Audio technology developer Wolfson Microelectronics (WLF) seems to be in a bit of a rut. Faced with falling smartphone volumes the company has struggled to fight off margin erosion, hitting full-year results hard. While first-half revenues increased 32% that progress has been entirely undone during the July to December period.


In fairness, this was expected, particularly with US platform supplier Qualcomm currently winning most of the 4G device work available and device manufacturers seemingly happy to take the US supplier's bundled audio solution.


Despite only a marginal miss on full-year expectations it would seem the market was rather hoping for a bit more optimism on the near-term outlook, and its relative absence is what has seen the shares fall again, down nearly 8% to 120p. Guidance for first quarter 2014 revenues of $28 million to $36 million would imply a rough 30% fall year-on-year, prompting analysts at stockbroker Numis to slash 2014 full-year revenues from $215 million to $189 million.

WOLFSON MICROELECTRONICS - Comparison Line Chart (Rebased to first)

Competition remains one of the bigger problems facing Wolfson. This may change as more 4G smartphones become increasingly the norm. That's certainly what Wolfson is hoping for - but there is little hard evidence to that effect right now, so investors are being asked to take this on faith.


There's also plenty of non-Qualcomm platform users too, particularly in China's cheap and cheerful handset manufacturing space. Wolfson's Audio Hubs are gaining traction, with 18 new product lines announced last year, on top of Samsung's ongoing support.


But it doesn't look like the competitive environment will improve any time soon, and all the while that's eating into gross margins, down from 43.9% to 42.2%.


Hacking away at costs is what the company is doing, which is sensible so long as costs don't include research and development. This should provide the future innovations to fuel longer-term growth. In the meantime, while positive news on product pipelines is hoped for, the timing remains unpredictable, and that means while Wolfson's technology retains long-run strategic value, the important timing of when it might crystallise it is anybody's guess.

Issue Date: 05 Feb 2014