Audience Trading At Cash Value

| About: Audience, Inc (ADNC)

Audience, Inc (NASDAQ:ADNC) launched its IPO back in May of this year. It priced at $17 per share, with a very small shareholder allotment relative to the total float. The IPO raised nearly $100 million for the company. Audience has no debt and is the world leader in audio processing technology for mobile phones and other electronic devices. Today, the stock is trading at cash value as per its last quarterly report. Audience's recent guidance did not indicate any future accelerated cash burn either, so there is no reason to think that it has less cash now compared to when these numbers were reported a few months ago.

Where did Audience go wrong?

The stock crashed over 60% on September 7, following a company update wherein it stated that it expects its earSmart noise reduction technology not to be included in the iPhone 5 from Apple (NASDAQ:AAPL). The iPhone 5 was released shortly after this announcement, and it was confirmed that Apple went with a new three microphone type setup. Furthermore, the company stated that it would likely not feature in future Apple devices. Although, it still expects to continue to sell processors and collect royalties on the older iPhones.

What do the analysts say?

Analysts have clearly thrown in the towel. Out of the three book runners from the May IPO, Deutsche Bank lowered the Audience price target from $22 to $5, acting very 'surprised' in a report that Audience lost its key OEM. JP Morgan echoed the same sentiments, while lowering its price target to only $10. Credit Suisse slapped an 'underperform' on Audience and lowered its price target to $6.80.

Investors and traders have followed suit, taking Audience to an all-time low close of $5.71 on October 2, 2012. This is almost exactly what the cash value per share was as of the last quarter, when the CFO mentioned the possibility of a share buyback when the stock was trading in the high teens.

What a startling valuation, considering that the company was worth several hundred million dollars before the loss of its key customer (or OEM as Audience refers to it) that made up 37% of its revenues from its Q2 financials. It is apparent that analysts don't like to be embarrassed or caught off guard and they clearly were in this instance and punished Audience for it.

Has Audience thrown in the towel?

Meanwhile, despite the loss of Apple, as devastating as that is to the company and the share price, Audience is still making significant strides. On Sunday night, it announced a deal with Huwaei, one of the largest mobile manufacturers in the world. Audience will be providing its earSmart eS305 audio processor for use in its next generation Ascend D1 Quad XL phone, set to launch this month.

Of course, a deal with Huwaei (or 'Who what?') does not create the same buzz as losing a deal with Apple, but it shows that the core Audience assets have some value above $0 (the current market valuation based on the current price per share). Being a vertically integrated machine that is sitting on mountains of cash, Apple developed its own voice processor. However, it is unlikely that other companies will do this and will continue to either buy processors or license technology from Audience.

Many investors may not believe it, but there is still life beyond Apple. In fact, OmniVision (NASDAQ:OVTI) went through the same ordeal, losing Apple as an OEM and the share price dropped like a rock, only to double in the following six months as investors realized that losing Apple as an OEM is not a fatal blow.

What did the CEO have to say to defend Audience?

At the Deutsche Bank 2012 Technology Conference on September 12, CEO Peter Santos delivered a very optimistic presentation, only a few days following the historic collapse in its company's share price. To summarize the key points:

  • earSmart audio processing technology is currently included in eight out of the top 10 mobile phones in the world.
  • There is a new collaboration with AT&T regarding a next generation smart phone.
  • Audience continues to gain major ground in Asia. Demand for its products is growing rapidly.
  • Strong and stable relationship with other manufacturers, particularly Samsung.
  • Looking to launch a brand new technology, earSmart515 with DSP plus codac in a single chip.
  • Expansion into Smart TVs, automotive and notebooks to bring growth in 2013 and beyond.

Is Audience a buy at the current valuation?

This surely does not sound like a company with absolutely zero intrinsic value, as implied by its share price. Despite the hit from losing Apple as an OEM, Audience went out and increased Q3 guidance on the back of strong sales.

Most importantly, margins are as strong as they have always been and Audience guided them to 58%-61% in Q3. Here is a company that is valued at $0 once you back out cash. As a contrarian, I look for opportunities like this where pessimism has reached epic proportions and Audience fits the bill.

Apart from what the impressive marketing hype would let you believe, there is life outside of Apple and Audience is still the world leader in audio processing technology. Losing Apple will likely be a blip on the 10-year stock chart for Audience, which is still poised for rapid growth going forward.

Disclosure: I am long ADNC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.