Pinned straw:
This is not the easiest business to understand @PhilO.
It's even harder to value as there's effectively 3 parts to it (Audio, Video, Control) and they are somewhat interrelated / interdependent.
Audio
Audinate have been selling networking software (Dante) via hardware (Chips, Card and Modules / CCM's) to their OEM customers for nearly 20 years.
This hardware is manufactured by third parties in China and Malaysia and shipped from there to OEM's each time they order parts for a new manufacturing run of pro AV gear.
So all the IP and value prop to customers is effectively software, not hardware IMO.
Selling hardware as conduit for the networking software was a necessary evil from early on as OEM's would need to design these CCM's into their kit.
As I understand it, most of this Pro-AV gear didn't have the onboard tech to house the software but that seems to be changing, as you might expect.
So now AD8 are increasingly able to sell their software without CCM's to transport it.
The monopoly aspect only relates to their dominance and expected ownership of the Audio segment. Here they have 14x the share of their nearest competitor and 90% of the digital penetration.
That said, there's still another 90% of the audio market to penetrate over time. Hard to know how much of this will digitise and how quickly but seems like a safe assumption given their early dominance and the network effects at play, that AD8 will take the lion's share.
On it's own this audio business is fast growing, high gross margin and likely quite profitable.
Video
They now are parlaying this Audio success into Video where there are a number of bigger competitors already established. The Pro-video market is bigger (2.4x Audio), more fragmented, more technically challenging and earlier in its maturity towards digital / interoperability.
This is not a slam dunk and it looks like we are already seeing a competitive response from the biggest player in this space – NDI, who have recently beefed up their security capability to appeal more to enterprises that Audinate traditionally targets.
So Video feels like it has a long way to play out but the prize is big, so worth going after IMO.
Control
Also variously referred to as Software, Software and Services, etc.
This is the biggest potential TAM (2.7x Audio) but that is dependent on building out Audio and Video market share - you need the Audio and Video endpoints out there to sell the control of them.
Similarly, having a widely used and liked control product(s) in market should drive faster adoption of Dante for Pro-Audio and Video kit.
This segment also requires a different business model – selling directly to the end users (AV engineers and the institutions they work for / advise).
Control has been the subject of some recent (long awaited) M&A which left the market underwhelmed but is a potential game changer – depending on how well they integrate and Go to market.
Get Funky
Now that the price is in a funk and sentiment seems very low, it could be a good time to look closely at this business if you believe as I do that it has a lot of potential.
If it gets anywhere near fulfilling that potential, it’s not hard to see the current price as very cheap. If mgmt can’t make meaningful progress in the video segment, or can’t successfully integrate Iris Studio, they will likely destroy a significant amount of capital trying, so today’s price could actually be expensive.
Disc: Held
Thinking about the real world problem they're trying to solve is where I try to anchor my analysis too @PhilO.
I think for Audinate in Audio this is to bring interoperability to networked Pro-Audio equipment. So you can plug a Dante-enabled gear like a Yamaha mixer, some Bose speakers and rode microphones into a network and they will all find each other as if they were from the same manufacturer and using that manufacturer's proprietary networking software. Then you (an AV engineer) can manage all of these endpoints centrally using Dante Control software like Director, Domain Manager, etc via a PC or Mac.
Before Audinate, you had 2 broad options - use the same manufacturer (OEM) for all of your kit (where the OEM had a virtual networking protocol - aka walled garden) or use cables to connect everything back to your mixing desk (analogue solution).
Agree, Video use case is pretty much the same - plus to link pro-video gear on a network to pro-audio gear on the same network - where all endpoints are Dante enabled. This is a key weapon that Audinate brings to the fight for Video supremacy - they already have Pro-audio networking dominance.
TAM time
A couple of years ago, Audinate had another go at defining their TAM with some consultants (Omdia).
The break down in AUD (with USD FX rate $0.65) was Audio = A$508m (16.5%), Video = A$1,200m (39%), Control = A$1,369m (44.5%).
So total TAM is just over A$3bn in annual revenue and estimated to be growing at about 5% p.a.
It’s not an easy market to analyse so this TAM is pretty rough but importantly AD8 have said they only include revenue they can realistically capture with their current products. Since then they have expanded their product offering organically and via M&A so this $3bn TAM should in theory be bigger now.
AD8 has about 10% of the total Audio market penetrated, but 90% of all networked products in market.
Why so slow
Product life cycles for Pro AV gear can be up to 8 years – moves slower than consumer AV gear, so the new kit needs to be designed with Dante chips or enabling hardware to take the networking software.
The process is to first sign up the OEM to be Dante enabled, then for OEM’s to design parts of their catalogue with Dante on board. There’s a lag for design wins to turn into sales as the time of manufacture is when AD8 gets paid by OEM’s.
So it might seem a bit slow and steady but this is what CEO Aidan has talked about in the past - there's not likely a tipping point or hockey stick in adoption coming, he expects adoption to just grind slowly higher over time like in the below graph.
With 90% of the Audio TAM still analogue, there’s a lot of white space but there’s some inertia too – if OEM’s feel they’ll get enough additional sales to more than justify the cost of Dante, they’ll likely take it up, otherwise they’ll probably stick with cabling and revisit in the next product refresh.
The more Dante becomes embedded as the default OS for Pro-audio, the more automatic it should be come for new products to be designed with Dante on board.
Software value prop
This will be case by case as there’s a wide variety of users out there and as mentioned in the last post, the value prop for software depends somewhat on the proliferation of hardware with Dante enabled.
That said, the control software is improving and has the potential to step change with the Iris Studio addition, especially if you buy into the hype these guys are peddling - https://www.youtube.com/watch?v=a6Ws3BEbsz0
Disc: Held.