Deutsche Bank’s Brian Modoff today starts coverage of chip maker Audience (ADNC), which went public May 10th and whose specialized digital signal processors (DSPs) are intended to improve sound quality in mobile devices, with a Buy rating and a $23 price target.
As Modoff summarizes the company, “Audience has reinvigorated the once sleepy area of cellular audio quality.”
“They have spent years convincing carriers and handset vendors of the benefits of voice enhancements.”
Modoff believes Audience technology is now “standard technology in all iPhone” models from Apple (AAPL), having probably been put in the latter’s “A5” microprocessor, and he sees the company winning contracts with other cell phone makers.
Modoff thinks making better voice calls is actually becoming the important thing in cellular, just as other innovations were a focus in prior years:
We have seen this pattern repeatedly over the years in handsets. Ten years ago, this area was GPS [...] Going even further back, we would argue that Qualcomm (QCOM) played a similar role with improving the air interface. In all of these, we see a common pattern. A small component or technology company comes up with an improvement. They then spend several tough years convincing the carriers of the importance of their approach. The carriers then push the handset vendors and the standards bodies into compliance. We believe the next area of such innovation will be voice quality, and Audience is the leader in promoting this technology. Audience has developed a process which greatly enhances voice quality of mobile phones and other devices. As with GPS, today�s mobile phones have some basic noise cancellation built into the standard, but this area languished for years. Audience has now succeeded in convincing carriers of the importance of this technology. This time around, they deviated from the pattern a bit with the help of Apple who saw Audience�s value and indirectly helped promote its proliferation. Improving voice quality on mobile phone is important for two reasons. First, it makes for a better consumer experience. Audience provides a notably improved voice stream, and this should led to benefits for the whole sector. Secondly, by eliminating background noise it reduces network traffic. Over time, this should allow the carriers some ability to run more efficient networks. We also see applications for this technology to enable whole new areas. Just as GPS led to easy social networking on phones, so too can Audience�s audio enhancements lead to growth in whole new applications. These could take the form of keyboard replacement for phones and PCs, to name one example, and there are probably many more no one has thought of yet.
Audience made $97.7 million in revenue last year and 14 cents per share in profit, and reported March revenue of $28.54 million and 46 cents profit.
For this year, Modoff is modeling $131 million in revenue and $3.64 per share in profit.
Audience shares today are up 71 cents, or 4%, at $17.86, below the stock’s first-day close of $19.10.
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