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4/19/2006
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Apple Decision Deals Chipmaker A Serious Blow

PortalPlayer, which gets 90% of its sales from a media processor used in the iPod, said it won't be supplying Apple's new midrange and high-end flash-based MP3s.

SAN JOSE, Calif. — High-flying PortalPlayer Inc. late Wednesday (April 19) said that it has been dealt a major setback at Apple Computer Inc., which is apparently switching media processor chip vendors in its iPod lines.

PortalPlayer (San Jose) generates over 90 percent of its sales from Apple’s iPod; it makes the media processor for the MP3. But PortalPlayer said that it has recently been advised that the follow-on to its PP5021 media processor chip has not been selected by Apple for use in its new mid-range and high-end flash-based iPods.

The chip company believes that the PP5021 will continue to be used in other members of the iPod family. It did not elaborate, however.

The follow-on chip was expected to be available in the second half of 2006. That chip is believed to be the PP5024, which represents the company’s entry into the MP3-based flash arena.

Based on a system-in-package (SIP) technology, the PP5024 is a 130-nm design that is said to integrate the media processor, peripheral input/output (IO) controllers and analog audio and power management functions on the same device. It enables high-performance audio jukebox features such as subscription music services and database caching support in a low-power flash platform.

Analysts were stunned by the news at Apple. “We previously thought that PortalPlayer would remain the processor supplier for the iPod Nano in 2006 given their operating system and scroll wheel software stickiness, and the operational risk to Apple should they decide to make a change with their processor/software supplier,” said Craig Berger, an analyst with Webbush Morgan Securities, in a report issued Thursday (April 20).

“We believe Samsung, SigmaTel, Actions, or LSI Logic might have won the iPod Nano chip socket, in that order of probability,” he said. “It is likely that LSI Logic will not win this business with Apple, and given their lower PortalPlayer unit volumes we believe LSI's EPS may be negatively impacted by $0.02 to $0.03 per quarter starting in the June quarter.”

It is unclear which vendor took the design win at Apple (Cupertino, Calif.). Apple itself is seeing a slowdown for the iPod due to seasonal factors.. Still, Apple reported healthy gains in first quarter revenue and profits on the strength of strong computer and iPod shipments.

On the other hand, PortalPlayer is expected to see its bottom line suffer as a result of the bad news. The company is developing and selling chips for non-MP3 applications, but it has yet to make a dent in the arena.

This “has a disastrous impact on PortalPlayer's profitability in light of the fact that iPod Nano chip shipments comprise 70 percent of our 2007 revenue forecast for PortalPlayer,” Berger said.

In 2005, 56.7 percent and 36.3 percent of PortalPlayer’s overall sales were generated from Taiwan’s Inventec Co. Ltd. and Hon Hai Precision Industry Co. Ltd., respectively. Inventec and Hon Hai make the iPod on an OEM basis for Apple.

Citing the iPod boom, the PortalPlayer recently said revenue for the fourth quarter of 2005 was $78.2 million, up 35 percent from $57.9 million in the third quarter of 2005 and up 75 percent from the $44.7 million in the fourth quarter of 2004.

GAAP net income for the fourth quarter of 2005 was $23.8 million, or $0.92 per diluted share. GAAP net income in the third quarter of 2005 was $10.3 million, or $0.40 per diluted share.

The company expected revenue to be in the range of $70 million to $80 million in the first quarter of 2006. GAAP net income per diluted share for the first quarter is expected to be in the range of $0.28 to $0.38.

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