Audience's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Audience, Inc (ADNC)

Audience, Inc. (NASDAQ:ADNC)

Q4 2013 Earnings Call

February 6, 2014 4:30 PM ET

Executives

Melanie Solomon – IR

Peter Santos – President and CEO

Kevin Palatnik – CFO

Analysts

Harlan Sur – JPMorgan

Brian Modoff – Deutsche Bank

Jay Srivatsa – Chardan Capital

Operator

Good day ladies and gentlemen, and welcome to the Audience Inc.’s Fourth Quarter 2013 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we’ll conduct the question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this call maybe recorded.

I will now introduce your host for today’s conference Melanie Solomon. You may begin.

Melanie Solomon

Thank you operator. Good afternoon everyone and thank you for joining us on today’s conference call to discuss Audience’s fourth quarter 2013 financial results. The webcast of this call may be accessed through our website www.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, the company’s 2013 audit was not still completed. As a result, there could be potential fluctuations in the company’s GAAP quarterly and annual operating results and financial conditions, including but not limited to matters related to tax.

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 press 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. And welcome to everyone on the call. We closed 2013 with higher-than-expected results and begin 2014 with an exciting slate of customer opportunities, innovations and the new product capabilities. We are seeing meaningful growth in China in the smartphone market with demand for our solutions ramping briskly. And applications of our technology in adjacent markets continue to develop. Today, I’ll briefly discuss our fourth quarter and full year 2013 results and then address product highlights and opportunities for 2014.

Fourth quarter total revenue was $33.6 million. Our largest customer in the quarter was Samsung which represented 62% of total sales. Non-GAAP gross margin for the fourth quarter was 53.4% and pro forma loss per share totaled $0.11 for the quarter. For the full year revenue was $161 million, non-GAAP gross margin was 55.9% and pro forma earnings per share was $0.39.

Turning now to color on our business. We have spoken previously about the opportunity in China. As our footprint with customers and partners expands and you’ll see escalating activity with OEMs such as Xiaomi, Huawei and ZTE. We had previously said that X Apple and X Samsung revenue would be in the 20% to 25% range by the end of 2013. And thanks largely to our engagement with these and other China customers we finished the year with 25% of revenue coming from customers other than Apple and Samsung in the fourth quarter.

Of particular note is our growth at Xiaomi, attributable to the success of their Mi2 and Mi3 phones waiting for them to come in at 18% customer for us in the fourth quarter. Additionally, our products were included in a range of models in China since our last earnings call including the Lenovo Vibe Z, Huawei Mate 2, ZTE Grand S2, ZTE Nubia ZS5, Meizu MX3, Yulong’s Coolpad 9190L and Gionee E7. A number of these were launched at CES showing the growing role in addition of Chinese OEMs in a global smartphone market. Several of these devices were also domestic models of 3G and 4G phones for China Mobile reflecting our ongoing advanced voice testing and ASR Assist collaboration with China Mobile and iFlytek. We believe that these efforts will provide durable advantages in the China market and we continue to increase our resource commitment for the opportunity there.

Samsung remains our large and important customer for us. We continuing in a position in our high-end portfolio and have secured design wins in the newish Galaxy S4 derivatives including the recently launched Galaxy Round. We are also seeing increase use of our trailing at second and third generation technologies in more and mid-range models at Samsung such as the Galaxy S3 Mini in response to increasing carrier voice quality requirements.

At this year’s Consumer Electronic Show we made what we think is our most significant new product announcement since the launch of our first category creating Advanced Voice Processor six years ago. We introduced our eS700 series which offers world-class stereo audio codec capability fused with our fourth generation Advanced Voice Processor. Our eS700 series also features a compelling new Always-on listening capability offering high-performance continuous keyword detection and command recognition as well as extremely low power consumption.

This system called Voice Cue enables your mobile device to wait to hear your voice and immediately receive a voice command even in noisy conditions without compromising battery life when in its idle listening state. Voice Cue combined with our fourth generation Speech Recognition Assist capability enables a seamless natural and dependable Always-on listening and response capability. And we’re seeing tremendous interest in the system from OEMs worldwide in response to our demos during and after CES.

Audience has deep experience in delivering low-power, high-performance voice computing, makes us uniquely capable to delivering upon us of a compelling Always-on voice experience. The eS704 and 702 Advanced Voice Processors and eS754 and 752 smart audio codecs are now sampling with customers. We expect Always-on to be highly important new area for us in 2014 particularly in the second half.

Turning to adjacent markets, we are gaining traction with our eS320 chip in tablets, ultrabooks and all-in-one PCs with four new product releases at Dell and NEC in the fourth quarter. As a reminder, this chip is specifically targeted toward PC computing improving user experience with applications like Voice over IP and speech to text programs. In the Television market we are ramping production for our first TV project expected to launch this spring. We believe that voice is poised to become a key user interface capability for this market.

In automotive, we have talked previously about the pilot projects we have underway with the leading OEM and we’d expect to see positive results from these efforts. We showed our first automotive demo at CES to a number of manufacturers and their strong interest in our technology for this segment.

In summary, 2013 was an important year for Audience in which we achieved greater diversification of both customers and markets and demonstrated the durability of our business growing year-on-year despite the ramp down in Apple revenue and softening of the high-end smartphone market. Looking ahead, the opportunity to increase smartphone and tablet content via codec capability, our leadership in Always-on voice, continued growth in China and increasing traction in adjacent markets we are optimistic regarding our long-term look.

With that, I’ll now turn the call over to Kevin for his review of the fourth quarter and full year financials and our forward guidance.

Kevin Palatnik

Thank you Peter and good afternoon everyone. Today, I’ll first summarize Q4, 2013 financial results and move to the outlook for Q1 2014. 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 to reevaluation expense, the treatment of non-cash rent expense, and related tax adjustments. Q4, 2013 results for the company’s key operating metrics were total revenue of $33.6 million, non-GAAP gross margin of 53.4% and non-GAAP operating margin of a negative 9%. In Q4, GAAP net loss was $2.5 million, this amounts to $0.11 per diluted share based on weighted average shares outstanding of 22 million.

That compares with GAAP net income of $3.4 million or $0.15 per diluted share based on weighted average shares outstanding of 22.5 million in the same period in 2012. On a non-GAAP basis we recorded a loss of $0.11 per diluted share based on weighted average shares outstanding of 22 million. That compares to net income of $0.14 per diluted share based on 22.5 million shares for the same period in 2012.

Total revenue for the fourth quarter was $33.6 million, hardware revenue was $31.6 million and license revenue was $2 million. Samsung represented approximately 62% of revenue in Q4, the same percentage of revenue as Q3. Apple and its contract manufacturers represented approximately 13% of revenue in Q4 compared with approximately 20% of revenue in Q3. Revenue from customers other than Samsung and Apple comprised 25% of revenues in Q4, this compared with 18% of revenues in Q3.

The largest OEM in this group is Xiaomi which became a greater than 10% customer in Q4 and represented 18% of revenues. In our Q3 earnings call we indicated that we expected X Apple and X Samsung Q4 revenue in absolute terms to increase sequentially by 30% to 35%. For Q4, revenue from these customers increased approximately 38% sequentially. Non-GAAP gross margin for Q4 was 53.4% that compares to 56.2% in Q3. The sequential decrease in gross margin was primarily due to product mix. Total operating expenses on a non-GAAP basis for Q4, were $21 million. Non-GAAP operating margin for Q4 was a negative 9% compared to a negative 1.1% for Q3. Q4 ending’s headcount was virtually flat to Q3 at 329.

Now, with regard to the balance sheet, cash and cash equivalents were approximately $125 million at year end. In addition, we have approximately $15 million invested in marketable securities. Total DSOs for Q4 were 16 days compared to 24 days in Q3.

And finally inventory at the end of Q4 was $13.6 million, a sequential decrease of approximately $3.9 million as we slowed the purchase of materials in response to lower demand.

Now I’ll turn to our outlook for Q1 2014. We expect revenue for Q1 to be in the range of $33 million to $36 million. At the midpoint, the sequential increase represented by this range is a result of modest growth in total at Samsung, Xiaomi and the rest of the non-Samsung non-Apple OEMs partially offset by a decreasing hardware sales to Apple related to the iPhone 4.

Q1 non-GAAP gross margin, we expected to be in the range of 49% to 52%. Q1 non-GAAP operating margin was expected to be in the range of a negative 13.5 % to a negative 15.5%. GAAP EPS for the first quarter, we’re expecting in the range of negative $0.24 to a negative $0.28 per diluted share and the non-GAAP EPS was expected to be in the range of a negative $0.17 to a negative $0.21 per diluted share based on approximately 22.1 million shares.

Operator, we’ll now take questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). Our first question comes from Harlan Sur of JPMorgan. Your line is open.

Harlan Sur – JPMorgan

Good afternoon. Thanks for taking my question and good to see the reacceleration in the business here in the March quarter and plus diversity. I guess the first question that comes to mind on the good revenue guidance for the March quarter is that you had a similar revenue ramp profile last year as you ramped into the Samsung GS4 smartphone that ended up resulting in inventory work downs and a revenue headwind for you and the team for the remainder of 2013. So, I guess the question is how confident are you that both your customer and your team are building for a more conservative launch into Samsung’s upcoming product platforms. And outside of that maybe you can just touch upon some of the other drivers here in the March quarter?

Kevin Palatnik

Sure Harlan. This is Kevin. With regard to the March quarter, just given the sequential growth from Q4, if we were to compare that to Q1 of 2013 over Q4 of 2012, this ramp for Q1 2014 is much lesser than increase and that’s testament to a little bit more conservative I think on both certain OEMs as they launch new product at the end of Q1 into Q2 as well as our own conservatives among top of that if you will. So, as we look forward into the March quarter, I think the ramp-ups that have been done on the past have been much more moderated and make a lot more sense.

Harlan Sur – JPMorgan

Okay, got it. And then outside of the core smartphone market, the team has the target to grow their non-smartphone business to roughly 10% of the mix buyer in Q3 of this year, those probably around 1% to 2% of your revenues last year. You’re ramping into multiple ultrabook platforms as you said in your prepared remarks, I think Peter you talked about the one potential set up opportunities, you got some tablet platforms ramping. How confident is the team in achieving this revenue mix?

Peter Santos

Harlan, this is Peter. And we have talked in the past about in the – somewhere at Q3 timeframe about getting into that percent of revenue. While, we did have several PC launches in the fourth quarter and have a pipeline of them coming up for in particular the back-to-school and holiday cycles this year. Because there were a couple of projects that were cancelled, we don’t believe that will quite hit the 10% number in the third quarter and we project at this point that by the end of the year, we’d be in those mid to high single-digits in terms of non-phone revenue from tablets, PCs and televisions.

Harlan Sur – JPMorgan

Okay, got it. And then the gross margins are coming down about 300 basis points in the March quarter, is most of that related to the step down in iPhone 4S shipments and therefore step down in royalties or is there also mix related impact there as well?

Kevin Palatnik

Harlan, Kevin again. Yes, generally it’s product mix. There is a step down in the iPhone 4 the silicon based product. But then as we look across the range of our portfolio from virtually Gen 1 to Gen 3 as we look at that mix it turned a little bit unfavorable with regards to Q1.

Harlan Sur – JPMorgan

Okay, got it. And then also sort of implied within your guidance, there seems to be a step up in OpEx here in the March quarter. Are there some one-time sort of programs specific initiatives or key thoughts [ph] that are responsible for the step up in the OpEx and beyond this step up here in March? How should we think about the OpEx run rate in Q2 and into the second half of the year?

Kevin Palatnik

With regard to OpEx Harlan, there is nothing significant, that is a onetime occurrence in Q1 in orders that will tape out related expense in Q1. There is a myriad of things that will rise the OpEx quarter-on-quarter including taxes benefits, little bit of head count, we do merits in Q1, the bonus programs that happened in Q1. Like I said a myriad of things, things also like CES and MWC that occur in Q1 but aren’t there in Q4. So, just it’s a longer list of items that drive a little bit more expense as we look into Q1. As we look through the rest of the year, we do expect to tape out this year, well I’m not going to talk about that right now, we’ll talk about that in future quarters. But I suspect that as we continue to invest in the Chinese opportunity, OpEx will grow a bit from here.

Harlan Sur – JPMorgan

Got it. And then this is my last question. So, as you think about the more conservative view in ecosystem built around some of Samsung’s platforms that are launching in the first half obviously additionally you’ve got new smartphone customers launching and you’re ramping more models with your existing customers and your non-mobile business is ramping. How confident are you in being able to drive sequential growth in Q2 and into the second half of this year?

Kevin Palatnik

Harlan, the further we go I mean the less visibility we have. But as we look into Q2 and Q3, we certainly see sequential growth. Q4, as you know one of our largest customers typically does some inventory adjustments in Q4. So, I mean just surprised to say Q1 to Q3 we do see sequential growth and when we get to Q3, we’ll have a real hard look at Q4 and got appropriately.

Harlan Sur – JPMorgan

Great. Thanks a lot. I’ll get back into the queue.

Kevin Palatnik

Yes.

Peter Santos

And Harlan just of it. This is Peter, to following that question just a bit more. Looking at the second half and your PC question earlier, we feel like we have a better handle on the timing of the PC ramps specifically. There has been some choppiness in that market relative to design win. So, our design win is going away. So, our design win in our pipeline is what we expected but there have been some OEMs that have tended to cancel product that’s more than expected. So, we feel like we have our arms on that better. Further, we expect to see the effects of content adds in particular from the 755 smart audio codec starting to really come to bare in the fall timeframe and that – that grows well for growth into the second half of the year.

Harlan Sur – JPMorgan

Great. Thank you.

Operator

Thank you. Our next question comes from Brian Modoff of Deutsche Bank. Your line is open.

Brian Modoff – Deutsche Bank

Yes, guys. Kevin, I wanted to go further on with the kind of question Harlan asked about the gross margin. So, what do you expect royalties to do sequentially in Q1? Obviously you think you expect them to come down but there – you yourself. What are you thinking on Q1 and what are you thinking for the rest of the year on that category. And then with gross margins as you look through the rest of the year, you did talk a lot about mix. How do you see the mix play out or in other words your gross margin is going to be down this year given royalties fading, mix of product relative to the last year. Thanks.

Kevin Palatnik

Sure. I hope you Brian. So, with regard to royalty as you said we always recognize that one clearly [ph] as say what you see for Q4 roughly are approximately $2 million, those are shipments from Q3. We have our royalty number for Q1 and it is slightly down. As I look throughout the rest of the year, I think it’s going to hover a couple of hundred k to where it is currently. But as we closer – as we get closer to probably the third quarter presumably there will be a next announcement and at that point maybe the 4S becomes end of life. Therefore, that would significantly impact Q3 shipments which we recognize in Q4. So, we believe that this tail for the 4S royalty we will maintain throughout the end of the year and drift down slowly over the quarters. With regard to gross margin, we expect a more favorable mix as we look into the Q2 quarter, that we do expect a bit of growth in gross margins for Q2. And beyond that, let me wait for next quarter’s earnings release to guide further in that.

Brian Modoff – Deutsche Bank

Okay. And then you talk a little bit more about – so you mentioned Xiaomi it’s 18%. How does the other vendors that you’re dealing with in China, any others that were above 5% of your revenues and how do you see those vendors come out as you move through the next quarters. And that was my last question, hand over after that.

Kevin Palatnik

So, within that 25% bucket obviously Xiaomi is the largest that be 18%. There are a number of players that hover around the 2% to 5% mark. And then substantial number beyond that whether in the 1% or so as mark. The big one that we’ve always talked about, the Huawei’s and so forth, we do good business with those folks. As we look throughout the year, we believe that will help further penetration into the domestic market the local market in China. But beyond that, they’re so small, we do expect some ramps and growth through the remainder of the year. But I don’t want to go too far into the year at this point.

Brian Modoff – Deutsche Bank

Okay. Thank you.

Kevin Palatnik

Thank you.

Operator

Thank you. Our next question comes from Jay Srivatsa of Chardan Capital. Your line is open.

Jay Srivatsa – Chardan Capital

Yes. Thanks for taking my question. Peter, you mentioned that CG opportunity potentially launching in spring. Can you give us a little bit more color on how big do you expect that to be going forward and how meaningful will it be by say second half of this year?

Peter Santos

For television overall excluding that opportunity, we’re being fairly conservative and don’t expect for example in the second half of the year that represents any more than single-digit percent of revenue. With regard to that first program, that we are in, we do have production orders on the book. So, we have a little bit of visibility into where we’ll start. It is a new product category for a large firm with – that has task and scale to be able to make this happen but nonetheless, that does still create some uncertainty on just how big it is and at this point we’re being conservative. And again, projecting that it won’t be any more than single-digit percent of revenue in the second half.

Jay Srivatsa – Chardan Capital

Okay. Fair enough. Can you expand on and give us an update on what’s happening with China Mobile, in fact they released and you started working with the handset guys, any color there, please.

Peter Santos

With regard to China Mobile specifically in the spec there is a drop spec it is about the issue and a spec that would be more of a mandate we’re expecting in the summer timeframe after a review process. So, the process around the spec is continuing it a few months maybe behind where we might have expected it to be. As regards working with OEMs or the effect of China Mobile’s activity and our work with them on OEMs, we launched a significant number of phones in just the last six months for China Mobile. And well this is in response to a mandatory spec, there is very much a dynamic especially for 3G, 4G phones for TD-SCDMA and TD-LTE where OEMs especially local OEMs in China but also elsewhere see hints and signs of this specific coming. And therefore, are going out and working to make sure that they can meet it.

Jay Srivatsa – Chardan Capital

Okay.

Peter Santos

And so far on that adjacent, no major OEM wants to be in a situation of working on this when the spec finally comes out. It’s not quick to be able to bring up this sort of capability so they tend to want to get out in front of it.

Jay Srivatsa – Chardan Capital

Sure. In terms of the Voice Cue product can you give us some update on how it’s been received by your customers and when do you see that product really ramping up into mass volume?

Peter Santos

Jay, the demonstration that we gave at CES was one in which you could say however you’re smart when is my next meeting and it comes back immediately and gives you the answer. We’re also able to show the power stages and our ability to manage power easily. So, we’d been able to demonstrate seamless keyword and then command and so you’re going have to wait for the AP to wake up able to demonstrate very low power and able to demonstrate very high performance for the keyword detection and speech recognition.

And that’s a lot of technology that leads to a very simple but compelling user experience. And the response that we got to it from OEMs was very strong. We see this entering the market in smartphones first but proliferating rapidly to tablets and then probably they’re somewhat slower pace into PCs. We expect to see the first devices in the market with this capability in the third quarter of this year.

Jay Srivatsa – Chardan Capital

Okay. Very good. Last question, Kevin, you’ve mentioned you’re expecting some modest margin improvements in Q2. I mean does Q1 really change your thoughts from where the longer term gross margin profile is going to be or do you feel it’s a little bit of an anomaly?

Kevin Palatnik

Jay, our long-term goal for model for gross margins non-GAAP are between 50% and 55%. For the longest time we were above that range primarily driven by the Apple royalty. That fades the black if you will. We’re very confident that we’ll remain in the 50% to 55%. So, as I look out through the rest of this year and including Q1 I think we’ll be in the middle of that range plus or minus.

Jay Srivatsa – Chardan Capital

Thank you. Good quarter, guys. Appreciate it.

Peter Santos

Thank you.

Kevin Palatnik

Thanks.

Operator

Thank you. I see a follow-up question from Harlan Sur of JPMorgan. Your line is open.

Harlan Sur – JPMorgan

Hey, guys. Thanks for taking my follow-up question. So, on the first generation, eS7xx I mean Peter you talked about the 750 product which includes an innovated codec and this contributing to the second half revenue growth profile. As this product been adopted by one customer or multiple customers, I just wanted to understand sort of the rate of adoption. And then on a go forward basis, does the team still plan for a launch two types of products, in other words one with and without codec on a go forward basis?

Peter Santos

So, thanks for question Harlan. Regarding adoption, we have a list of seven to eight major phone customers and actually some tablet customers that are evaluating this technology and in almost all cases they are real products for which the 755 family is being considered. So, we’re quite happy with the pipeline that we have and with the adoption that we’re going to see, this is our second generation codec and is really now considered to be in the top-tier of codecs that are available in the marketplace.

With regard to your question about our product strategy well we continue as we have with the 7xx generation offering both digital-only voice processor and a fully integrated digital voice processor plus codec. We’re still of course on the drawing board with future generations of our technology. I would expect that we would – that we’d continue to offer digital in new version and that does give us flexibility to pursue some opportunities. That said, as we go forward from this generation on to subsequent ones a greater and greater share of our overall business will be for the integrated products integrating both voice and audio and additional capabilities going forward.

Harlan Sur – JPMorgan

Great. Thank you.

Operator

Thank you. (Operator instructions). I’m not showing any further questions in the queue. I like to turn the call back over to management for any further remarks.

Peter Santos

Thank you everyone for calling in this afternoon. We look forward to speaking with you soon. And see you on road [ph].

Operator

Ladies and gentlemen, thanks for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!