|Shares Out. (in M):||24||P/E||0.0x||0.0x|
|Market Cap (in $M):||192||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||-120||EBIT||18||20|
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Audience, Inc. (Nasdaq: ADNC), the clear market and IP leader in advanced voice and audio processing for mobile devices, is a severely broken May 2012 IPO that has been left for dead by investors after the company announced on September 6th that its technology would not be incorporated in the iPhone 5. As a result, Audience, which priced its IPO at $17.00 on May 11th and traded as high as $23.41 on June 15th, fell to the mid-single digits on the AAPL news. As a result, ADNC shares are now a value investor’s delight, as it is dirt cheap, despised and left for dead, yet the company is running on all cylinders with strong momentum (really! despite AAPL!). With a market cap of $192mm using 23.6mm fully diluted shares, after subtracting $120mm of cash & marketable securities ($5.08/share or 63% of the share price is net cash), the TEV is only $72mm and TBV is $5.91/share, providing great downside support at this depressed level. The street is currently modeling $150-160mm of sales, $80mm of gross profit and $12mm of EBITDA for 2013 (implying <0.5x TEV/Sales, <1.0x TEV/GP and 6.0x TEV/EBITDA) – and I expect these operating estimates too prove far too low given the enormous success of Samsung’s flagship products (Galaxy S III, Galaxy Note II, Google Nexus 10 tablet), big new design wins and new product categories that will be revenue generative in 2013. Based on the faster than expected uptake into new OEMs and channels (PCs, Automobiles, TV), I believe that 2013 EBITDA meets or exceeds 2012 results, implying a TEV/2013 EBITDA of a remarkably low 3.6-4.0x with strong out-year growth and leading strategic patent assets. Watch here to understand the Audience technology and how it works: http://www.audience.com/experience
I expect that within 12 months ADNC will trade for at least 2-3x its current price, and I believe there is a very high probability that the company is acquired by Intel, Google or QUALCOMM due to its mission-critical IP and the fact that 3 venture funds own 60% of the stock and will need to exit. Further adding to our confidence is the fact that the company’s head of engineering bought nearly $800,000 worth of stock (100,000 shares) in the open market at prices ranging from $7.21-8.48 from November 2-16. ADNC is presenting at the Credit Suisse conference at 12:30 ET this Wednesday, which should bring additional positive attention to the story in the near-term (live webcast here: http://investor.audience.com/). There are multiple potential catalysts for near-term (next 3 months) value realization here, as described herein.
Keys to the story are as follows:
While it’s unclear why AAPL chose to go with its own beam-forming technology for the iPhone 5, Audience technology has consistently beaten it in the marketplace as Apple’s technology has exhibited the following problems (again, discussed on the Q3 conf call):
A critical question is how strong Audience’s relationship with Samsung is, given that Sammy represented 55% of ADNC’s Q3 sales (this should decline significantly due to ramp with new customers and product channels in late 2012 and 2013). Audience CEO clearly stated on the Q3 call that the Samsung relationship was very strong, and he listed three structural reasons why Sammy would not leave Audience, aside from the best-in-class tech that Audience offers:
Note 1: Interestingly, the transcript for the company's Q3 call is not readily available. I would highly recommend listening to the call itself, as we believe the CEO's tone in certain comments is quite telling. The link is here: http://investor.audience.com/eventdetail.cfm?eventid=119596
Note 2: It was released today in the proxy that there is a proposal to exchange 1.9mm options with an average exercise price of $12.07 for 1.8mm new options struck at the closing price as of the date of the exchange offer while resetting the vesting schedule. While option repricing is never ideal, it is probably reasonable in order to retain key employees and maintain morale given the company's strong momentum and share price movement due to AAPL. The 23.6mm fully diluted sharecount used above is the company's estimate for Q4.
Note 3: Having recently upgraded from a Samsung Galaxy S II to the Galaxy Note II (an Audience product), the difference is incredible even to an untrained ear. The example in the video on the company's website is accurate in my assessment.
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