Did Audience Underwriters Understand (And Communicate) The Risks? (ADNC, AAPL, FB)


Audience, Inc. (NASDAQ: ADNC) is now the worst IPO of the year. News surfaced last night from the company that its main customer, one Apple Inc. (NASDAQ: AAPL) was unlikely to use its technology (chips for audio quality) in the iPhone5. Whoops. What is so interesting is that Audience just came public back on May 10. The IPO price was $17.00 and that now compares to a low of $5.80 today.

It does not matter that Audience actually raised its guidance nor that the company believes smart television sets, tablets, and other markets can drive strong sales. What matters is the risk of Apple in-housing the technology.

What we want to know is just how much the underwriters really gave attention to about the risks here. Audience now feels like Facebook Inc. (NASDAQ: FB), with the primary difference that the post IPO drop came overnight rather than over a weekly basis for weeks in a row. Now these are the two worst performing IPOs from before this summer.

At the time of the IPO, it was roughly 5.3 million shares priced at $17 per share and that was above the $14 to $16 indicated range. It is interesting if you review old articles that its business had dropped because Apple had switched from buying its chips to licensing its intellectual property.

The underwriting syndicate was J.P. Morgan, Credit Suisse, Deutsche Bank Securities, and Pacific Crest Securities. Should you be shocked that ALL FOUR of these brokerage firms had the equivalent of "buy" ratings on the stock, but all four downgraded the stock today?

The company did outline the risks here in the RISK FACTORS in its IPO filing. It noted:

We sell our products to Foxconn International Holdings, Ltd. and its affiliates (collectively, Foxconn) and Protek (Shanghai) Limited and its affiliates (collectively, Protek), each a major CM that produces mobile phones containing our processors almost exclusively for Apple. We also license our processor IP to this OEM. In 2010, 2011 and the three months ended March 31, 2012, this OEM, Foxconn and Protek collectively accounted for 82%, 75% and 62% of our total revenue, respectively. We entered into an agreement with Apple in 2008, which governs our relationship and under which we sell custom processors to Foxconn and Protek and license our processor IP to this OEM for other mobile phones. For a detailed description of this agreement, see "Business—Customers" beginning on page 89. Historically, we have sold Foxconn and Protek our processors on a purchase order basis. We anticipate that Foxconn and Protek will continue to purchase our processors for multiple mobile phone models that they produce but we expect their purchases to continue to decline over time as we continue to transition to a partial licensing model with this OEM.

And here are even more specifics on the Apple relationship:

Commencing in the three months ended December 31, 2011, Apple has integrated our processor IP in certain of its mobile phones, and we recorded our first royalty revenue in the three months ended March 31, 2012. Pursuant to our agreement, this OEM will pay us a royalty, on a quarterly basis, for the use of our processor IP for all mobile phones in which it is used. We have granted a similar license to this OEM for a new generation of processor IP; however, this OEM is not obligated to incorporate our processor IP into any of its current or future mobile devices. For the new generation processor IP, the royalty this OEM is required to pay us is subject to a lifetime maximum, after which we would not receive royalties for shipments of devices into which our processor IP has been integrated. Under our agreement with this OEM, we have entered into statements of work to set forth terms and conditions specific to licensing processor IP. Pursuant to both the agreement and statements of work, this OEM may cancel a statement of work for a new custom processor upon 30 days prior written notice to us. This OEM has no obligation to, and we do not know the extent to which the OEM will continue to, license our processor IP for integration into mobile devices it produces.

This is one of those instances where "caveat emptor" (buyer beware) applies. The only question is how long that the investment community should have known about this loss of business. For those investors who merely bought based upon the Apple halo-effect, this should be a lesson learned. It is no secret that Apple routinely takes on suppliers, learns tricks and traits of the technology used, and then turns the table in some fashion.

Audience shares are down 63% at $6.93 in active volume and the market cap is now listed as only $139.3 million.

The Risk Factors section of the IPO Filing is rather long at 16 pages (literally) and these are just the headings without the long detail on each, and this does not even take the risks related to regulations:

Due to the length of the Risk Factors section, we put this on a PAGE 2…


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