REUTERS: Amid a bleak earnings season for semiconductor companies as China's economy slows, Xilinx Inc provided a bright spot for the sector: Revenue growth driven by the early phases of 5G wireless data networks, earlier and sharper than analysts had expected.
Those networks, up to 100 times faster than existing ones, will generate billions of dollars for gear and chips. Carriers in South Korea and China plan to roll out 5G networks this year, and handset makers, including Samsung Electronics Co Ltd , plan to make phones work on those networks.
Unexpectedly strong spending on those networks helped raise the San Jose, California-based company's revenue 27 percent in the fourth quarter, even though most analysts believe the networks will not be widely available until 2020.
"The start of this ramp is happening faster than we had thought," Xilinx Chief Executive Victor Peng said on the company's quarterly earnings call on Jan. 23. "And the strength for coming out of the gate is pretty strong."
As the roll out accelerates, though, Xilinx will face competition from other chipmakers with similar products that allow constant tweaking of the new technology, analysts said.
And, as standards mature, the programmable chipmaker will face competition from custom made chips that are less flexible but faster and cheaper, said Kinngai Chan, an analyst with Summit Insights Group.
Intel Corp's Altera division, for instance, also makes so-called programmable chips and is poised to benefit from 5G, though Kevin Cassidy, an analyst with Stifel, noted that the unit only makes up about 3 percent of Intel's revenue.
Marvell Technology Group Ltd already makes a custom chip, and Qualcomm Inc is planning to release one. Some large network gear makers are making their own chips, such as Nokia's ReefShark chipset released last year.
It typically takes at least a year for custom chips to start eating away at market share of programmable chips, said Tristan Gerra, a senior research analyst with RW Baird.
That pushes the risk for Xilinx losing business in China and Korea out to next year, but by that time, U.S. carriers will be busy building out networks, giving Xilinx new chances to win business.
And Xilinx, meanwhile, is selling other 5G products, such as a one-chip combination of analog radio chips and digital processors that aim to replace several components from the likes of Analog Devices and Texas Instruments.
"This integration should make Xilinx’s design wins more sticky – we think Xilinx will continue to see design win activity for 5G in multiple years ahead," Baird's Gerra said.
On Xilinx's earnings call last week, its CEO pointed to those chips as a way to hang on to 5G business even as custom chips start to gain share.
(Reporting by Stephen Nellis in San Francisco and Sonam Rai in Bengaluru; editing by Peter Henderson in San Francisco; Editing by Marguerita Choy)