June 20, 2012 at 17:38 PM EDT
Apple's (Nasdaq: AAPL) Siri Would be Nothing Without this Company
View articles by David Zeiler Tags: Apple (Nasdaq: AAPL), Apple siri, apple technology, Audience, Audience technology, iOS 6, iPad, iPhone 4s, voice-controll
As impressive as the Apple Inc. (Nasdaq: AAPL) iPhone's Siri can be, without noise filtering technology from Audience Inc. (Nasdaq: ADNC), it would hardly work at all.

That's why Apple Inc. (Nasdaq: AAPL) only uses hardware for Siri that has Audience's latest "earSmart" technology.

The short list currently includes just the iPhone 4s, although the third-generation iPad will be added when iOS 6 arrives later this year.

The attention from Apple has put the 11-year-old Audience on everyone's radar screen. Now that the company is public - it had its IPO in May - investors can come along for the ride.

Audience: Apple's (Nasdaq: AAPL) Vital Partner Audience has spent years developing ways to filter out background noise. The algorithms it uses are based on human hearing, replicated in hardware.

It's earSmart technology is so precise, call clarity is no longer an issue-even in a very noisy place like a crowded bar.

It's easy to see why such a feature is vital to Siri.

Audience technology is "clearly superior to what some of the other companies have today," Linley Gwennap, principal analyst at chip researcher Linley Group, told Bloomberg Businessweek. "You can hear the difference. The other companies are just now trying to do the kind of research that Audience is doing."

While most of the mobile phone industry spent the past five years catching up to Apple's touchscreen technology, Audience kept plugging away at improving voice calls.

Deutsche Bank analyst Brian Modoff, who launched coverage of ADNC earlier this month, said advanced voice filtering is likely to spread rapidly among phone makers, much as GPS did a decade ago.

"As with GPS, today's mobile phones have some basic noise cancellation built into the standard, but this area languished for years," Modoff said. "Audience has now succeeded in convincing carriers of the importance of this technology."

Research firm IDC says advanced sound filtering technology will spread to 70% of phones by 2016 - a market it says is worth $750 million.

A Growing Audience Recognizing the value of high-quality sound, Apple was an early customer - and a big one. As of last year, Apple accounted for about 75% of ADNC's revenue.

With its importance to Siri, Apple is likely to remain a major Audience customer for a long time. Beyond the iPhone and iPad, Audience technology is expected to play a key role in the long-rumored voice-controlled Apple iTV.

Apple's stamp of approval has also helped attract other phone makers to Audience.

Companies using Audience technology now include Samsung Corp. (PINK: SSNLF), HTC Corp. (PINK: HTCKF) and Sony Corp. (NYSE ADR: SNE).

Samsung, in fact, is now the company's second-biggest customer. Samsung accounted for 20% of ADNC's revenue in 2011, a steep jump from 7% in 2010.

Samsung also has plans to extend Audience technology beyond smartphones -- it recently filed a patent for a voice-controlled robot.

With Samsung and Apple as its two main customers, Audience is ideally positioned. ABI Research recently reported Samsung and Apple together own 50% of the smartphone market and 90% of the profits.

Even the carriers have taken notice. Audience made a deal with AT&T Inc. (NYSE: T) in 2010 to put its chips in many of its phones. The company says it has other U.S. carrier partners as well.

Audience technology is already in more than 50 devices.

Audience by the Numbers ADNC has grown quickly in recent years. In 2008, revenue was just $2.45 million. By 2010 - after Apple started buying the company's chips - revenue rocketed to $47.92 million. Sales almost doubled again in 2011, rising to $98 million.

Apple's shift from buying Audience chips last year to licensing its technology for its home-grown A5 family of chips means a bit less revenue going forward but higher margins. However, rising sales of iPhones and iPads, as well as ADNC's increasing chip sales to Samsung and other mobile device makers, should keep driving revenue up.

Improvements in ADNC's bottom line have followed suit. Audience lost money until 2010, when it made a profit of $4.8 million. Profits rose to $8.3 million in 2011, with analysts estimating 2012 net income to reach $13.78 million on sales of about $130 million.

Following its May IPO, three brokerages initiated coverage of ADNC, all with a "Buy" rating.

Audience has a high P/E of about 32, not unusual for a tech stock. But its balance sheet looks solid, with just $69,000 of debt against $18.71 million of cash.

The average one-year price target is $23.17, 14.9% higher than Wednesday's close of $20.16.

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Tags: Apple (Nasdaq: AAPL), Apple siri, apple technology, Audience, Audience technology, iOS 6, iPad, iPhone 4s, voice-controll
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