Apple Won't Listen to This Audience

Everything was going so well for Audience (NASDAQ: ADNC  ) . Just six months ago, the audio technology provider had a solid IPO and was working with Apple (NASDAQ: AAPL  ) to improve the capabilities of Siri for future iPhones. Then, on Sept. 7, its stock dropped from $19 to $7. The day before, Audience had announced it was "unlikely" that its products would be used in any more Apple products. Could that be the sole reason for such a severe price drop?

What they do and how they've done
Founded in 2000 by neuroscientist Lloyd Watts, Audience has two goals: create technology that hears as well as humans, and make it available for mass-market manufacturers. The company has provided a line of earSmart Advanced Voice processors for Samsung, HTC, and LG, and, until recently, Apple. Because of Audience's technologies, Siri understands when you ask her a question, and can in turn deliver a sassy and relevant response.

Audience's quarterly report (it has not been public long enough to have an annual one) reflected solid financial figures. Q2 revenue for 2012 was $33.3 million, up from the $24.9 million in Q2 2011. Margins were solid, too, with a net income margin of 13% (up from 11% last year), gross margin 62% (previously 53%) and the operating margin jumping 7 points to 48%. So what could have happened to throw this promising start-up into a financial lurch so quickly?

Apple giveth, and Apple taketh away
According to Audience's registration statement, in 2008 the company began distributing its processors to Apple through two commercial manufacturers: Foxconn and Protek. In 2010, distribution from these CMs to Apple added up to 82% of Audience's revenue, and 79% in 2011.

At first, this appeared to be a shrewd business tactic on Audience's part. As of Dec. 31, 2011, Apple integrated earSmart voice processors into its iPhones, and paid Audience quarterly royalties for them. However, a long-term agreement was apparently not in the cards. Following Audience's not-so-confident announcement, some tech websites have begun whispering rumors that Apple may utilize its own voice technologies when the time comes for its next iPhone. Without its core source of revenue, Audience could hemorrhage money before it has even released its first annual report.

Who else fell from the Apple tree?
This is not the first time a company has fallen from Apple's graces, of course. Let's take a look at how some recently dropped businesses have fared.

Omnivision Technologies (NASDAQ: OVTI  ) , suffered at the hands of Apple last year, when rival Sony pushed it out of working on a sensor chip for the iPhone 4S camera. The news wasn't obvious until reverse engineer Chipworks deconstructed an iPhone 4S and found a Sony stamp. By the time of that discovery, however, Omnivision's stock had dropped spectacularly, as fellow Fool Evan Niu reported. Shares fell from $35 to $14 in three months, and although Omnivision now collaborates on innovations with Tesla Motors and Skype, its stock price has stayed relatively stagnant.

Then there's Marvell Technology (NASDAQ: MRVL  ) . This company was previously a distributor of Wi-Fi/Bluetooth chips, but in 2009 Apple dropped Marvell in favor of collaborating with Broadcom. Marvell has by no means folded as a result (it continues to collaborate on developing new products with Samsung and SanDisk, among others), but its share price of $8 is nowhere near the 2006 record high of $34.

Foolish Takeaway
One lesson Audience can take away from these two companies is the value of diversification. A company with a varied set of strengths has a much higher likelihood of staying afloat should one of those assets suddenly fail. Omnivision and Marvell have stayed afloat after the changes with Apple, because they offer more than just Wi-Fi and camera chips, and they work with more companies.

While Audience's story has gotten much gloomier since Sept. 6, all may not be lost for this unique company. If it can learn how to diversify its business model and customer mix, this company's recent downward turn could be less fatal than it appears. Strengthening its relationship with its other clients could give this company the boost it needs to get out of the woods.

In the business world, sometimes you have to break a few eggs to make a great omelette, and Apple has good reason for wanting only the best companies on its iPhone production team.  We've released a premium research report on Apple, where you'll learn everything you need to know about Apple's next big product launch, and receive ongoing guidance as key news hits. Claim your copy today by clicking here now.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 14, 2012, at 12:35 PM, afamiii wrote:

    'all may not be lost for this unique company. If it can learn how to diversify its business model and customer mix,'

    Please do your home work. IN 2010 Apple was 82% of revenue, in 2011 79% in Q2 this year (before the Apple announcement) Apple was 35% of revenue and in Q3 (last quarter) it was 22%.

    Add to this that it grew revenue 55% in Q3 and is offering guidance of only 13% growth in Q4 (as a result of the Apple loss.)

    Meanwhile Audience had through most of oct been trading around book value of $6.

    Even now if you added residual royalty revenue value to its net current assets it is still trading below liquidation value.

  • Report this Comment On November 14, 2012, at 12:35 PM, afamiii wrote:

    PS: Long ADNC

  • Report this Comment On November 15, 2012, at 4:28 PM, Avatar910 wrote:

    It would appear that ADNC will survive without Apple, but whether it will prosper is another matter

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