Wolfson Microelectronics, the Edinburgh microchip designer, has suffered a significant setback after losing its contract to supply components for the Apple iPod Touch and iPod Nano.

Failure to renew the deal, which analysts believe accounts for at least 15 per cent of Wolfson’s revenue, led to the Scottish group’s share price dropping by a third in early trading yesterday. Wolfson will continue to provide audio chips for Apple’s iPhone.

Its shares tumbled by as much as 30 per cent to a three-and-a-half-year low of 99p, recovering to 116p by the close, down 26p on the day.

Apple’s withdrawal is the latest blow in a year that has seen Wolfson’s shares fall by almost two thirds. They hit a record high of 560p in June 2006.

The company was considered the bright spark of the UK technology sector when it floated in October 2003, with contracts to supply parts for devices such as the X-Box, Tom-Tom satellite navigation systems and Samsung handsets.

However, it has failed to win big deals with leading mobile phone manufacturers as they move into music-enabled phones, a product that might supplant standalone MP3 players such as the iPod. A general downturn in the technology sector, combined with Wolfson’s failure to maintain high growth expectations, has seen its shares steadily decline.

Last year the company lost its contract to supply microchips for the iPod Classic. It was also forced to reduce internal growth forecasts earlier this year, fearing a reduced consumer appetite for high-end gadgets.

Industry sources worry that the loss of the iPod contract may be not be the end of the chip designer’s troubles.

Earlier this month Wolfson said that John Carey was resigning as a nonexecutive director after nine years, for seven of which he served as chairman. Mr Carey, one of the founders of AMD and an instrumental force in Wolfson’s early success, is due to step down from the board today.

A source familiar with the matter said: “The fact John Carey is leaving suggests this could be much more serious than just a contract.”

In a business update yesterday, Wolfson admitted that it had lost the contract. Due to nondisclosure agreements, the company could say only that it would not be supplying parts to “a major Tier 1 customer” in “the next generation of players to be launched during the third quarter this year”. Analysts said that the products are Apple’s iPod Touch and iPod Nano.

Cirrus Logic, whose share price is $6.58 on Nasdaq, is believed to have won the contract.

Wolfson emphasised that the update was not a profit warning. Reiterating its guidance for this year’s first quarter in the range of $44 million to $48 million, it said that it expects full-year revenue consistent with market expectations. It added that a strong performance from its other applications, such as handsets and GPS systems, would mitigate the setback, as it continues to diversify away from music players.

Analysts at Cazenove said that confidence in the current full-year forecasts required a “leap of faith” from investors in the light of the news, and downgraded 2008 revenue forecasts to $245 million, against $230 million last year. Although conceding that the company had “a whole string of positives”, Nick Hyslop, an analyst for RBC Technology Research, said: “Right now it is bad news in a bad market.”

Vital parts

— Wolfson is a leading supplier of high performance mixed-signal chips for the digital consumer market

— Its ultra-high performance flagship products are used by some of the world’s leading high-end hi-fi manufacturers

— It has created more than 80 products for the digital market

— They are vital for products such as digital televisions, set-top boxes, hi-fis and DVD players and help to realise the full potential of portable devices

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