(By Mani) Volterra Semiconductor Corp. (NASDAQ:VLTR) could deliver share gains in Server and Notebook power management, while maintaining consistently high margins.
Fremont, California-based Volterra makes analog and mixed signal power management semiconductors for the computing, storage, networking, and consumer markets. In terms of products, the company offers integrated voltage regulator semiconductors, integrated power protection and distribution semiconductors, and scalable voltage regulator semiconductor chipsets. The company continues to develop new products with the aim of expanding its served addressable market.
Currently, Volterra holds 82 patents (81 US and one foreign), while 107 more are pending (64 US and 43 foreign), with expiration dates ranging from December 2017 to January 2030.
As a major supplier of Server and Storage power management, Volterra counts leading vendors International Business Machines (NYSE:IBM), Hewlett Packard Co. (NYSE:HPQ), Dell (NASDAQ:DELL), and Fujitsu as customers. According to Gartner estimates, these four OEMs represented 78 percent of the Server market in 2011. Volterra's largest customer, IBM accounts for approximately 26% of revenue for 2011.
The company is a leading vendor of notebook power management to Lenovo, Sony, HP, Acer, Dell and Fujitsu, who collectively hold about 60 percent of the global PC market. Significant networking customers include Cisco Systems (NASDAQ:CSCO), Juniper Networks (NYSE:JNPR), Huawei and Alcatel-Lucent (NYSE:ALU).
"Given the nature of the end-markets, VLTR's services to a high customer concentration is likely to persist," Deutsche Bank analyst Bob Gujavarty said in a client note.
Volterra is highly exposed to the Server and Storage market that accounts for 60 percent of revenue. But in recent years, the growth was driven by gains in the Consumer and Portable market. Though, the gains in Consumer and Portable have boosted revenue growth, it hurts margins. Gross margin dropped below 60 percent in 2011, and the company is unlikely to revisit a 60 percent plus margin in the near term.
"However, we believe the mix induced GM pressure has abated, and the company should see modestly higher margins in 2012E and 2013E. We are positive about VLTR's ability to grow revenue faster than the market as the company is poised to grow its content and market share on platforms ramping in 2012 and 2013," Gujavarty said.
Meanwhile, the launch of Romley platform by Intel Corp. (NASDAQ:INTC) in early 2012 is a catalyst for server growth in 2012 and 2013. Romley offers improved performance, better power efficiency, and ushers in the 10G Ethernet.
Romley presents a significant opportunity for Volterra as the company is poised to grow its market share and content on Romley platforms.
"We estimate VLTR content of $50-55 on Romley platforms and as VLTR adds new design wins, its market share should approach 40%. Brickland in 2013 is a relatively minor refresh for high-end servers but design activity for Grantley in 2014 has already begun," the analyst added.
In addition, the growing capability of x86 servers will be a tailwind for Volterra going forward. The proliferation of multicore x86 servers also resulted in a dramatic increase in average memory per server and a corresponding increase in power consumption.
"We believe Volterra is very well positioned to gain market share in high-performance power management. The company has established a dominant position in Servers and is steadily growing the Notebook and Networking businesses," Gujavarty noted.
Volterra, which competes with Intersil Corp. (NASDAQ:ISIL), Infineon, Texas Instruments, Inc. (NASDAQ:TXN), MaximIntegrated (NASDAQ:MXIM), Linear Technology (NASDAQ:LLTC) and International Rectifier (NYSE:IRF), could deliver above-market revenue growth and modest margin improvement due to a rebound in Server and Storage revenue.
The company is expected to gain share across new platforms and although the pace of the ramp may be slow, there is little risk to the company's competitive position at leading server OEMs.
"VLTR's financial performance is highly correlated to products cycles in Servers and Notebooks but the company is less reliant on the highly volatile consumer electronics markets, which we view as a positive," Gujavarty added.