Audience's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 1.13 | About: Audience, Inc (ADNC)

Audience, Inc (NASDAQ:ADNC)

Q2 2013 Earnings Conference Call

August 1, 2013; 04:30 p.m. ET

Executives

Peter Santos - President & Chief Executive Officer

Kevin Palatnik - Chief Financial Officer

Suzanne Craig - IR, The Blueshirt Group

Analysts

Kip Clifton - Deutsche Bank

Harlan Sur - JPMorgan

Ryan McCormack - Credit Suisse

James Faucette - Pacific Crest Securities

Jay Srivatsa - Chardan Capital Market

Gary Mobley - Benchmark

Operator

Good day ladies and gentlemen, and welcome to the Audience Incorporated, second quarter 2013 earnings conference call.

At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this call is being recorded.

I will now like to introduce your host of today’s conference call, Ms. Suzanne Schmidt. Ma’am you may began.

Suzanne Schmidt

Thank you operator. Good afternoon everyone and thank you for joining us on today’s conference call to discuss Audience’s second quarter 2013 financial results. The webcast of this call can be accessed through our website at audience.com and will be archived for two weeks. Today’s call is being hosted by Peter Santos, President and CEO; and Kevin Palatnik, CFO.

During this conference call we will make forward-looking statements regarding future events or results of the company. Actual events or results could differ materially from those projected in the forward-looking statements. Please refer to our SEC filings, including our most recent Form 10-Q, which contain important factors that could cause actual results to differ materially from the forward-looking statements.

In addition, Audience reports gross margin, net income, basic and diluted net income per share in accordance with GAAP and additionally on a non-GAAP basis. Management believes that non-GAAP information is useful, because it can enhance the understanding of the company’s ongoing economic performance.

Audience uses non-GAAP reporting internally to evaluate and manage the company’s operations. Audience has chosen to provide this information to investors to enable the comparisons of operating results in a manner that the company analyzes its operating results.

A full reconciliation of the GAAP to non-GAAP financial data can be found in our earnings release issued earlier today and we ask that you review it in conjunction with this call.

And now, let me turn the call over to Peter Santos, President and CEO of Audience.

Peter Santos

Thank you Suzanne and welcome to everyone on the call. In the second quarter we delivered solid financial results and continued to build a strong pipeline of opportunities that began to see near term weakens in the high-end smartphone business of our largest customer Samsung.

Going forward however we anticipate continued expansion of the role of voice as a key user interface and believe we are better positioned than every to benefit from this fundamental trend, with not only mobile phones, but also in PC, tablet, television and automotive applications.

Today I’ll briefly discuss our second quarter results and then review conditions in the smartphone and our opportunity with it, including our business with Samsung. I’ll also touch on our partnership with China Mobile, as well as our progress in developing its Asian markets.

Second quarter total revenue increased 36% year-over-year to $45.3 million. Our largest customer in the quarter was Samsung, which represented 66% of total sales. Non-GAAP gross margin for the second quarter was 59.2% and pro-forma earnings per share totaled $0.24 for the quarter.

As many in the analyst community have identified, there is a transition underway in the smartphone and mobile market. As smartphones have become established as the predominant phone factor, growth has shifted from high end devices in developed markets to mid-range and low-end devices in emerging markets, and in turn in particular.

As this transition occurs, we’ve also seen in recently published market share date, signs of a rebalancing of smartphone market share from Apple and Samsung to players such as LG, Huawei and ZTE. This is something that’s anticipated and we view as favorable audience as we continue to execute on diversifying our customer base. However we project a near term impact in our business with Samsung as their high end shipments flow prior to the significant onset of shipments of mid-range devices which use our products.

Specifically our expectations for third quarter shipments of our ES325 advanced voice processor, which is used in the Samsung Galaxy S4 smartphones have been sharply reduced during just the last month and production volume from mid-ranger models, including the Galaxy Mega and others are just beginning to ramp as we move into the second half of 2013.

Looking ahead, we anticipate we’ll benefit from our market position among potential share gainers in both the high-end and mid-rage smartphone markets and expect our smart phone business to return to growth by the end of this year. In fact we have recently launched devices such as the LG Optimus Pro and China models of Huawei’s Ascend P2, Ascend G and Mate devices among others that we expect to support that growth.

Additionally we have already seeing penetration of our existing product portfolio into mid-rage devices such as the Samsung Galaxy Mega, as well as other flagship mid range devices that are scheduled to launch in the second half of this year.

Finally, we have under development products specifically designed to target these mid-rage opportunities, as well as those in adjacent markets, which we expect to substantially growth our servable market in 2014.

Further supporting our growth potential is our recently announced relationship with China Mobile, the world’s largest mobile service provider with nearly 700 million subscribers. As part of this collaboration, Audience will assist and advice China Mobile in the development and implementation of best-in-class voice quality requirements in testing for devices with these onto their network.

We expect that this will accelerate the move in the China market towards the highest subscriber who holds quality levels and believe it positions us well to be the voice solution provider of choice for OEMs focused on China, which is why we’re understood to be the single largest mobile phone growth opportunity in the world.

Looking to adjacent markets, we continue to see broad interest in our solutions in the PC market. The Dell Vostro 5460 and 5560 are the first of their kind to ship with our advanced voice option solutions and were debuted in June at Computex in Taipei to the enthusiastic response from both customers and the media. We see a growing pipeline of opportunities with top PC and tablet OEMs and ODMs to deliver an exceptional voice experience to end users.

In the television market momentum is building in the industry for voice interface and our technology has a key role to play in making this a dependable experience. We continue to work to complete some initial high profile projects, which we expect to launch soon and begin generating revenue by the end of this year.

In automotive we continue to see significant interest in our industry leading speech recognition assist capability, and we believe this segment represents an important medium term opportunity for market diversification, and see it as among the most exciting and compelling applications for our technology.

In summary, despite the near term headwind we expect in our business with Samsung related to demand for their high end Smartphones, we are excited and confident about our growth prospects for 2014 and beyond. Our unique technology offering and focused efforts are being validated around the world and we believe our diversification strategy is creating a strong foundation for long term growth, as it becomes increasingly clear that advanced voice represents the next wave of human interface across numerous consumer platforms.

With that, I’ll now turn the call over to Kevin for a review of second quarter financials and our forward guidance.

Kevin Palatnik

Thank you Peter and good afternoon everyone. Today I’ll first summarize Q2, 2013 financial results, then move to the outlook for Q3. I’ll discuss primarily non-GAAP results and ask that you refer to today’s press release for a detailed reconciliation between GAAP and non-GAAP financial results. The non-GAAP adjustments relate primarily to stock based compensation expense, warrant revaluation expense, the treatment of non-cash rent expense and related tax adjustments.

Q2, 2013 results for the company’s key operating metrics were a total revenue of $45.3 million, non-GAAP gross margin of 59.2% and non-GAAP operating margin of 15.7%. In Q2, GAAP net income was $2.7 million.

This amounts to $0.11 per diluted share based on weighted average shares outstanding of $23.2 million. That compared with GAAP net income of $4.3 million or $0.17 per diluted share, based on weighted average shares outstanding of $14.3 million in the same period in 2012. The year ago period reflected adjustments for our preferred stock that converted in connection with our IPO and as a result is not directly comparable.

On a non-GAAP basis we recorded net income of $0.24 per diluted share based on weighted average outstanding of $23.2 million. That compares to net income of $0.24 per diluted share based on 20.7 million shares for the same period in 2012.

Total revenue for the first quarter was $45.3 million. This is an increase of approximately 36% over the same period in 2012. Hardware revenue was $42.8 million and license revenue was $2.5 million. Hardware revenue increased by 102% over the same period in 2012. Loyalty revenue decreased by 79% over the same period in 2012 and we expect both the absolute number and the percentage of royalty revenue to continue to decrease throughout the year.

Samsung represented approximately 66% of revenue in Q2, 2013 compared with approximately 62% of revenue in Q1. Apple and its contract manufacturers represented approximately 23% of revenue in Q2, compared with approximately 26% of revenue in Q1. Revenue from customers other than Samsung and Apple comprised 11% of revenues in Q2, as compared with 12% of revenues in Q1.

Non-GAAP gross margin for Q2, 2013 was 59.2%. That compares to 54.2% in Q1, 2013. The sequential increase in our non-GAAP gross margin is a result of the richer product mix of our current third generation product, the ES325 versus our second and older generation products.

Total operating expenses on a non-GAAP basis for Q2 were $19.7 million. These expenses excluded approximately $1.1 million of takeout expense that was scheduled for the June quarter, but actually quit in July. Non-GAAP operating margin for Q2 was 15.7% compared to 15.4% in Q1. Q2 ending headcount was 315, an increase of 27 from Q1 headcount of 288.

With regard to the balance sheet, cash and cash equivalents were approximately $103 million at quarter end. In addition, we have approximately $26 million invested in marketable securities. Total DSOs for Q2, 2013 were 33 days and that compares with 32 days in Q1.

And finally inventory at the end of Q2 was $22.7 million, a sequential increase of approximately $6.9 million as we built inventory for the ramp up of handsets that were expected to ramp in Q2 and Q3.

Now I'll turn to the outlook for Q3, 2013. We expect revenue for Q3 to be in the range of $31 million to $34 million. The sequential decrease represented by this range is a result of three factors: Lower than expected demand from Samsung; the headwind we expect with Apple continuing to decrease as a percentage of our business, both of which were partially offset by growth in our less than 10% customers as a result of our continued diversification efforts. Also note that total revenue from customers other than Samsung and Apple is expected to grow by 15% to 20% sequentially.

Q3 non-GAAP gross margin is expected to be in the range of 54% to 57%. Q3 non-GAAP operating margin is expected to be in the range of a negative 9% to a negative 11%. This includes the takeout expense discussed earlier of approximately $1.1 million with approximately 3 points of non-GAAP operating margin. Given the top line challenges we expect to face in Q3, we’re highly focused on keeping operating expenses in check.

And finally, GAAP EPS for the third quarter is expected to be in the range of a negative $0.16 to a negative $0.20 per diluted share and non-GAAP EPS is expected to be in the range of a negative $0.09 to a negative $0.13 per diluted share, based on approximately 23.5 million shares.

Operator, we’ll now take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Brian Modoff with Deutsche Bank. Your line is open.

Kip Clifton - Deutsche Bank

Hi guys, this is Kip Clifton calling in for Brian. So as we look forward and you talk about the volumes your seeing or you could see in the mid to low end Smartphone market, can you discuss some of the OEMs where your seeing traction outside of Samsung that maybe would be pulled in by somebody like the China Mobile to be inserting in its handsets.

Peter Santos

Sure. Kip this is Peter. The OEMs that we see is thus positioned to be pulled into China Mobile if you look at it from that perspective. It includes some names that we’ve mentioned in the past. I’d begin with Xiaomi. They actually started this year selling their first store now to China Mobiles market and we have a quite high share of their skews.

Other players that I think are going to be the earliest in that category are Huawei and ZTE, also [Opo and VDK] (ph). That’s where I think the majority of that category will come from; however, we also expect that there are going to be other OEMs that we haven’t yet talked about publicly, where we will see the use of our technology on China Mobile devices.

Kip Clifton - Deutsche Bank

Yes, okay. And switching to the adjacent market opportunity, do you still feel like you could see being here with revenues or revenue share for that opportunity around 10% of total sales.

Peter Santos

Adjacent markets in total, you may recall that the market where we still see as moving the fastest is the PC market and while as I said in my prepared comments, we see a very significant interest and up-tick there, it has moved a bit more slowly than we expected about a year ago or the beginning of this year when we were talking about double digit percentages.

So what we expect is that we’ll go out of this year with really single digit percentages from both adjacent markets and we’ll begin to approach double digits as we get into the middle of ’14.

Kip Clifton - Deutsche Bank

Okay. And then Kevin, just with the inventory, I’m guessing that’s mostly for the high end of the eS325. Are there stores that they come into and try the S4?

Peter Santos

Yes, and some of their phones will be launched in the second half, but your earlier comment is right on eS325. For the S4 they were an early adopter with the release. They rebuilt inventory for their global launch and as the volumes have decreased, we came out with that on our books.

You can consider, the eS325 is also used in the LG Optimus Pro, as well as a number of other products and that other new launch is going into this quarter and next quarter.

Kip Clifton - Deutsche Bank

Okay, fantastic. Thanks guys, I appreciate it.

Peter Santos

Thanks Kip. Sure.

Operator

Our next question comes from the line of Harlan Sur with JPMorgan. Your line is open.

Harlan Sur – JPMorgan

Hey guys, thanks for taking my questions. So on the shipment and revenue decline in Q3 from Apple and Samsung, I calculated, and it’s roughly about a $13.5 million decline. So can you just help us articulate roughly what portion of this short fall is 4S related and what portion is due to the Samsung shipment declines?

Kevin Palatnik

Sure Harlan, this is Kevin. So I can talk to it in percentages or absolutes, either way you get to the same point. Of that round numbers $13 million, about $10 million of it is related to Samsung and the remainder Apple and from an Apple perspective, as we get closer and closer to the rumored launch of whatever they are going to launch in next Jan, there is some variability. So as we normally do, we take a conservative position on it, but that’s the breakout, about 10 and 3, 3.5.

Harlan Sur – JPMorgan

Okay and I appreciate that. And then Peter, I think you said you expected a return to growth in Q4, so I guess a few questions there. What’s your confidence level around this? Are you already starting to maybe see your forecast and orders reflecting this? What’s going to be driving this growth inflection and do you expect Samsung and your other smartphone vendors to drive this inflection?

Peter Santos

So Harlan, taking them in turn. Confidence in the return to growth is high and is based upon principally a forecast. We generally don’t see backlog that far out or not significant backlog. So its really based upon forecast and its principally based on forecast for launched models, launched models or models that have past MP, the mass production milestone at which point we and the customer have completed all the work. And it’s a very relatively small share there if any, from projects that have not yet reached the MP milestone.

In terms of drivers, for that growth, I see a relatively even balance among smartphones, both high end from the customers, as well as mid-range from some existing new customers and also from PC opportunities, which I had talked about earlier, starting to generate revenue in the second half of this year.

So to reiterate we’ll say that the growth that we see will certainly be within the smartphone market. And as I said in my comments that we will see growth in smartphone and the overall growth of the company will be added to by adjacent markets.

Harlan Sur – JPMorgan

Got it. And then I think the question has to be asked. I mean obviously you have demonstrated a leadership position on the premium end segment of the market and there will be more premium end smartphones being rolled out in the second half of the year by Samsung and some of your other customers.

So I guess the first questions to be asked there is, are you maintaining your design win traction at the premium and then I just have a follow up on sort of the mid-range segment of the market.

Peter Santos

Sure. Harlan, our view is that we are maintaining our share and as we have discussed before, that our largest customer Samsung, we believe that we are in fact growing our share and as exemplified by the LG and Huawei and GT wins, but we’re actually expanding our overall share in some of those accounts.

I’ll let you ask your follow-up.

Harlan Sur – JPMorgan

Okay, and from a mid-range perspective right, we are seeing evidence as you pointed out right. I think you guys were designed into the Galaxy S1 Mini and I guess there could be some debate whether that’s high-end or mid-end, but its definitely not premium, and then obviously the Galaxy Mega 6.3 which is mid-end.

How it is the penetration of your products into the mid-range smart phone, as the market progressing. I mean is it accelerating? Is there anyway that you guys can sort of quantify what percentage of your chips are at shipments, lets say looking out over the next couple of quarters, will mid range represent or may be percent of your design wins today. What percentage of those design wins are mid-range based smartphones.

Peter Santos

So Harlan, let me just make a couple of comments on market structure in general, as regards with mid-range.

While the overall market is growing and there were second quarter statistics to be effected. It was up 10% sequentially; there is certainly a transaction in progress towards faster growth in the mid-range and also some shifting of share.

We see the fasted growing opportunities that we have as being in the mid-range market and in China and we have seen, and we are not prepared to quantify, but we are getting addition design wins at Samsung and also at Huawei and some other players in mid-range markets.

And the way that I would describe that dynamic is the carrier strategy or creating poll and demand for Audience Voice is beginning to take hold in the mid-range market. It began really at the premium end and what you’re now seeing is that requirement proliferating down to mid-range devices and we think that the relationship with China Mobile is going to accelerate that process.

And the traction that we’ve gotten in mid-range devices to-date, has actually been with our existing portfolio of products. In some cases with our flagship products and other cases with trailing edge waterfall products. And as we look ahead, we’ve have identified opportunities to develop products that are purpose built for that market segment. And what I would look for would be design win activity in 2014, including the first half of 2014 for those products as we announce them.

So qualitatively, we feel good about our position strategically in terms of how we are driving requirements to the market and in terms of our offering for the mid-range market. As I said before, we are not yet able to quantify the number of projects or design wins as a percentage, but its certainly increasing.

Harlan Sur – JPMorgan

Okay, great. I’ll get back into the queue. Thank you.

Operator

Our next question comes from the line of John Pitzer with Credit Suisse. Your line is open.

Ryan McCormack - Credit Suisse

Hi, this is Ryan McCormack giving a call for John. Just talking about the product that you spoke about developing for the mid-range, but presumably this is to hit a lower cost point.

I guess without sort of pre-announcing the product, what are some of the core functions in voice quality and noise cancellation that you guys are going to be kind of carrying forward even in a mid-range product. And I guess what potential does it have to introduce more competitive threats into the market against you guys.

Peter Santos

Ryan, this is Peter. We re not prepared to talk about specific features at this point, but I can highlight that we have participated in the mid-range before and currently it has been with trailing edge technologies on legacy products that we ourselves priced at a lower end.

What that means is, approximately speaking the right kind of solution for those sort of markets will not have some of our latest and greatest features on our cutting edge technologies, like our highest quality far field and wide band and speech recognition capabilities, as well as some of the other things that we are rolling out.

So a way to think about our mid-range strategy are going to be feature sets that are comparable to trailing edge technologies at lower cost points for our customers and also lower cost of ownership in terms of what it takes for them to integrate.

Ryan McCormack - Credit Suisse

Got it, okay. And then I guess as a second question, generally speaking, how does the mix towards the mid-range, I guess potentially impact the value proposition for you guys. I mean clearly this question was brought up around the Apple announcement last year and I guess the questions may arise again as more of the volumes start to make through the mid range. How much value is the mid-range OEM putting into this capability and I guess so that dovetails to the product question, but maybe speaking to on a market place perspective.

Peter Santos

Well, I think what you will see with advanced voice quality for mid-range phones is the same pattern that we’ve seen with any number of mobile phone features that begin at the high end and then roll down into the next tier of products.

Cameras are a great example; certainly there weren’t cameras on the drench phones when cameras first came into being. So what we see is that the capability, lets say for a reduced feature set that was on a 2011 vintage.

Smartphone, is once the high-end smartphone is capability, that would expect to see on our 2013 to 2014 mid-range phone and the feature set would be constrain, but the level of performance would be similar. And the difficult of delivering an advance wide solution on the mid range or a high-end phone is still quite hard, the difficulty of meeting carrier requirements, which are now starting to move into mid-range that remains difficult.

And the question that I believe you have is that the competitive dynamics change and certainly it would be a more competitive segment, but one that we think will be relative _ to compete in. because we will still bring to their best in class performance at close to price period.

Ryan McCormack - Credit Suisse

Great, and then my last question, and then I’ll just back in. How much of the engagement, you mentioned that engagement China Mobile is expected to kind of give you an inroad with a lot of the China Mobile handset suppers. I guess how much of your engagement is about making China Mobile familiar with voice quality generally and how much of it is an engagement where you can kind of leave the witness a bit to find a spec that is more to advantage your products. Thanks.

Peter Santos

It’s very much the ladder in which we are not only educating them about voice quality, but also advising them on where to set their speck, how to do testing. How to – steps and requirements in a way that they can be sure that OEMs don’t make phones sound worse, even in the process.

So our strategy, with carriers has around the world that we’ve done, execute its tough work has been to not just educate but to influence and we’ve been successful in that effort in North American, in Europe and to see this relationship with China Mobile as an opportunity, not only to do the same thing in China, but to do it in a much more streamline and faster way.

Ryan McCormack - Credit Suisse

Great. Thanks guys.

Operator

Our next question comes from the line of James Faucette of Pacific Crest Securities. Your line is open.

James Faucette - Pacific Crest Securities

Thanks very much. Just have a few questions. First, as you look at the December quarter in your target to return to growth, is that based on the expectation that the platforms that you‘re shipping right will show some sort of rebound or stability and do you expect the newer platforms for which you are entering production now or are in the mass production stage will more than off set continued decline to the existing platforms.

Peter Santos

James, this is Peter. It is primarily based on the introduction of new platforms and based on what we think is a better understanding since we are closer to it, of how existing platforms that are already in production are going to behave going forward based upon our forecast. It’s really based on new platforms that we see in the come in market, both high end and mid range.

James Faucette - Pacific Crest Securities

Got it. Then when you look at the new mid-tier, as you go into the new mid-tier platforms how should we think about both generally ASP for those, but also relative contribution margin or gross margin on those products.

Kevin Palatnik

James, its Kevin. So as Peter mentioned earlier about the waterfall, the technology into that mid-range, those typically are second-generation products or older. So they’ve already come down the price curve. So as we’ve described in the past about our portfolio of ASPs being around $1 with the variance of plus or minus 25%. Their older technologies are in the lower end of that ASP, so call it minus 25% around that zip code if you will.

From a gross margin standpoint, I mean they go hand in hand with ASPs. So they are less than our first generation, our eS325 product, but as that gets weighted in along with our upcoming products that should be much more cost effective. I don’t see significant impact to gross margins.

James Faucette - Pacific Crest Securities

Very good, and then can you talk about – one of the concerns has been recently with at least some of the other OEMs, that they are starting to try to exert a lot more pricing pressure on the component suppliers. What have you see in terms of overall pricing pressure and has that changed much? I know there’s always pressure, but just wondering, the amount is varying at all rate now, such that there will be something else for us to be concerned about down the road.

Peter Santos

So as you know James, I mean Samsung is very aggressive when it comes to pricing. They are not like other OEMs that want to negotiate price up front. Those OEMs pretty much live with that pricing throughout the life of the project. Samsung comes to us more frequently in the year and it’s with pressure. But we haven’t seen anymore or less pressure; it’s been the same. But now given the volumes that we see, we have more ammo to go back and push back on that pressure.

James Faucette - Pacific Crest Securities

Got it, great. That’s all the questions I had for right now. Thank you.

Peter Santos

All right. Thanks James.

Operator

(Operator Instructions). Our next question comes from the line of Jay Srivatsa with Chardan Capital Market. Your line is open.

Jay Srivatsa - Chardan Capital Market

Thank you for taking my question. With China Mobile, could you give us some sense on, has China Mobile released the spec that incorporates the advance voice processing capability and if not, what is the timing of when that comes out and when your customers outside of the existing OEMs start catering to that market and to that speck. Can you give us some clarity on the timing of when you expect those to happen?

Peter Santos

Sure Jay. We are on track with our work with them and that begins with collaboration on lab equipments and testing and that sort of thing and we expect that the first release of specification is going to be around the very end of this year and that will result in initial revenue for us early in the second half of ’14 with the cycle between the climates and delivery. So that’s the cycle time that we expected at the out set of this collaboration and we are still on track for that.

Jay Srivatsa - Chardan Capital Markets

Okay. Now just as market segmentation has happened in the U.S. and Europe and those countries, you don’t expect a similar market segmentation in China. Are you concerned that your spec that gets release starts to get pushed into the high end of the market and not so much into mid or low end where the high volumes going be. So do you have some sense on is it going to be universal across all different segments or which segment does it really go after.

Peter Santos

Jay, we don’t have a clear indication of the exact pacing of the introduction of the requirement. We don’t expect however that it would be universal for example, that it would be required on very single device ever to go on the network. We think that it will rollout initially for 3G and 4G interfaces at the higher end of the market, probably more predominate at high end and then move into the mid-range. That’s our estimate right now. We do have to work through this with China Mobile to understand that.

That said, in terms of Audience’s opportunity, while the percentages in growth and the China market certainly tilt toward mid-range and low end, there is very significant opportunity for us in the high end, in that market, especially with the domestic players like Huawei, ZTE, Xiaomi and Lenovo. So that’s how we expect it to play out as in the upper section of the market initially, but we don’t view that as – meaning there is an unattractive near term opportunity. We think there is a sizable business.

Jay Srivatsa - Chardan Capital Markets

Okay, and then for Kevin, given the forecast of the unprofitable mixed quarter, are there opportunities for you to look at cost reduction in some areas and when do you expect to be able to act on them.

Kevin Palatnik

Jay, we’ve done that as we’ve seen changes in the forecast over the last three to four weeks. We’ve taken hard look of what we spend and what we do and we’ve already baked that into some of the numbers. We are continuing to look for more opportunities as we move to the right in time, but the majority of that has already been baked in.

Jay Srivatsa - Chardan Capital Markets

Okay. Thank you.

Peter Santos

Thank you.

Operator

Our next question comes from the line of Gary Mobley with Benchmark. Your line is open.

Gary Mobley – Benchmark

Hi guys, thanks for taking my question. I want to ask a couple of questions and start up by asking a question relating to a previous one in may be a slightly more detailed fashion.

Looking at the Samsung business expected for the third quarter, I guess going to be down 40% or $10 million to $11 million sequentially, I was hopping that maybe you can give us a sense of how much of that is attributable to ASP declines in the eS325 and how much is the function of lower volumes and then as well, can you give us an update on eS515. Is that still on target to ship in the fourth quarter 2013. Thank you.

Kevin Palatnik

Gary, this is Kevin. I’ll start and then Peter can take the 515 question. So from a math perspective, Samsung was 66% of our business in Q2 and then if you look at that math, it’s around $30 million. So the sequential decrease is about 10 or about a third, 33%. The majority, the significant majority of that has to do with volumes driving ASP.

Peter Santos

And with regard to the 515, we are in progress on a number of different products and evaluations. As we’ve highlighted before, the evaluation cycle for Codex tends to be longer and specifically we do expect that we are going to see initial production in Q4. However that said, it will just be initial production and we don’t expect for it to account for a significant percentage of revenue in Q4 and we’ll start to come more significant on the first half.

Gary Mobley – Benchmark

All right, very good. Thank you guys.

Peter Santos

Thanks Gary.

Operator

We have a follow up from Mr. Harlan Sur. Your line is open.

Harlan Sur - JPMorgan

Thanks for talking my follows. So the team is anticipating 15% to 17% growth within your non-Apple or non-Samsung customers in Q3. Can you just give us some sense on which of your smart phone customers within that segment are driving that strength.

Is it Xiaomi, it is Huawei is it ZTE, it is Meizu, is it kind of the all above and then more importantly, do you expect the non-Apple, non-Samsung customers to contribute to the growth you anticipate in Q4 as well.

Peter Santos

Sure. Harlan, the names that you mentioned are the names from which we expect the majority of that growth in Q3, specifically Xiaomi, Huawei, ZTE and also LG is the other name that I would add in terms of non-Apple Samsung revenue generation. And we expect those names in addition to some of the PC opportunities that we see to – actually quite a bit larger growth in that, that ex-Apple, ex-Samsung bucket in the fourth quarter and project that our percent of revenue from those customers ex-Apple and Samsung to be in the range of 20% to 25% of Q4 revenues.

Harlan Sur - JPMorgan

Got it, okay. Thank you very much.

Peter Santos

Thanks Harlan.

Operator

I’m not showing any further questions in queue. I would now like to turn the call back over to management for any future remarks.

Peter Santos

Thank you everyone for calling in this afternoon. We look forward to speaking with you soon and seeing you on the road.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect and everyone have a great day.

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Audience (ADNC): Q2 EPS of $0.24 beats by $0.08.

Revenue of $45.3M beats by $400K. (PR)