Very happy for the SP to tank from here, although I doubt that it will in the absence of further news. $AD8 has a strong reputation, and so they should be able to attract a quality replacement for Rob. My reasons are selfish - I've started to rebuild my $AD8 position, and would be happy to add some more if SP falls below $15.
CFO Departure
People decide for all manner of reasons in mid-career to make a change, and it doesn't necessarily reflect anything about the company. (I speak from personal experience.)
Looking at Rob's skin in the game in the 2023 Annual Report his shareholding was 145,655 shares, plus performance rights in addition. Over the last two years he has sold down typically 15% to 30% of his holdings each year, so has not accumulated as large a position as he might have. As a key insider with 7 years service at a senior level, this is quite a small holding. Still it is $2.5 million worth - its a reasonable nest-egg, together with his accummulated earnings and proceeds to see him and his family right for whatever lies ahead. Although "personal reasons" isn't as helpful as it might be and leaves room for inevitable speculation, people are entitled to privacy. (Many years ago, as a key insider, when I sold down my holdings I was asked to give a reason by the Remco. My response "personal reasons" i.e., none of your business, its my life and they are my assets.)
However, the fact that he will see through the next reporting round convinces me that there is nothing amiss here. A key issue in this type of firm is revenue recognition (witness what happened at $AMS) or inventory control/reporting. That's the kind of issue that could get a CFO uncomfortable with hanging around - but then they wouldn't stay for the reporting round, including the audit of the annual accounts. So, I can't see any flags here that might be associated with a CFO exit.
If Rob had built up a large position and was also offloading it at the recent high prices, that might add some support to some of the speculation. If he was acting on some hunch that the forward prospects of the company might have peaked, I'm guessing we'll see some leading indicators of that in the FY results. So, while it alerts me to pour carefully over the FY result and scruitinise the commentary and outlook statements carefully, I do that anyway.
I take more comfort knowing that Aidan Williams has almost 1.9 million shares after his recent selldown, which was only 2.5% of his holding. That kind of sell-down, even if it occurs on a regular basis, doesn't both me, particularly given that it was at a very good price at just under $22. At the end of 2020, he had 1.9 million shares, and so he is selling down slightly less than he is accumulating from performance rights/LTIs - but of course the value has grown very materially over the last 3-4 years. Its hard work being a CEO, and taking out $1 million to buy a better house, paydown the mortgage, or the kids mortgages, or even to diversify your holdings a bit, is hardly an issue from my perspective. I don't share the obsession of some over insider sell-downs. Why be rich, if you can't enjoy it?
With both his shareholding and performance rights, Aidan still has a lot of skin in the game. It's a personal legacy he has built up over the large part of his career - 21 years to be precise. I'd be much more concerned if he - as the remaining co-Founder - were to leave. $AD8 is a global leader in digital audio networking, and is having a crack at extending that leadership to AV. You'd have thought - money aside - the motivation of being at the helm of a global leadership success story like that is powerful. (Think Sam Huppert, Richard White, and Aram Mirkazemi - its a small and select club on the ASX in the technology space).
Every firm needs a good CFO. Every CEO needs a competent CFO working alongside them. Aidan and the Board will know this, and I am sure they will go through a robust search and selection process to get a good candidate. In time we'll find out. Provided they make a reasonable appointment, then I am convinced the future prospects of $AD8 doesn't rest on the brilliance of the CFO! That depends more on Aidan, the CTO, the Ops Lead, and the Sales and Markeing leads.
My View on $AD8
Just under 2 years ago I sold out of $AD8 at just south of $10. While at the time I had a wild range of valuations - so wide as to be almost useless - I had two concerns about 1) expense growth and 2) $AD8 entering the more competitive AV space, which I judged would be a different kettle of fish to audio. That judgement wasn't particularly well-informed beyond observing the number of companies globally working on digital AV, networking, and the potential in software. I couldn't answer the question "why should $AD8 win in AV?"
As is often the case, I regretted the decision soon after taking it, and in Q3 last year bought back 2/3rd of the position at around $9.00, only to sell it all again at $17.29 in Jan-24 prior to the latest results. (Again, on risk reward, I felt the shares were more than fully valued, and I wasn't a high conviction on the stock).
What I didn't count on was just how good the 1H result would be - so of course, I felt like a Wally, once again selling a winner. (Now for the record, I didn't add back in SM, which I should have because $AD8 fits in my "unproven" category of stocks. The reason was that the SP got away on me very quickly again in August last year, and I was waiting to add on SM, but never again got the opportunity!)
As I reflect on the psychology of my own decision-making, I have a contrarian streak. And so I started to doubt the upper scenarios of my valuation once all the "talking heads" started spouting on about how great $AD8 is without revealing much substance in their arguments. I can't help it, but that started to ring "sell" alarm bells in my head.
However, the fact is that my two grounds for selling in 2022 have not been bourne out. Expense control has been good, revenue growth and margins have been strong (alebit aided by the backlog, which will likely now be absent into FY25). More importantly, $AD8 seems to be making good progress in AV, underscoring that the video acquisition was a good one. While I still question whether they can achieve the global dominance in AV that they appear to have done in audio, it still creates the blue sky in the valuation again. Today I can see valuations anywhere from $14 to $24. Still a very wide range, but we are solidly back at the lower end, so the risk-reward is favourable, albeit this relies on strong execution and growth for several years. Any hiccups in performance will likely be punished, and its not inconceivable we could see the SP sub-$10 again.
So patience continues to be a virtue, particularly with highly rated, volatile growth stocks, and I am now back in, both in RL and SM, with enough of a position to have scratched this itch, but with some headroom to add more if we see further SP weakness. I'm more likely to wait and see what the FY looks like.
