First on TMO - Analyst Reiterates Apple to Make Flash-Based Player; SigmaTel Stocks Soars

by , 4:45 PM EDT, October 20th, 2004

Following the report of strong third quarter earnings Tuesday, Thomas Weisel market analyst Jason Pflaum reiterated to clients Wednesday his confidence that semiconductor maker SigmaTel will supply chips for a flash-based music player from Apple Computer that will be released before Christmas.

In an interview with The Mac Observer, Mr. Pflaum cited various sources in Asia for his continued confidence that Apple will release a flash-based player.

"I recently spent two weeks in Asia meeting with a number of folks who are in a position to know details of SigmaTel's supply chain," he said in an exclusive interview with TMO. "Based on our industry contacts, we are confident that one, Apple is planning to launch a flash-based player, and two, SigmaTel is the provider of controller chip for that device.

"Apple's entry (into the flash-based player market) could upset the OEM (original equipment manufacturing) apple cart as the first true 'branded' entrant," he wrote to clients in a report obtained independently by TMO.

Mr. Pflaum is estimating such a manufacturing deal with Apple could be a US$2 to $4 million revenue opportunity for SigmaTel. "The forecast is conservative at best," he told TMO. He said SigmaTel is prepared to meet whatever the demand Apple throws at them to make a new flash-based player. SigmaTel does not manufacturer its own chips, but outsources production to companies in Asia.

Mr. Pflaum believes the product is already in production and will be released by Apple for the Christmas buying season.

"It's a very tight supply chain, but I think this product from Apple will come out by the end of the year," he said. "That could obviously change, but we're pretty confident this will happen and you'll see product on the shelves in December."

SigmaTel officials refused comment on the report. It is Apple's policy to not comment on product strategy.

The SigmaTel-made controller is basically a 'system-on-a-chip' solution that acts as the brains of a flash-based device. Unlike Apple's hugely popular iPod and iPod mini players, the new player would presumably use solid-state flash memory, which has less capacity than hard drive-based players but can make for a lighter and cheaper player.

Mr. Pflaum said SigmaTel is currently the market leader is providing controller chips to flash-based MP3 players worldwide, with a 65% market share.

Sigmatel shares leaped Wednesday, after the semiconductor company surpassed earnings expectations for the third quarter. Excluding items, SigmaTel, based in Austin, Texas, reported earnings of US37 cents a share, which was well above projected earnings of 29 cents a share that had been forecast, on average, in a Thomson First Call survey of analysts.

Shares of SigmaTel (SGTL) closed Wednesday at $28.23, up $4.80, or 20.49%, on volume of 5.3 million shares.

Lending further credance to reports of a flash-based Apple player this quarter is the SigmaTel estimate of a fourth-quarter profit of between 35 cents and 40 cents a share, on revenue of between $55 million and $60 million. Analysts were expecting a profit of 30 cents a share on $44.9 million in revenue.

Thomas Weisel has an investment banking relationship with SigmaTel. Mr. Pflaum does not cover Apple Computer as an analyst for Thomas Weisel.