Bluetooth group CSR sees shares slump after contract loss

Shares in the bluetooth specialist CSR crashed by a quarter yesterday after one of its largest customers, a manufacturer of mobile phone headsets, unexpectedly cut short an order.

Less than two months after saying revenue would grow by almost 50 per cent in the third quarter, CSR slashed its second-half outlook. It now expects growth of between 29 and 32 per cent in the third quarter, falling to about 24 per cent in the fourth. The news triggered a 25 per cent fall in CSR shares, down 288p to 856p, wiping £370m off its market valuation.

John Scarisbrick, the chief executive of CSR, has reassured analysts the warning did not relate to increased competition. "We do not believe this is related to market-share loss ... in the third quarter, we believe we have gained market share," he said. He conceded headset sales remain a volatile part of its business due to the high level of promotional activity related to the product.

Lee Simpson, an analyst with Evolution Securities, said: "This shows that customers can turn on a sixpence and cancel a contract. The third quarter is historically CRS's strongest period so this is quite a bump in the road."

CSR makes semiconductors using bluetooth technology that enables a short-range wireless connection between devices such as headsets and mobile phones. On average, one bluetooth headset is sold for every four mobile handsets purchased. Paul Goodridge, the finance director, said he expects that ratio to continue into 2007. Yet analysts fear that sales of bluetooth headsets could slow as cheaper handsets start to dominate volume growth in the mobile phone market.

The warning relates to one large customer cutting short an order for headsets after an inventory build-up. CSR refused to name the client as semiconductor companies have non-disclosure agreements with customers. CSR derives about 60 per cent of its sales from its top five customers who include Sony, Nokia, Sharp, Hewlett-Packard and Microsoft. Ominously, CSR also alluded to further changes to its supply arrangements with two customers outside the headset sector.

CSR remains confident over its prospects. It still expects a record third quarter and expects further growth in 2007. Since it listed in 2004, CSR has achieved stunning growth in the bluetooth market. Despite competing against much larger companies, the Cambridge-based company has dominated the sector.