Regarding operating leverage, the drop in Audinate's overheads as a percentage of revenue from 65% to 56% in the FY23 result was impressive and unexpected given the more gradual movement across FY19 to FY22:

To reach mid-20s EBITDA margins over time, we'd have to assume a further drop from 56% to 50% overheads (i.e. 75% gross margins - 50% OPEX = 25% EBITDA margin). Dolby has an overheads percentage at 48%.

The 50% OPEX profile for Audinate (25% EBITDA margin) is likely to be made up of (over time):

• 10% sales and marketing (S&M) in line with the FY23 result [note: this is up from 5.6% of rev in FY22]
• 35% employee expenses [note: currently at 42% of rev, down from 52% of rev in FY22]
• 5% other operating expenses [note: currently 7.7%, down from 8.2% in FY22]

If we were to be more bullish on the profile, in a slightly revised case, we might get to 35% EBITDA margins (75% gross margins – 40% OPEX = 35% EBITDA margins), comprised of:

• 10% sales and marketing
• 25% employee expenses
• 5% other operating expenses

Given the in-person sales sales-heavy nature of the business (e.g. trade shows and technical training), S&M will likely stay high over time. Even in a software business like Xero, sales and marketing is currently at 12% at >$1bn rev. Dolby spends 29% of revenue on sales and marketing.

Audinate is absolutely dominant with 12x the market adoption of its closest competitor, per the FY23 presentation. However, this measure of dominance was down from 14x at 30 June 2022 and 19x at the end of 2021. Indicating ongoing spending is required to retain the lead. It is not out of the question that Audinate may increase S&M at a rate in line with, or greater than top line growth over the medium term. So I don’t see S&M going below 10% of rev.

Working out where employee expenses (as a % of rev) may settle is more of a challenge and where the EBITDA margin opportunity lies. It will vary by industry of course but payroll to revenue expenses are normally around 5-30% for software businesses. Could be up to 50% for more labor-intensive service-based businesses. Dolby has G&A as a percentage of rev at around 22%.

Would love to hear other thoughts - how high could Audinate's EBITDA margin get to, over time? Why? Why not? What are the best comparables?

An important question given this is one of the single biggest drivers of the valuation and is unclear today.

@Strawman, @edgescape, @Valueinvestor0909, @Slew, @Slomo, @mushroompanda , @RobW