CurrentOfferings.com Story:

PortalPlayer rises on debut

by David Shabelman, TheDeal, November 19, 2004

PortalPlayer Inc., which makes chips and software for digital media players such as Apple Computer Inc.'s iPod, went public Friday and made sweet music, rising 52% in its first day of trading, to close at $25.80.

A strong opening was virtually a given because of all the buzz surrounding the Santa Clara, Calif.-based company.

On Thursday, Nov. 18, PortalPlayer's 6.25 million share initial public offering priced at $17 a share. This was above an upwardly revised $14 to $16 price range, allowing the company to raise $106.3 million.

The day before, the range was raised from $11 to $13.

PortalPlayer is "the unsung hero of the iPod," said Michael Gartenberg, vice president and research director with JupiterResearch.

PortalPlayer powers iPod, a mini-jukebox that can store between 1,000 and 10,000 songs. "What Intel [Corp.] was to the PC, PortalPlayer is to the iPod," Gartenberg said.

According to research firm IDC, unit shipments of hard-drive-based portable MP3 players such as the iPod are expected to rise to more than 25 million in 2008 from 2.67 million units in 2003.

Apple commands a good chunk of that market. The Cupertino, Calif., company shipped more than 2 million iPods in the third quarter and is expected to continue dominating the market.

But even with iPods flying off the shelves, PortalPlayer hasn't been able to turn a profit.

For the first nine months of 2004, the company lost $131,000 on sales of $47.8 million.

PortalPlayer also is heavily dependent on iPod's fortunes. Of the $20.9 million in revenue the company recorded in the third quarter, 92.5% came from Taiwan's Inventec Appliances Corp., which manufactures the iPod for Apple in China.

The overreliance on one customer has some watchers preaching caution.

"For all intents and purposes, it's a one-customer company," said Tom Taulli, co-founder of CurrentOfferings.com.

"They picked a good customer in Apple, but [CEO] Steve Jobs is ruthless, and he understands that the value of the iPod is not the underlying technology but its coolness factor."

Taulli added "over time I think Jobs will squeeze PortalPlayer on pricing to get better margins on his product."

Taulli said it is often difficult for companies that develop a killer application to transition into another area, as PortalPlayer may need to do.

But now that it is a public company, Taulli said PortalPlayer is in a better financial position to develop different products or buy a company in a new alternative market.

"They should be applauded for the work they've done. It's just what do you do after the iPod," Taulli said.

Gartenberg agreed. The challenge for PortalPlayer "is for the company to go beyond the iPod and Apple and develop its own brand," he said.

Gartenberg suggested that some of these opportunities could come with cell-phone makers, who will rapidly deploy more media-centric products.

The challenges PortalPlayer faces are not lost on the company. In its prospectus, the company indicated it will explore new markets for its technology, including software that allows the viewing and storing of photos.

PortalPlayer also mentioned expanding its customer base to makers of cameras and mobile handsets.

"They have plans beyond the iPod," a source close to the company said. "It's a very good company with very good people. But at the same time, they don't want to alienate such an extraordinary customer because the iPod is the hula hoop of the moment."

Another source said PortalPlayer was peppered with questions from investors during its road show regarding its reliance on Apple, and if the company did not recognize the need to diversify its revenue streams before, it certainly does now.

"That's going to be their challenge," the source said. "But with the money they're getting from the IPO, they can accelerate those efforts."

While PortalPlayer powers the most popular MP3 player, other companies such as Philips Semiconductors and SigmaTel Inc. also bring life to other MP3 devices.

Austin, Texas-based SigmaTel, whose shares have doubled in price since it went public in 2003, provides the technology for Singapore-based Creative Technology Ltd.'s Nomad Jukebox.

Just last week, Creative Tech CEO Sim Wong Hoo said his company would spend $100 million in 2005 in marketing efforts taking on iPod. "The MP3 war has started, and I am the one who has declared war," Sim said.

PortalPlayer also competes with other semiconductor companies such as Intel and Texas Instruments Inc.

Taulli said acquiring PortalPlayer could be a way for companies such as Intel and TI to quickly enter the portable device arena, though that prospect just got a little more expensive with PortalPlayer going public.