Semiconductor company PortalPlayer (Nasdaq: PLAY) is in a world of hurt right now, though its most recent quarter was a fairly smooth ride.
The company makes system-on-a-chip designs that power nearly all of the current models of Apple (Nasdaq: AAPL) iPods, and though PortalPlayer refuses to drop names, as much as 90% of the company's revenues are thought to stem from that very successful partnership.
Two weeks ago, the hammer fell on PortalPlayer. Apple decided that it needed fresh blood inside the next generation of media players, due for a fall release, and its old partner is left supplying parts for devices that will soon be obsolete. PortalPlayer's earnings release for the first quarter shows strong sales and $0.26 per diluted share, far short of estimates but way better than what lies ahead. It's a good thing that the balance sheet is squeaky clean, because there may be some cash-burning quarters to come.
The company lowered revenue guidance for the next quarter substantially. Rather than $45 million to $70 million and gains comparable to this quarter's, management now expects $30 million to $40 million and a possible net loss. That seems to indicate that Apple is already starting to switch its manufacturing processes from the old PortalPlayer models to the new, as-yet unannounced, devices using Samsung chips. By the fourth quarter, 95% of PortalPlayer revenues were expected to come from the next generation of chips, which were designed specifically to run those new iPods. But that is no longer in the cards, and it leaves PortalPlayer floundering for new outlets for its products.
It's not just a case of Apple backstabbing a partner, though. The new chip is running six weeks behind schedule and has not yet been released to manufacturing. Apple may have tired of waiting for a new platform and turned elsewhere out of a desire to keep its own deadlines.
The beleaguered chipmaker needs to find new partners, pronto. Maybe it can lure Creative (Nasdaq: CREAF) away from its exclusive use of Texas Instruments (NYSE: TXN) chips, or perhaps somebody like Harman (NYSE: HAR) could use a multimedia solution with Wi-Fi wireless networking capabilities. Somebody needs to fuel the coming video-on-demand revolution, after all, and PortalPlayer could be desperate enough to give its new partners a great deal. If you get kicked out of one revolution, you can still start another one.
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Fool contributor Anders Bylund enjoys digital entertainment, no matter who made the chips inside. He does not own shares in any company mentioned, but if he did, he would tell you. The Fool is serious about disclosure.
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