iPod Contract Loss Sends Semi Firm's Shares Tumbling

Despite the chip manufacturer's assertion that growth will absorb the impact of the loss, the news its semiconductors will not be used in the iPod nano and iPod touch players due this autumn sent its shares plunging as much as 25 percent and saw Citigroup analysts downgrade the stock from "buy" to "hold." The shares closed down 18 percent.

Biggest Buyer

Apple is Wolfson's largest customer, accounting for 18 percent of last year's sales with contracts for its iPod and iPhone products. However, Wolfson says its forecasts for the year will still be met, and confirmed first-quarter guidance of between US$44 million and $48 million.

"Revenue from applications other than portable media players grew by 22 percent in 2007 and represented 76 percent of the total," said the company. "Consequently, Wolfson expects the impact on revenues from the portable media player design loss to be mitigated by stronger than previously anticipated growth across its customer base and application areas."

The company has had a series of setbacks in recent months. Its shares have fallen 56 percent in the past year. Financial results for 2007 showed operating profit down 10 percent on 2006. Forecasts were lowered last month in response to concerns about the economic climate squeezing sales of electronics.

Too Optimistic?

Mark Davies, an equity analyst at Panmure Gordon, said: "Wolfson says the losses will be offset by other areas, but, at this stage in the year, with issues around consumer confidence and very little visibility in the semiconductor market, believing the forecast that everything is going to be OK is a leap of faith."

Wolfson chips have already been dropped once by Apple when the deal for the iPod classic went to the U.S. manufacturer Cirrus Logic (Nasdaq: CRUS) last year. However, the fact the UK firm is holding on to the iPhone business offers a glimmer of hope. The iPod market is maturing, putting pressure on hardware prices, prompting some analysts to suggest it was the premium price of Wolfson's high-end chips that closed the door on the deal. In contrast, the iPhone is a high-end gadget in a new market, and it could ultimately cannibalize the music player's customer base.