Squeezed margins take shine off Wolfson’s Q4 sales spurt

WARNINGS of lower margins sounded a sour note amid bumper sales figures from audio chip-maker Wolfson Microelectronics today, driving shares lower despite its return to profit.

The booming popularity of smartphones and tablet computers helped the Edinburgh-based outfit grow revenues by 52 per cent in the final three months of 2012, with its audio chips used in many of the top-selling devices.

Wolfson expects similar year-on-year sales growth in the current quarter, but warned a different mix of products being shipped will mean a lower-than-average gross margin of 41 per cent.

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Chief executive Mike Hickey told The Scotsman that the guidance was only for the current quarter and that he expected margins to recover strongly in the second half of the year.

Gross margins are forecast to regain the company’s typical levels above 45 per cent as its mix shifts back to more value-added products and production of the latest microphone chips reaches a more economic scale.

The company reported revenues of $56.1 million (£35.8m) in the fourth quarter of 2012, up from $36.9m in the same period a year earlier.

That helped the firm to return to profit with a $500,000 surplus at the operating level, compared to a fourth-quarter loss of $7.2m in 2011.

Wolfson’s audio chips are built into some of the most-popular tablet brands, including Amazon’s Kindle Fire HD, Microsoft’s Surface and Samsung’s Galaxy Note.

Consumers have found space in their squeezed budgets for the latest must-have gadgets, but the firm still sells chips for more-traditional consumer electronics, which have struggled to sell amid an economic downturn.

Hickey said that if the consumer outlook improves then suppyling chips to other consumer products could provide a further boost to sales. He added: “More and more devices are becoming like smartphones and that’s driving most of our near-term growth. Over time, smart devices are becoming more pervasive in consumer electronics, from TVs and game consoles to washing machines and air conditioners.

“They are controlled by smartphones and adopt similar architecture and interfaces and that offers opportunities for our devices. We think this is an evolving trend and we’ve focused our innovation on the fact that an increasing number of devices will need great audio for voice control.”

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He said the firm had led a transition to separate “stand alone” audio rather than integrated systems and succeeded in building a supply link with most of the major consumer electronics brands.

Alexandra Jarvis, an analyst at Peel Hunt, said: “Aside from the gross

margin issue, there are plenty of

positives in Wolfson’s results.

“We retain our ‘buy’ rating due to the momentum in the business in terms of design wins and end-customer diversification, as well excellent exposure to fast-growing device categories. This is now being reflected in revenue growth.

“It is certainly disappointing that there seem to be ongoing manufacturing issues moderating profit growth. However, this is not sufficient yet for us to change our view on the stock.”

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