August 11, 2004 11:39 AM PDT

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PortalPlayer, the Silicon Valley company whose chip powers the iPod, is looking to play its tune for Wall Street.

Santa Clara, Calif.-based PortalPlayer filed registration papers last week with the Securities and Exchange Commission, the first step toward an initial public offering. The company said it hoped to raise as much as $75 million. PortalPlayer did not say how many shares it expects to sell in the offering.

One of the challenges for the company in going public is that its fortunes are tied so closely to Apple Computer's popular iPod digital music player. Although PortalPlayer's software and chips go in players from companies such as Aiwa, Philips, Rio and Samsung, the overwhelming majority of its business comes from the iPod, with roughly 85 percent of last year's sales stemming from the iPod. In the filing, PortalPlayer said it is actively trying to diversify its business.

PortalPlayer has posted losses in each of its past three years, but the company's losses have narrowed each year as its sales have continued to grow. In 2001, PortalPlayer had revenue of $1.9 million and a loss of $25.2 million; in 2002, the company lost $22.5 million on revenue of $8.8 million, and last year it lost $8 million on revenue of $20.9 million.

PortalPlayer designs but does not actually manufacture its chips. That work is done by chip foundry Taiwan Semiconductor Manufacturing Company and by LSI Logic, which also holds a 5.6 percent stake in the company.

The company has 134 workers, about half of whom are engineers in India, with most other employees divided between the company's Santa Clara headquarters and an office in Kirkland, Wash. The company saw its ranks thinned by layoffs in August 2002 and January 2003, which added up to 60 job cuts. The latter round of layoffs followed the departure a month earlier of John Mallard, one of the executives who helped launch the company.

However, PortalPlayer said it has since added 10 workers and expects to continue hiring based on its expected growth rate.

That said, the company lists in its registration form a host of potential pitfalls, ranging from its narrow customer base to the resources of chip rivals such as Intel and Texas Instruments.

One of PortalPlayer's smaller rivals, SigmaTel, went public last year. Although smaller than Intel and TI, SigmaTel's sales are several times that of PortalPlayer and the company is also profitable. Still, SigmaTel has had a bumpy ride on Wall Street. Its shares briefly soared but are now trading around $16, half of the peak reached in January.

The downsides for Apple's market-leading MP3 player could also be seen as risk factors for PortalPlayer. PortalPlayer warns, among other things, that the consumer electronics market is known for quickly becoming commoditized, that buyers tend to expect more features for the same or a lower price and that Apple's player will face stepped-up competition once Microsoft has software that allows rival portable devices to carry music that is rented as part of a subscription.

PortalPlayer also describes the functions of its chips in the filing--a list of features Apple could choose to add to the iPod without having to change chip suppliers. Among the technologies PortalPlayer said it supports are Bluetooth and Ethernet networking as well as the ability to create and play photo slide shows that are synchronized to music.

The company's most advanced chip, the PP5020 supports both color LCD displays as well as output to a TV or printer and a connection directly to a digital camera. The company did not list a chip that supports video playback, though it sees that as one direction in which the market appears to be headed. Apple has indicated that it does not see as big a market for portable video-playing devices, noting that music is something that one can enjoy in the background, while movie watching is a more dedicated activity.

PortalPlayer said it has raised a total of $84.9 million in funding and has about $8.8 million of that remaining in cash.

The company said it hopes to trade on the Nasdaq exchange under the ticker symbol "PLAY."

Most of the company's current executives have a background at other chipmakers, with several early employees coming from National Semiconductor and two newer recruits who share a line on their resume from S3, a now defunct maker of graphics chips. CEO Gary Johnson, who joined PortalPlayer last year, is a former CEO at S3 and chief financial officer Svend-Olaf Carlsen, who joined PortalPlayer in June, held a variety of finance posts at S3. More recently, Carlsen was CFO at laptop chipmaker Transmeta.

 

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