Cracking result. Here are some of my take aways from the conference call.

• EBIT positive and free cashflow positive for 2H FY23. Management is expecting EBIT and FCF to continue to improve in FY24. This isn’t just a comment made on a whim. The company re-recognised $7.7m of deferred tax assets in the results - which means management expects continued future profits in the foreseeable future and would have had detailed conversations with the auditor to qualify these projections.
• Audinate is leveraged to the USD and a strengthening USD is good for the company. 40% USD revenue growth for the year translated to 50% growth in AUD terms. Cost of goods sold is USD, marketing is mostly USD, and 15% of the headcount is US based. But the rest of the expenses are mostly AUD, Philippines and Europe based. Continued USD strengthening will be a tailwind. The AUD/USD average exchange was $0.67 for 2H FY23 and is now currently $0.64. So expect another helping hand in 1H FY24.
• Management has been more emphatic about the trend of customers transitioning from hardware (chips, cards, modules) to software implementations. Which means a nominal change in gross profit dollars, an increase in gross profit margins and a slowing of top line revenue numbers. So expect more talk of Gross Profit (historically 24-32% CAGR) going forward rather than Revenue growth.
• It was mentioned that Dante Connect will gain video support in FY24. This is going to be a key watch point for Dante Video adoption as it’s going after NDI’s core competency - video broadcast and content creation with cloud workflows.
• Management was very positive about the progress made in Dante Video. The last 6-12 months of new products, design wins, units shipped and reception has only reaffirmed that they’re moving 3x the pace as they were with Audio at the same point. And this is mainly due to the brand recognition of Dante and the existing audio install base.
• 1H FY24 as mentioned will likely have a currency tailwind. But is also looking strong as the Ultimo backlog is being cleared after a period of supply constraints.

Companies like AD8 have the latent potential to surprise the market very pleasantly. A few more halfs like this, and the valuation doesn't look as egregious anymore.

I've replaced this graph with a corrected version. (Apologies if it caused confusion.)

In the previous one, I wasn't calculating FCF correctly, and it was picking up movements in long term deposits reported in the Investing cashflow line, and omitting Lease Payments which are reported in the financing CF line, but which are a part of the operating cashflow.

In this corrected version, FCF =OpCF + CF(PPE) + CF (Acquisitions) + CF (Intangibles) + CF (Lease Payments)

Reported (& graphed) InvCF looks very low in FY23, because $11m of the capital raise proceeds were taken out of long term deposit and used to offset the $14m investment in intangibles.

So the picture below better portrays what is going on:

• The supply chain challenges in FY22, sent OpCF essentially to zero
• With the supply chain challenges now over, we can see OpCF back on its long term rising trend
• Overall, they are running just below breakeven on a FCF basis, with $24m cash and cash equivalents and $16m remaining term deposits, which means an effective buffer of $40m.

The balance sheet support the low rate of cash burn for many years to come, and won't be an issue if they continue the revenue growth trajectory.