Company Overview: An Australia-based company, Audinate Group Limited (ASX: AD8) is engaged in providing professional audio networking technologies across the world. The Company is involved in improving both software and hardware to accelerate the delivery and management of audio over information technology (IT) networks. The move is intended to improve audio quality, equipment interoperability and system flexibility. 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: Audinate Group Limited (ASX: AD8) is engaged in developing digital Audio-Visual networking solutions via its technology platform, Dante®. The company’s Dante audio is preferred over IP networking solution and is utilized in the professional live sound, broadcast, commercial installation, and recording industries. Notably, the company has more than 450 customers, and over 2,300 Dante enabled products on the market.
 
2019 was a remarkable year for Audinate as the business exceeded its financial goals and delivered on strategic product initiatives, which aided the company to build its platform for future growth. In FY19, the company had unveiled Dante AV products at the InfoComm tradeshow. The move has doubled the company’s total addressable market of its audio networking business. The company aims to secure design wins for these products in FY20 and enter FY21 with a robust pipeline for additional revenue growth.  In FY19, the company generated revenue amounting to US$20.3 million, up 33.6% on FY18 revenue of US$15.3 million. In Australian dollars, revenue went up by 44.1%, from A$19.7 million in FY18 to A$28.3 million in FY19. The solid growth in revenue is attributable to further penetration of Dante-enable products in key market segments. EBITDA for the period was reported at A$2.8 million, up 249% year over year. NPAT for the period amounted to ~A$0.7 million, representing an improvement of ~$0.6 million on the prior year after adjustment of one-off tax benefit received in FY18. During the year, the company saw an increase of 30% in operating expenses to A$18.3 million. The expenses primarily pertained to investment in people that included new roles related to sales and engineering, costs associated with the company’s new Sydney office and the second year of long-term incentive expenses.
 
Looking at the performance over the period covering 1HFY16 to 1HFY20, the company witnessed a CAGR growth of 27.6% in top-line with 1HFY16 revenue amounting to US$3.8 million and 1HFY20 revenue amounting to U$11.1 million. The increase in revenue during the period is attributable to a 28% increase in shipments of Dante chips, cards, modules, and software. Notably, gross profit margin increased historically from 75% to 77%, on the back of software growth.
 

Revenues & Dante Trends (Source: Company Reports)
 
Going forward, the company stands to benefit from record achievement and growing revenue in the last few years. Moreover, continued expansion and investment in R&D, consistent product upgradation, is expected to be continued in FY20. The company is well-positioned to drive innovation throughout the Audio-Visual (AV) industry and capitalise on growing 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.
 
1HFY20 Performance Highlights: During the half-year ended 31^st December 2019, the company reported robust results on the back of continued growth in software sales. The company has expanded the reach of its Dante enable products, with 147 new products released recently at a tradeshow, taking the number of products available in the market up by 35%. During the half, revenue came in at $16.1 million, an increase of 14% on the prior corresponding period. During the period, the company marked a shift in the product mix to a larger proportion of high margin software sales which provided a boost to gross margin. Gross profit for the period increased 20% year over year and came in at $12.4 million due to favourable product mix of higher software sales and fewer low margin Ultimo chips. Operating expenses for the period came in at $10.6 million, up 22% year over year, due to higher employee expenses which increased 28% on pcp and made good progress in enhancing the engineering team.
 

1HFY20 Key Highlights (Source: Company Reports)
 
Robust Expansion of Product Offering: Revenue growth in 1HFY20 was supported by the increased scale of operations with respect to Dante-enabled products. As at 31 December 2019, the company had 2,371 Dante enable products available for sale. The number of Original Equipment Manufacturers shipping Dante enable products increased by 28% to 292 in 1HFY20. The company recorded 147 Dante enabled products launched at ISE tradeshow, which increased 113% on a year over year basis. Further, Audinate’s user accounts continue to grow by 19% pcp in 1HFY20.
 

Dante Highlight (Source: Company Report)

Balance Sheet & Cash Flow Details: At the end of the period, the company’s cash balance stood at $34.3 million and total assets amounted to $56.8 million.The company has no debt, which helps the company to focus on its growth strategies and boost long-term shareholder value. During the period, cash from operations came in at $2.9 million, up from 551K reported in the year-ago quarter. In 1HFY20, the company declared a dividend of 4.8 cps.
 
Key Developments: During the 1HFY20, the company remained on track to offer continuous delivery of mature chips, cards & modules product. The move aided the company to meet the increasing demand for its newly unveiled 147 Dante audio 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 also increased marketing & training resources of staff in Europe, China, Latin America to support the software transition of the Audio Visual sector.
 
COVID-19 & March Quarter Update: Due to the increasing rate of COVID-19 spread worldwide, the company finds its sensible to suspend its previous FY20 growth analysis. For the period ended 31 March 2020, the company reported unaudited revenues of US$5.3 million, up 14% year over year. The company is strongly positioned to endure significant adjustments in the sector and economic conditions. As at 31 March 2020, the company had more than A$30.9 million cash on hand, with no debt.
 
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table which together form around 33.08% of the total shareholding. Yamaha Corp holds the maximum number of shares with a percentage holding of 9.34%, followed by Smallco Investment Manager Ltd. with a holding of 9.2%.

  
Top Ten Shareholders (Source: Thomson Reuters)
 
Key Metrics: 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 0.31x. Current ratio of the company stood at 4.73x in 1HFY20, higher than the industry median of 1.92x. 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)
 
Outlook: The company’s historical US dollar revenue growth has been in the range of 26% to 31%. The company expects to continue the trajectory with a focus to grow the shareholder’s value in the long run. It also focuses on revenue growth through design wins for its newly launched products along with the implementation of its next-generation Dante audio and video software.
 
The company’s increased software sales and expansion in the product base, are a clear indication of the long-term success of the company. Going forward, the company will continue to see the impact of macro-economic conditions and US tariffs on its results, along with the potential impact of coronavirus. Despite the above challenges, the company expects to report an upward movement in revenue during 2HFY20.
 

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
 
Valuation Methodology: P/CF Multiple Based Relative Valuation (Illustrative)
 
P/CF Based 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 up 24.32% over a period of one month. Currently, the stock is trading slightly above the average of its 52-weeks trading range of $2.51 - $9.3. 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 a P/CF multiple based illustrative relative valuation method and arrived at a target price, offering an upside of lower double-digit (in percentage terms). 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 $6.72, down 2.609% on 5 June 2020.
 
 
AD8 Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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