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Fairchild's Performance Should Improve In The Future

April 26, 2014 | About:
jaggom

jaggom

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Both Apple (AAPL) and Samsung (SSNLF) failed to help chip maker Fairchild Semiconductor (FCS) achieve the growth that analysts were expecting last quarter. The company displayed inconsistent performance as it didn't receive as many orders as it had expected.

Unexpectedly weak

Fairchild has suffered immensely from lower demand from its “other” mobile customer (probably Samsung) and weakness in the Asian budget smartphone market. The company recorded a yearly decline in revenue and a drop in net income. In addition, gross margin also contracted from the year-ago period.

The outlook was also quite dampening, signifying a slowdown in Fairchild’s business. The company was not at par with expectations even during the usually profitable Q4 when orders from mobile customers should be flowing in strongly.

Fairchild supplied a total of five chips for the iPads. It has supplied a couple of chips to iPad Mini Retina and iPad Air. The retina iPad Mini is expected to witness strong sales after a potentially strong December quarter. The iPad Mini with retina's shipments are expected to rise 5 million to 6 million units in the current quarter as estimated by Digitimes.

In addition, Barclays expects good demand for the older iPad Mini with shipment projected at 6 million to 7 million in Q1. But, Fairchild, witnessed lower orders elsewhere.

Fairchild saw increasingly weaker demand from its Asian mobile customers which are reducing inventories. The demand stabilized at a slightly lower level as reported by the company’s management. Samsung was Fairchild’s largest customer with more than 10% of the revenue contribution. Hence, Fairchild faced tough times with Samsung cutting orders for its latest flagship.

Better times

Actually, Samsung had manufactured far too many Galaxy devices at launch, but when demand didn’t pick up as expected, it started slashing orders. However, Fairchild’s other mobile customers are believed to drain their inventories in the December quarter, that indicates improvement in the order patterns for the first quarter.

Now, with Samsung launching its next smartphone flagship, Fairchild will start ramping up production pretty soon. Hence, it might see order inflows from Samsung in the first quarter.

Since the demand environment is not completely favorable so, Fairchild is focusing on improving operational efficiencies to reduce costs. Going Forward, Fairchild’s new 8-inch fab facility in Korea that began commercial production in the previous quarter makes management optimistic about lowering costs. In fact, the improved utilization is believed to help Fairchild save “tens of millions of dollars” annually from the next fiscal year.

Moreover, Fairchild is seeing steady improvements in its other businesses including industrial and automotive. The seasonality had a very minor impact on the industrial market performance which exceeded the expectations and the automotive end-market also performed similarly. The strong demand for Fairchild’s drivetrain solutions is bound to drive the growth for automotive market.

Conclusion

In fiscal 2014, several design wins and better demand Fairchild products is expected to demonstrate modest but steady sales growth in its mobile, industrial, appliance, and automotive businesses. Thus, even though the stock performed poorly in 2013, declining almost 10%, it could still turn the strings in 2014 if the end-markets recover. Hence, looking at the improving signs for Fairchild business in the future, investors could think of picking up some shares.


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