Can Audience Block Out the Doubters?

NEW YORK (TheStreet) -- It's been two months since Apple (AAPL) sent chilling waves through Audience (ADNC) and its investors.

Audience, which specializes in noise suppression technology, had long been a staple in previous iterations Apple's iPhones. But Audience suspected it had been left off the new iPhone 5 when the company realized it had not been involved in the typical pre-launch discussions.

Peter Santos, CEO of Audience, didn't wait for confirmation and opted to informed investors about the possibility Apple would not extend their relationship, even though Apple had not yet confirmed this.

On the announcement, shares of Audience lost over 60% of their value, and dropped as low as $5.51 -- a decline of 80% from its 52-week high.

This event was a testament to the dangers that exist when one company, in this case Apple, represents a significant portion of your revenue. On the heels of the company's recent earnings report, I was looking for confirmation Audience can sustain growth without Apple.

A Good Third Quarter, But...

Audience reported net income of $4.9 million, or 21 cents per share, on revenue of $40.8 million. Earnings per share grew 60% year-over-year -- exceeding the $2.7 million in net income Audience earned in the third quarter of 2011.

While that might look impressive, it is worth noting the company had significantly fewer shares outstanding at this point in 2011 -- 3.8 million shares compared to 23.2 million today.

However, that revenue showed 55% year-over-year growth is pretty remarkable. Equally impressive was that sales grew by 22% from the second quarter. Likewise, margins were solid -- improving eight points year over year.

In terms of outlook for the fourth quarter, Audience expects net income, which includes stock-based compensation as well as expenses, of $800,000 to $1.7 million, or 4 cents to 8 cents per share, on revenue as high as $38 million. Margins are projected to come in at negative five points to flat.

Moving Forward

Although guidance was unimpressive, the company deserves a considerable amount of credit for its third-quarter performance, particularly as this was its first full quarter as a public company. Growth indicators were positive and the company is now in the midst of expansion into markets such as China.

However, Apple ending the relationship in its "i-Devices" leaves many questions as to the value of Audience's technology.

The first and obvious question is: If Apple, which unlike any other company values the user experience, no longer sees the need to further the Audience relationship, will other companies see Audience's technology as a viable solution in their smartphones and tablets?

This opens several doors to competitors of Audience, and even Qualcomm ( QCOM), which does not directly compete. But Qualcomm has similar technology that does noise suppression in a software platform.

In other words, although Audience's third-quarter and possibly its fourth-quarter numbers may not reflect Apple's defection, it is certain to be a major blow going forward and the impact will be felt likely in the first two quarters of 2013.

On the other hand, current investors may find comfort in knowing that Audience still has major relationships with both Samsung and Google ( GOOG).

Still the challenge for the company is trying to convince new and existing customers why its technology deserves slots in their hardware. After all, if having Siri, which relies of voice quality and noise suppression, could not keep Apple interested, it might be quite a challenge going forward.

Bottom Line

Since reaching a low of $5.51 the shares of Audience have rebounded nicely by over 42%. Investors want to know if the stock has reached bottom.

Though the shares look cheap, I worry the adverse impact of Apple's lost relationship might not be over. The recent stock rebound is nothing more than a knee-jerk reaction to what was an overreaction. Staying on the sidelines still looks like the best play.

At the time of publication, the author had a position in AAPL.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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