Company Overview: Audinate Group Limited (ASX: AD8) is an Australia-based company, which is 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
 

 
Higher Adoption of its Dante Product & Increased Investments to Boost the Growth: 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 450 OEM customers, and more than 2,300 Dante enabled products in the market.
 
The company exited 2019 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. During the period, the company made its first step into the video market, with the release of Dante AV products at the InfoComm tradeshow. 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.  
 
A quick Look at FY19 Highlights: In FY19, AD8’s revenues grew~33.6% year over year and stood at US$20.3 million. In Australian dollars, revenue increased 44.1% from the prior corresponding period. The strong growth in revenue is attributable to further penetration of Dante-enable products in key market segments. EBITDA for the period went up 249% and came in at A$2.8 million, whereas NPAT for the period came in at ~A$0.7 million, which improved ~$0.6 million on the prior year. During the year, operating expenses increased 30%, primarily due to higher investment in people that encompassed fresh roles associated with sales and engineering, expenses related to AD8’s new Sydney office and initiatives to achieve its long-term incentive expenses.
 
Coming to 1HFY20, the company remained on track to advance constant 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 increased the marketing & training resources of staff in Europe, China, Latin America to support the software transition of the Audio-Visual sector.
 
The company has recently withdrawn its FY20 outlook, owing to the increasing rate of uncertainty led by COVID-19 outbreak. For the period ended 31 March 2020, the company reported unaudited revenues of US$5.3 million, which increased 14% from the prior corresponding period. The company is well placed to withstand substantial adjustments in the sector and economic conditions. It is worth noting that as on 31 March 2020, the company had more than A$30.9 million cash on hand, with no debt.
 
Over a period of 5 years starting from 1HFY16 to 1HFY20, AD8 saw a CAGR of 27.6% in top-line, primarily attributed to a 28% increase in shipments of Dante chips, cards, modules, and software. Particularly, gross profit margin increased historically from 75% to 77%, on the back of software growth.
 

 
Revenues, Dante units shipped, EBITDA & Gross Margin Trends(Source: Company Reports)

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 during 2HFY20.
 
Interim Results: During 1HFY20 for the period ended 31st December 2019, the company reported revenues $16.1 million, up 14% year over year, on the back of continued growth in software sales. The company has also increased the reach of its Dante enable products, with 147 new products released recently at a tradeshow, taking the number of OEM products available in the market up by ~35%.  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 $12.4 million, up 20% on a year over year basis. Operating expenses for the period came in at $10.6 million, an increase of 22% from the prior corresponding period, due to higher employee expenses which increased 28% on pcp and made good progress in enhancing the engineering team.
 

Key Financial Highlight (Source: Company Reports)
 
Dante-enabled products Remain Key Catalysts: 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 skyrocketed 113% on a year over year basis. Further, AD8’s user accounts continue to grow by 19% pcp in 1HFY20. It is worth mentioning that Dante has 7 times more adoption as compared to its close competitors. Further, post ISE tradeshow, Dante enable now stand at 2,518. This proves that the company is expanding its lead as the clear global market leader in audio networking.
 

Dante Highlight (Source: Company Reports)
 
Balance Sheet & Cash Flow Highlight: At the end of the period, the company’s cash balance came in at $34.3 million and total assets amounted to $56.8 million. The company’s lease liability stood at $2.9 million 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 $2.9 million, up from 551K reported in the year-ago quarter. In 1HFY20, the company declared a dividend of 4.8 cps.
 
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table which together form around 33.13% of the total shareholding. Yamaha Corp holds the maximum number of shares with a percentage holding of 9.26%, followed by Smallco Investment Manager Ltd. with a holding of 9.18%.
 
 
Top Ten Shareholders (Source: Thomson Reuters)
 
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 0.31x. 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)
 
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 FY20. 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.
 

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
 
Valuation Methodology 1: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)
 

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Valuation Methodology 2: 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 up 17.51% over a period of one month. Currently, the stock is trading slightly below 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 and EV/Sales multiple based illustrative relative valuation methods 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 $5.18, down 3.538% on 3 July 2020. 
 
 
AD8 Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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