year and is expected to rise to about $140bn in 2011.

Chief financial officer Mark Cubitt added: "I'd be very disappointed if we didn't return to profitability during 2011. The consensus forecast among analysts is now for us to deliver both an underlying and pre-tax profit for the full-year."

But gross margin fell from 50.9 per cent to 47 per cent year-on-year in Q4 after problems with the quality of components produced by one of its suppliers, referred to as "supplier yield".

Cubitt said: "The supplier has put steps in place to stop the problem recurring so we believe this will be a one-off event."

Timothy Shaw, an analyst at Citi, agreed. He said: "Given excellent execution on design-ins and sales recovery, we believe it would be wrong for the market to punish Wolfson for short-term supplier yield issues."

One of Wolfson's power management chips was last week included in the design for the Tegra 2 chips being made by Nvidia, which will run the next generation of smartphones and tablet computers. The Scottish company - spun out of Edinburgh University in 1984 and floated in 2003 - already makes chips for phone manufacturers such as Samsung and LG.

Andrej Krneta, an analyst at Jefferies International, which carries a "buy" rating on the firm, said: "Wolfson's design-win prowess has led the share price recovery from the 2008 lows. It has transitioned from a recovery play to a European semiconductor out-performer in 2010."But Ian Robertson at Seymour Pierce, which carries a "sell" rating on Wolfson, warned: "The statement is bullish with plenty of commentary about design-ins and exciting growth statistics but there is still little evidence of the AudioPlus strategy in power management, microphones and noise cancellation actually coming through in revenue terms."