How Apple Pulled The Rug Out From Under Audience

Shares of Audience Inc (NASDAQ:ADNC) have collapsed by over 67% today after the company announced that the main customer for its noise-filtering chips, Apple Inc. (NASDAQ:AAPL), is not likely to use its technology in its forthcoming, latest iPhone.

How Apple Pulled The Rug Out From Under Audience

Audience Inc (NASDAQ:ADNC) has been a member of Apple Inc. (NASDAQ:AAPL) supply chain since 2008, and feeds its chips to Foxconn and Protek Ltd., the manufacturers of the phones on behalf of Apple. Apple’s new phone is rumored to be launching next week. The chips made by Audience enhance voice quality by removing extraneous noise.

Michael Mauboussin: Here’s what active managers can do

michael mauboussin, Credit Suisse, valuation and portfolio positioning, capital markets theory, competitive strategy analysis, decision making, skill versus luck, value investing, Legg Mason, The Success Equation, Think Twice: Harnessing the Power of Counterintuition, analysts, behavioral finance, More Than You Know: Finding Financial Wisdom in Unconventional Places, academics , valuewalkThe debate over active versus passive management continues as trends show the ongoing shift from active into passive funds. Q2 2020 hedge fund letters, conferences and more At the Morningstar Investment Conference, Michael Mauboussin of Counterpoint Global argued that the rise of index funds has made it more difficult to be an active manager. Drawing Read More

According to Reuters, Audience Chief Executive Peter Santos said, “Events of the last week in the normal course of business led us to believe that our technology is not likely to be enabled in Apple’s next generation mobile phone.”

In the Press Release of the company, Audience Inc (NASDAQ:ADNC) says:

Audience sells processors and licenses its processor IP to Apple Inc. and certain of its subsidiaries (collectively, OEM) for inclusion in the OEM’s mobile phones pursuant to a Master Development and Supply Agreement (MDSA). Pursuant to a statement of work under the MDSA, amended in March 2012, Audience developed and licensed a new generation of processor IP for use in the OEM’s devices. However, the OEM is not obligated to use Audience’s processor IP. Audience now believes that it is unlikely that the OEM will enable Audience’s processor IP in its next generation mobile phone.

It may be noted that since revenues typically realize a quarter after the sale of the phones, no material effect will be noted during the third quarter, but Apple Inc. (NASDAQ:AAPL)’s business will sorely missed in the quarter after that. Basically, the company would only be getting revenues for iPhone 4S. For Q3, ADNC projects revenues of $35 million to $38 million, improved from previous guidance of $33 million to $36 million, with EPS expected at 14-18 cents per share. Obviously, for Q4 and later, all bets are off.

It may be recalled that ADNC went public just in May, issuing shares at $17. Analysts are reducing their ratings of the stock post the above event.

Credit Suisse have re-rated the stock to Underperform from Perform, and given a revised price target of $6.80. They express concerns regarding the loss of Apple as a customer and the “long term relevance of Audience’s core IP.”

They say: “What was once viewed as “like-to-have” functionality becoming a”must-have” functionality over the long-term now appears to be a problematic “good-enough-without functionality.”

According to their estimates, royalties in CY13 will reduce by almost 77% due to the exclusion of ADNC from the new iPhone.