Xilinx Tumbles on 5G Shortfall but CEO Confident in Long Term

Victor Peng says the complexity of 5G wireless is delaying sales of chips, and the lack of momentum around a Phase II U.S.-China trade pact is making business uncertain.
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Xilinx  (XLNX) - Get Report shares may be plummeting on the weaker-than-expected results and guidance it reported on Tuesday, but CEO Victor Peng told TheStreet after its report that “we’re very confident about the long-term.”

Shares of the programmable chip vendor were down 9.6% to $89.11 in early trading Wednesday after the company reported fiscal Q3 revenue ever so slightly below analysts’ expectations, and profit per share slightly ahead, but forecast revenue this quarter well below consensus, citing a weaker-than-expected market for 5G wireless equipment that uses Xilinx chips.

Xilinx said it will cut 7% of its global workforce, mainly in selling, general and administrative roles, to be able to maintain operating profit despite the shortfall in revenue. The operating cost cuts are meant to preserve capital for R&D efforts such as new lines of chips.

Peng acknowledged in a phone interview with TheStreet that “clearly, where we are today is not where we expected to be” only a couple months ago. He called the layoffs “truly painful steps,” but “proactive” in nature to deal with the reduced outlook.

Aside from the shortfall in wireless, Peng indicated that the trade dispute between the United States and China continues to weigh on the business. In fact, he sounded less hopeful for a resolution than he did back in July, when he told TheStreet, “we don't want to be rash” in predicting the worst.

Regarding a “Phase I” agreement recently reached between the two countries, Peng said, “We’re happy to see some progress on IP [intellectual property issues], but in terms of how it helps our business, it doesn’t.” Added Peng, from what he could tell, “there isn’t any energy around Phase II any time soon, so trade remains uncertain.”

Asked if the 7% layoffs were enough or whether there would be more, Peng said “we tried to be very thoughtful with this, it was very difficult to do; from everything we know now, this gets us to the right place.” He added, however, there is “a lot of uncertainly in the system,” meaning, global trade.

As for the shortfall in wireless, they seem to confirm the cautious outlook that TheStreet expressed last year about the roll-out of 5G, namely, that it’s not happening as fast as expected.

Peng said he’s hearing through his customers, companies that sell base-station radio equipment to wireless operators around the world, that operators are “taking a pause” before spending on further build-out. But the reasons for that pause also sound like they could be structural in nature, a hesitation by carriers born of uncertainty rather than a mere issue of timing. 

Carriers are “not seeing demand materialize across regions” for 5G as they had expected to, he said on a call with analysts following the earnings report. He also said carriers were “seeking more profitability before they invest further.”

Asked by TheStreet in the phone interview about those comments, Peng clarified, saying “I don’t feel I have deep insight into this." But when pressed on the matter of possible structural issues with 5G's roll-out, Peng conceded there might be larger concerns. “Deployment of this technology is still an investment, and there are still discussions of business models" as far as carriers are concerned, he said.

Unlike previous wireless upgrades, 5G, Peng said, “is much more complex and challenging; there are multiple wireless standards, not just one, and multiple different spectrum allocations, and multiple different technologies.”

On the positive side, Peng said initial test samples of one of its major new products, “Versal,” has generated a lot of excitement. That chip can go into 5G radio applications, and also into artificial intelligence applications. “It takes time for complex applications like that to ramp up to full volume, but once it does, that becomes a very solid business.”

Asked whether it's a good time to buy the stock, Peng demurred with a laugh, saying that his general counsel might not approve of such remarks. “I would say, again, we’ve taken some difficult, proactive steps, but we remain very confident about the long term, and focused on getting back to a strong growth rate, but it’s going to take longer to get there than we thought.”