Audience was on track for a solid IPO. Their voice processing technology is embedded into market-leading mobile devices to enable clearer understanding of speech thanks to much more sophisticated analysis. The $14-16 filing range compares well with our $31 IV. (A link to our research note is available in the left sidebar.)

But lo and behold a patent litigation lawsuit was launched against the company just as they begin the IPO marketing process. So far the only information available is what Dan Primack put out yesterday.

The patent appears to be bona fide but it’s just one in a sea of related patents and intellectual property. Of course “claims of infringement” is listed as a risk factor on page 28 of the voluminous S-1 filing. There are actually several relating to IP. But such “risk factors” are now boilerplate and typically ignored or minimized by investors.

Audience is no stranger to patents and IP protection and they note seven issued, 87 pending US and 37 pending foreign patent applications in their IP bag of tricks. They are probably familiar with patent US 2003/008401 A1.

Adding to the surprise is the fact that Apple and Samsung has formidable (an understatement) legal and IP teams and the embedded nature of the Audience solution would make it seem unlikely that Apple wouldn’t have done the work to ensure that there as no valid potential conflict in the IP.

In this case the timing is nasty. Just as Audience was about jump into the pool as a public company along comes Dmitry Terez who spits in their lane. It’s unlikely that the deal will happen unless some resolution (at least an LOI) can be put into place.

Audience has the means to pay a reasonable settlement. A 2% royalty would be about $3M cash upfront and then $2-3M year depending on volume. Audience would still be profitable although the IV would drop into the high $20’s which is hardly a devastating outcome.

Until something is resolved there’s no way to know if both sides are going to be reasonable or if a fight will ensue.

The impact of murky patents and patent law has been growing steadily over the past year. The big boys – Apple, Samsung, Microsoft and Google have all been very active and public “patent plays” have been growing. Names like Acacia Research (ACTG), VimetX (VHC), IPO Candy name RPX Corporation (RPXC) and more recently Vringo (VRNG).

There is a growing frustration with the lack fo reform but at the moment the system seems incapable of reform. So now companies and investors must come to grips with trying to bring products to market knowing that at any moment some patent litigation may spring up.

The Audience case is one that will heighten the discussion of how patent laws prevent companies from innovating and bringing new products to market. What we don’t know is whether Mr. Terez has been reasonable and forthcoming with respect to licensing his patent in the past or if he was simply lurking.

We’ll be watching for some resolution and adjusting our analysis and IV once we know more.

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1 Comment

  1. John Clinnin on 05/08/2012 at 9:39 pm

    at moment, no rewrite of S-1 expected

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