Company Overview: Audinate Group Limited (ASX: AD8) is an Australia-based company, betrothed in providing professional audio networking technologies across the world. The company is engaged in improving both software and hardware to accelerate the delivery and management of audio over information technology (IT) networks. The company’s technology platform replaces traditional analogue audio cables by transmitting coordinated audio signals across large distances, to various locations at one go.

AD8 Details

AD8 Rides on Higher Adoption of its Dante Product & Increased Investments: Audinate Group Limited (ASX: AD8) is involved in the development of digital Audio-Visual networking solutions through its technology platform, Dante®. The company’s Dante audio is preferred over IP networking solution and technology and distributes audio & video signals across computer networks. It is used in the professional live sound, broadcast, commercial installation, and recording industries. Notably, the company has more than 524 OEM customers, and around 2,804 Dante enabled products in the market.

The company started 2020 with a remarkable performance as its business exceeded financial goals and delivered on strategic product initiatives. This, in turn, helped the company to create its platform for future growth. The number of Dante enabled products manufactured by AD8’s Original Equipment Manufacturer (OEM) customers is a vital measure of the company’s technology production and usually a top indicator of future revenue growth. The Company has attained an increase of 31% in this metric and finished FY20 with 2,804 Dante-enabled products on the market.

During the COVID-19 led outbreak, a large number of AV professionals are working from home, which depicts growth opportunity for Audinate to ramp up webinars and its Dante Certification training program. Market research has discovered that this training is a key leading indicator of professionals’ tendency to utilize and implement Dante technology. The move had doubled the company’s total addressable market of its audio networking business. Further, AD8 focuses more to secure design wins for these products in FY20 and enter FY21 with a robust pipeline for additional revenue growth.

In 2HFY20, the company conducted 77 webinars, including 25 in Chinese and 23 in five other non-English languages. In these webinars, around 40,000 AV professionals commenced Dante certification. The company remained on track to advance the constant delivery of mature chips, cards & modules products. The company also completed delivery of new products, namely, Dante AV Product Design Suite, Dante Embedded Platform and Dante IP Core, and increased its product pipeline to incorporate new design wins. AD8 increased the marketing & training resources of staff in Europe, China, Latin America to support the software transition of the Audio-Visual sector.

Over a period of 4 years starting from FY16 to FY20, AD8 saw a CAGR of ~24% in top-line, primarily attributed to an increase in shipments of Dante chips, cards, modules, and software. Particularly, gross profit margin increased to reach 77%, on the back of software growth. Dante units shipped increased at a CAGR of ~32% from FY16 to FY20.

Revenues, and Dante units shipped (Source: Company Reports)

The company remains on track to invest higher to double its engineering and R&D functions over the coming two years. The company is also taking necessary measures to develop next-generation Dante audio and video software implementations, thereby making Dante video the technology choice for OEMs. The company is well equipped to stay afloat in the sector and economic conditions and expand its total addressable market with the addition of video & software products. It is worth noting that as on 30 June 2020, the company has $68 million cash at bank, to pursue growth agenda and potential M&A. 

Key Highlights of FY20 Results: During FY20, for the period ended 30 June 2020, the company reported revenues of $30.3 million, up from $23.3 million reported in the year-ago period, on the back of continued growth in software sales. The company has also increased the reach of its Dante enable products to 2,804, taking the number of OEM products available in the market up by ~21%.  During the period, the company demonstrated a shift in the product mix to a larger proportion of high margin software sales which offered a boost to gross margin. Gross profit for the period came in at $23.2 million, up from $21.1 million reported in FY19. Gross profit margin improved from 74.4% to 76.6%. Administration and other operating expenses for the period came in at $2.89 million, as compared to $2.97 million reported in FY19. EBITDA for the period stood at $2.0 million, as compared to $2.8 million reported in FY19. Losses were reported at $4.1 million, due to higher depreciation and amortisation expenses.

Key Financial Highlight (Source: Company Reports)

Dante-enabled products Remain Key Catalysts: Revenue growth in FY20 was supported by the increased scale of operations with respect to Dante-enabled products. As at 30 June 2020, the company had 2,804 Dante enable products available for sale. The number of Original Equipment Manufacturers shipping Dante enable products increased by 21% to 328 in FY20. Professionals trained on Dante stood at 57,000 during FY20. Notably, almost 120,000 people attended the webinars or participated in online training conducted by the company. The company also won several designs for Dante products, with Yamaha, Bolin, and Patton. This proves that the company is expanding its lead as the clear global market leader in audio and video networking.

Balance Sheet & Cash Flow Highlights: At the end of the period, the company’s cash balance came in at $29.3 million and total assets amounted to $50.3 million. The company’s lease liability stood at $585k at the end of the period. With the strong balance sheet and net cash position, the company focusses on its growth strategies to boost long-term shareholder value. During the period, cash from operations came in at $4.8 million, up from $3.6 million reported in FY19.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table which together form around 32.24% of the total shareholding. Yamaha Corp holds the maximum number of shares with a percentage holding of 8.57%, followed by Smallco Investment Manager Ltd. with a holding of 8.5%.

Key Ratios Analysis: In 1HFY20, the company reported an EBITDA margin of 11.6%, higher than June’19 EBITDA margin of 7.6%. In 1HFY20, the company reported gross margin of 77.1%, higher than June’19 margin of 75.5% and the industry median of 24.5%. ROE in 1HFY20 stood at 0.8%, as compared to June’19 negative ROE of 0.6%. Debt levels for 1HFY20 also stood at decent levels, with a debt-to-equity multiple of 0.06x, lower than the industry median of 0.29x. Current ratio of the company stood at 4.73x in 1HFY20, higher than the industry median of 2.04x. The company is confident about business growth, looking at the potential impact on gross margin from its key products.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Risk Analysis: The company will continue to see the impact of macro-economic conditions and US tariffs on its results. Notably, the company remains battered by the US tariffs imposed on some of its products & OEM products made in China. Further, the economic slowdown in China is likely to impact Asia revenues. Also, stiff competition along with the potential impact of coronavirus pose risks on the operational front.

Outlook: Going forward, the company stands to gain from record achievement and growing revenue in the last few years. Moreover, continued expansion and investment in R&D, consistent product upgradation, is likely to be continued in FY21. The company is well-positioned to drive innovation throughout the Audio-Visual (AV) industry and capitalise on growth opportunities and support the software transition in the AV space. Notably, economic conditions and US tariffs may impact the near-term results, however, the company’s strong competitive landscape in terms of networked audio products remains a key positive.

Looking ahead, AD8 expects to continue its growth trajectory with an increased focus to grow the shareholders’ value in the long run. It also focuses on revenue growth through design wins for its newly launched products as well as the execution of its next-generation Dante audio and video software. The company’s improved software sales and expansion in the product base, are a clear sign of the long-term success of the company. Despite the challenges faced by the company, it expects to report an upward movement in revenue in FY21.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of the company went down 9.37% over a period of one month. Currently, the stock is trading slightly below the average of its 52-week trading range of $2.51 - $9.3. On the technical analysis front, the stock of the company has a support level at ~A$4.96 and a resistance level at ~A$6.33. The company remains on track to invest in research & development. With the above developments in place, the company expects to maintain its historical revenue growth trajectory and deliver shareholder’s value in the long run. Furthermore, AD8 is continuously working on the acceleration of product development and has the foundations in place to support the software transition of the Audio-Video industry in the medium-term. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price, offering an upside of lower double-digit (in percentage terms). For the purpose, we have considered peers such as Infomedia Ltd (ASX: IFM), WiseTech Global Ltd (ASX: WTC), and Altium Ltd (ASX: ALU), to name a few. Considering the key business developments, and anticipated growth in the software business, we give a “Buy” recommendation on the stock at the current market price of $5.33, up 5.964% on 21 August 2020.

AD8 Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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