It's increasingly looking like getting business from Apple (Nasdaq:AAPL) is a mixed blessing for small-cap tech companies. While investors had been looking for Audience (Nasdaq:ADNC) to use its solid relationship with Apple (and Samsung) as a platform from which to build on its voice isolation/noise suppression technology, it now looks as though Apple has elected not to use the company's technology in the next iPhone. Not only does that news hammer the expected profit stream for 2013, it also calls into question the broader bullish thesis for the company's technology.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Apple Elects Not to Flip the Switch
Audience has had a relationship with Apple for several years now, with the company selling processors and licensing IP to Apple that Apple then incorporated into its iPhones. Audience informed investors on Thursday evening that based on a lack of customary pre-launch discussions with Apple, they now believe that Apple will not activate their IP on the processor of the next iPhone. Although that won't have a devastating impact on 2013 revenue (maybe around 10%), that royalty stream was virtually pure profit, and so it will have a significant impact on earnings and cash flow.

The Central Question ("Why?") Has No Clear Answer
Of course, Apple being Apple, there hasn't been formal confirmation of this, nor any insight into why the company would make this decision. While I guess it's possible that the company elected to go with a competitor's technology (perhaps Qualcomm's (Nasdaq:QCOM) software-based approach), I don't think that's the case. Rather, I'd say there's probably a better chance that Apple thinks either that the iPhone 5 doesn't need any noise suppression assistance or it has developed its own proprietary technology/capabilities.

That uncertainty is likely to be a real problem. At this point, voice isolation/noise suppression technology has largely been seen as "nice to have" technology for high-end devices, but not essential. If it turns out that Apple, a company notably obsessed with the user experience, doesn't think this technology is necessary, that could make it quite a bit harder for Audience to sell other customers on its importance, to say nothing of broadening usage into follow-on markets like tablets, PCs and autos.

Not a Fatal Blow at This Point
Apple has been a significant customer for Audience for a while now, and losing that relationship has always been a risk factor. However, it's important to note that Apple was not Audience's only customer. The company also relies heavily on Samsung for revenue (over 40% in the last quarter), and that relationship seems to be secure. Likewise, the company has announced recent wins with HTC, Huawei and Google (Nasdaq:GOOG).

The question, though, is whether the company can replace the revenue (and profits) that the iPhone 5 would have represented. In the short run the answer is very clearly "no," but the company does have a good chunk of cash on the balance sheet and appears to have a technology lead over Qualcomm, Texas Instruments (Nasdaq:TXN), Cirrus Logic (Nasdaq:CRUS) and Fortemedia.

Arguably, the best hope for Audience is that user reviews of the iPhone 5 cite noise/voice quality as a problem and that Audience-users like Samsung gain share as a result. That could be a long shot, though, as I can't recall Apple ever being forced to backtrack like that in the relatively brief history of the iPhone.

The Bottom Line
A quick look at the balance sheet indicates about $5.50 per fully diluted share in cash, against a current price of $6.10 as of this writing. Clearly, then, the market expects the loss of this Apple business to utterly devastate Audience, and many analysts have slashed their target prices into the single digits. I understand the fear, and I don't wish to soft-peddle the risk to the business model and sentiment that this news represents. That said, giving the company almost no value at all for its technology seems like an extreme reaction. Audience management is going to have to work even harder to establish its technology now, but this is a name that I think is going to be worth watching once the initial selling frenzy lets up.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    What Will HP's Split Do to Its Stock?

    Read about Hewlett-Packard Enterprises, a new spinoff company from Hewlett-Packard. Understand how the two companies will focus on different markets.
  2. Investing Basics

    Learn How to Trade Semiconductor Stocks in 4 Steps

    The enormously diverse semiconductor industry requires market players looking for exposure have specialized knowledge.
  3. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  4. Professionals

    Why Near-Retirees Shouldn't Sweat the Volatility

    With the stock market bumpy, some folks nearing retirement might be nervous. Here's how to create some wiggle room for your portfolio.
  5. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  6. Investing News

    Why the Philippines Is the #1 Source for Tech Startups & Talent

    In the last few years, the Philippines has been working diligently to re-invent itself, and that work has paid off. The Southeast Asian nation is rapidly gaining notoriety as a leading source ...
  7. Investing News

    Austin Set to Rival Silicon Valley

    Over the years, Austin, Texas has lovingly embraced its quirky reputation with the slogan “Keep Austin Weird.” Today, the capital city is attracting several tech startups and investors, making ...
  8. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  9. Professionals

    Fund and ETF Strategies for Volatile Markets

    Looking for short-term fixes in reaction to market volatility? Here are a few strategies — and their downsides.
  10. Stock Analysis

    The Biggest Risks of Investing in Amazon Stock

    Find out which risks are most important to Amazon's shareholders. Learn which operational risks impact share prices and which financial risks affect investors.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!