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IPO CANDIDATE WITH ALL THE RIGHT STUFF: MOBILE, APPLE, SPEECH PROCESSING, LICENSING MODEL, PROFITS AND A SMALL SHARE COUNT.
Kris Tuttle April 30, 2012
INTRODUCTION We are certainly entering an era where “human I/O” is becoming critical to most digital applications. Increasing use of gesture, voice and visual interfaces will define out future interfaces. Noise is a big problem. Even humans are challenged to follow conversations when substantial noise is present. Voice interfaces need multiple methods to work well but if the noise cannot be filtered out most of the other techniques can’t be applied. We’re not sure we’d call this a “transformational experience” as the Audience management team describes but it certainly matters. Most major consumer electronics companies have some version of noise reduction and cancelation technology in the market today. It does appear that Audience has gone deeper into the science of hearing to come up with a superior approach. This differentiation relies on two distinct areas of focus. The first is the method of analysis applied. It incorporates more factors and more sophisticated computational algorithms. The second is incorporating these methods directly into silicon (or equivalent IP solutions) to deliver voice processing in chip form. It’s clear from ratings and tests that the Audience solution is discernably better. In addition Apple certainly wouldn’t have licensed and incorporated it into their newest iPhone to enable SIRI if it wasn’t a strong technology. It’s somewhat surprising that this company hasn’t been acquired. Some obvious candidates include ARM Holdings [LSE:ARM], Imagination Technologies [LSE:IMG], Texas Instruments [NYSE:TXN], Qualcomm [NASDAQ:QCOM] and Nuance [NASDAQ: NUAN]. An acquisition could have been done easily at 2x the current IPO valuation and perhaps as high as 4x. From a fit standpoint Imagination Technologies would be best but in that case it’s likely that the purchase price would have included a large component of high-priced stock (although Apple also has an equity interest in Imagination Technologies and it’s a company with a bright future.) Our only material concern at this point is whether the pricing of this technology will be commoditized even if it remains superior. We’ve seen that before. The IPO will be a success and we expect the deal terms to be revised upwards and for the stock to trade up toward (or beyond) our IV of $35. POSITIVES, NEUTRALS AND NEGATIVES Mobile computing demands alternative I/O methods that incorporate vision, gestures and sounds. Speech is a critical need for applications that provide useful services to users. The ability for software to parse and understand speech is directly impacted by the quality of the raw input. The size of the potential market is certainly large relative to the current revenue of Audience and their proposed market capitalization of $300M. If the company is successful in penetrating tablets, internetconnected TVs and automobiles their available market will expand. It may be a bit smaller than some expect because we expect to see substantial pressure on per-unit costs as a technology matures. Biological and scene analysis approach to sound processing with a voice focus has important advantages over general DSP chips and methods. “Selective listening” tasks are challenging tests for intelligent systems and additional analysis improves results dramatically. Aggressive IP protection and patent portfolio should help protect their industry position. Growth has been meteoric and operating margins are already at 10%. The company should have no trouble reaching their target model, which includes operating margins of 20-25%. The company has recently introduced a licensing model similar to what firms like ARM have been doing. Typically investors grant much higher trading multiples to companies with this model. 1 April 30, 2012
Audience IPO Note
Nvidia. Nextel. We’ve included Nuance in our analysis because they are the acknowledged leader in the speech processing area and have amassed a strong market position and a great deal of intellectual property around voice over the years. complexity and in some cases slow sales cycles and harder than normal to predict results. Xilinx. Nuance is more of a software company and is focused on understanding more than the raw processing but they are certainly immediately adjacent and active in the market. Although there is much to like about it there’s also much that isn’t known yet. If it begins to happen valuation multiples will be reduced dramatically. We’d expect the deal terms to be revised upwards. This is a close one to watch. We don’t know them firsthand but the credentials and backgrounds are comprehensive and include alumni from LSI. [Our IV model. Agere. IBM. Consumers won’t tolerate dropped calls but they understand that noisy environments make talking hard so they complain less if noise disrupts their calls or voice commands. = = We’ve also got to put management in the positive column for Audience. which is far above the current mid-point of the proposed range of $14 to $16. peer group table and a few company descriptions follow. which came public late in 2011. However any minor change in the terms of timing of business at one of these companies could have a major impact on Audience near-term results. We think we’re using the right multiple of 20x in our IV even though one could argue for 25x given the growth rate. Given that these two companies are #1 and #2 in the target market we can’t list this one as a negative. As usual we are not going to dial in the alleged company long-term tax rate of 21% and will instead use our standard 35%. InvenSense was a fairly quiet IPO but has performed well over the past few month. InvenSense provides a motion processing system that is in some ways analogous to what Audience is doing with voice. Two other public companies that are similar include OmniVision for image processing [NASDAQ: OVTI] and Synaptics for touch gestures [NASDAQ: SYNA]. Cadence. The major question for investors is whether the long term margins for Audience will be closer to InvenSense at 26% of OmniVision and Synaptics at 10%.] Audience IPO Note . This technology is a “nice to have” but not essential. Our IV analysis suggests a $35 price for the shares. The licensing model is new for Audience and represents a recent transition in the business model. Partnership with mobile operators is a viable element of a go to market strategy but comes with higher costs. Device makers and service providers have a deeper interest but tend to be price sensitive. These companies are quite different from Audience but their margins and multiples are comparable. and Sony. VALUATION & CONCLUSION From an investor positioning and market perspective Audience is most like InvenSense [NASDAQ: INVN]. Since this already yields an IV of $35 versus the $15 mid-point of the current proposed range we will leave it at that. So investors will have to learn how this type of business and mix impacts the long-term growth and model of the company. Because Audience has licensed their IP to Apple rather than sell the chips they will be compared to an ARM Holdings or an Imagination Technologies in this regard. In combination with the nature of the service and myriad alternatives (even if inferior) may keep pricing very competitive and could prevent revenues and operating profits from scaling with market share and units. Customer concentration is normally a negative but in this case it’s Apple at 62% and Samsung at 36% which together make up nearly all company revenue.
4% 76.5 1.2 18.2 36.9% $35.0% 9.7 TTM P/E 36.3% 95.0% $82.7 NM 64.3 $119. InterDigital.8 9.7% 25.0 15.1 156.4 35% $66 14.6% 10.7% $21.7 29.8% $15.8 157.1% $8.2% 43. Dilution Cap (M) P/S Cash Debt Tax Rate P/E Multiple Discount Rate Intrinsic Value Up/Downside Peer Analysis 30-Apr-12 COMPANY InvenSense.50 1 YR CHG na -44% 9% 20% -24% 12% -35% -26% -15% 38% -18% -41% -76% -11% -26% -12.0% $44.8% $42.8 -614.8 $98 103.0% TEV / Revenue 8.5% 14. Inc.7% $9.8 0.8 35% $16 10.84 $5.3% 11.9% 46.910 184 11.8% 43.9% 67.0 $50 62.0 $170 70.7% $64 $0 20 $3 $374 $45 $420 $20.8 NM 28.9 $0 42.1% 3.61 $11.5% $12.0% $65 $0.4% 31.365 3.0 $28.7 $222.0% $53.0 40.316 $241 21 $63 ADNC Nasdaq 50% $15.8% $70.9% $11.1% 66.0 $325 22.0 0.4 $0.2% 21.0% Gross Margin 54.4 $85 $0 35% 20 15% $35.0 18.8% 14.6% $65.8% 55.0% $120.3 $6 134.0% $197.0% $100.98 $6.5 $0 2009 $5. Rambus Inc.0% $61.0% $70.0% $38 $0.1 NM 47.3 35% -$10 -399.6% 25.3 5.6 59.0% 17.7 372.7 35% $53 13.3% 53.0% $70.8% 29.93 $2 2008 $2.9% 43.2 23.50 $8.7 38.7 10.A.2% 92.0% $140.0 $35.08 $18.5% $1.6 16.8 35.2% $325 $22 20 $16 $609 $100 $709 $35.49 2014 $175.0 $22.6% -2.89 $6.3 $28.3 57.99 2011 $97.0 $265 26.0% $5.6% na 3 MO CHG -2% 42% -19% -13% -2% 9% -12% 8% -13% 20% 16% -27% -35% 9% 8% 1. Immersion Corporation QUALCOMM Incorporated NVIDIA Corporation RadiSys Corporation ARM Holdings plc Imagination Technologies Group Plc MIPS Technologies Inc.0% $167.0 $1. Synaptics Inc.0% $139.0% 21.3% $19.0 -289.2 $48 733.18 $12.1 57.9 150.6% -7.9% 12.8% $30.0 $8.5% 10.3% 93.5% 271.0 $151.0% $9.8 $185.0% -$216 -$11 20 -$11 $281 $27 $308 $15.8% $45.2% 10.2 35% $6 6.2 5.9 3.3% 43.8 35% $42 13.3 20.2% -$17 $0.4% $9 $0.6% $25 $0.4% $655 $80 20 $32 2015 $210.0% 39. Inc.0% 18.0 $460 17.4 0.4% 28.0% $82 $0.1 643.7% $491 $47 20 $25 $752 $138 $890 $44.0 $390 20.4 NM 15.6 3.2 22.7 $0 49.33 $4.0% $845 $122 20 $41 2016 $250.3% -$196 $0 20 -$10 $186 $13 $199 $9.376 31 17.5% -5.6% -1.9 30.1% 41.8 39.0% 20.0% $47.1 18.4% $23.6 43.8 24.3% -$15 $0.8 18.8 2.00 Segment Motion Processing Image Processing Touch Processing Speech Processing Immersive Interfaces Communications Chips Graphics Chips Wireless Chips Ticker INVN OVTI SYNA NUAN IMMR QCOM NVDA RSYS Price $16.4% -18.8% 98.5 37.50 $64.7 57.157 798 720 8.4% 10.9% 51.4% 78.0 $13.7 35% $3 6.8 35% -$11 -188.0 22.2 57.8% 94.0 56.6% 2. Inc.0 18.39 2010 $47.5% na 300 110 TEV 1.175 99 96.0 $3.8% 54.6% 34.0% $161.1% 27.3% 21.1% 100.0 $115 60.1% $21.0% $101 $0.0 $210 31.7 14.7 $52.4 49. RadiSys Corporation Average Audience Speech Chips ADNC $15.3% -21.107 4.0 $90 55.0% $50 $0.2 3.0% $58.4 18.4% 40.0% $6.6% 43.3% $5 $0.INTRINSIC VALUATION & PEER GROUP ADNC 30-Apr-12 Dec YE Hardware Licensing YoY Change $ Total Revenue YoY Growth COGS % COGS $ Gross Profit Gross Margin SGA % SGA $ R&D % R&D $ Operating Expenses % Operating Expenses $ Operating Margin Operating Income Interest Expense Taxes Tax Rate Net Income Net Margin Market Value Using P/E Cash Position Shares (M) Period Share Price PV of MV 4 Years Out PV of Cash 4 Years Out PV MV + Cash PV Value Per Share 70.1% $119 $6 20 $6 $483 $70 $553 $27.8 $262.7 1.901 251 791 431 254 184 LTM Rev 144 937 554 1.93 $24.0% $90.6 35% $33 12.0% -25.0% $81.00 20 1% $300 1.64 2012 $110.0 $70 50.6 13.2 18.9 18.2 0.0% $78.0% 140.77 $29.0% $114.3 57.0 $90.0 -$5.3 2.9% -3.5% -2.8 $0 3.4% 26.4% 10. OmniVision Technologies Inc.2% 31.7 19.7% $1.0 -$5.23 $6.44 2013 $140.1% $17.2% na 1 MO CHG -11% -6% -15% -3% 1% -6% -16% -12% -10% 1% 25% -22% -26% 9% -12% -8.998 333 825 179 65 293 313 328 333 LTM Growth 0.0 53.0% $37.0 $17.0% 43. Parrot S.0% 19. Nuance Communications.3% 13.4 21.3 18.4 7.065 $175 21 $52 2017 $290.85 $30.2 35% $25 11.5% 18.9 1.1% 14.3 $160 63.4 NM Mobile Processors LSE:ARM Graphics Processors LSE:IMG Processors Mobile IP Memory IP Wireless Infrastructure MIPS IDCC RMBS RSYS Wireless Devices ENXTPA:PARRO Audience IPO Note .44 136% Ticker Exchange Rev Growth Current Price Shares Out Avg.3% $1.185 2.0 $140 65.0 296.7 $0.8% 18.0% Oper Margin 23.79 $27.
video and music players.ONE OR TWO COMPANY DESCRIPTIONS1 Imagination Technologies Group plc engages in the design. manufactures. and digital home applications. California. PCs. a touch-sensitive pad that senses the position and movement of a person’s finger on its surface. digital television and set-top box remote controls. It involved in the development of embedded graphics. and for digital lifestyle products comprising mobile smart phones and feature phones. The company provides custom human interface solutions for navigation. and marketing of multimedia technology and related products. as well as platform independent solutions. Immersion Corporation develops. and other electronic devices. the TouchStyk. and TouchSense 6000. which eliminates the need for physical buttons. and markets consumer products. Its products include MotionProcessing units (MPUs) and inertial measurement units (IMUs). as well as a range of mobile. development. 1 Company descriptions from S&P CapitalIQ Audience IPO Note . display. ENSIGMA communications IP. The company was founded in 2003 and is based in Sunnyvale. which combine a TouchPad and a pointing stick into a single notebook computer. California. California. such as POWERVR visual intellectual property (IP). and multithreaded processor and multi standard broadcast receiver and connectivity technologies. the ClickPad. InvenSense’s IMU-3000 products combine the three-axis MEMS gyroscope with the DMP and a secondary input port that interfaces with third party digital accelerometers to deliver a six-axis SensorFusion output to the host processor. and other peripherals. handheld multimedia. designs. and multimedia controls for various PC original equipment manufacturers (OEMs). video. Synaptics Incorporated develops and supplies custom-designed human interface solutions that enable people to interact with various mobile computing. InvenSense. The company also offers single and multi-axis gyroscopes to measure rotation motion around one or two axes and provide the results through an analog output. TouchSense 3000. and global positioning devices. and application programming interfaces. a pointing stick module. and the Far East. including keyboards. and monitors. markets. It also develops. and household consumer and industrial devices. It licenses its technologies to the manufacturers of automotive. The company provides haptic technologies that allow people to use their sense of touch when operating a variety of digital devices. authoring tools. which enable three-axis and six-axis functionality by integrating multiple sensors. The company’s product portfolio includes TouchSense 1000. The company offers its solutions primarily to the personal computer (PC) market consisting of notebook computers. and in-car electronic markets. and dual pointing solutions. home consumer. entertainment. 3D mice. Inc. The company is headquartered in Kings Langley. licenses. as well as advanced DigitalMotion processor (DMP) functionality. as well as remote control devices for desktops. The company operates primarily in North America. design kits for prototyping. commercial and industrial controls. and supports a range of hardware and software technologies and products that enhance digital devices with touch interaction. mobile computing. the United Kingdom. and sells micro-electro-mechanical systems (MEMS) gyroscopes for motion processing solutions in consumer electronics. communications. a TouchPad application. and mobile communications products under the TouchSense brand. The company delivers next-generation motion processing based on its advanced multi-axis gyroscope technology by targeting applications in video game devices. such as digital and connected radios. enabling users to use the interface of their choice. handheld. portable navigation devices. digital still and video cameras. Synaptics Incorporated was founded in 1986 and is based in Santa Clara. The company licenses its SoC IP products. manufactures. Immersion Corporation was founded in 1993 and is headquartered in San Jose. medical. TouchSense 2000. handsets and tablet devices. TouchSense 5000. and META multi-threaded processor IP to a range of semiconductor and consumer electronics companies worldwide for use in the mobile phone multimedia. cursor control. consumer electronics. It also offers turn-key engineering and integration services. and entertainment devices. develops. TouchSense 4000. Europe. gaming. and MPU-3000 products add MotionProcessing library (MPL) to deliver motion processing functionality. wireless. Its custom human interface solutions for the PC market include TouchPad. mice. including semiconductor system-on-chip intellectual property (SoC IP) products.
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