Sharing my AD8 notes to myself following the recent downgrade, so apologies if some of this is repetitive has been covered elsewhere...

Growth

I think about Audinate’s growth as having 3 sources. All are from selling their Dante protocol in different forms. Note, this is different to the 3 segments they call out in their presentations – more on them below.

The primary revenue source is from sales to existing Original Equipment Manufacturers (OEM’s) who buy Dante enabled Chips, Cards & Modules (CCM’s) from Audinate.

The growth drivers I see are:

1)   Existing Dante enabled pro AV units being shipped in greater quantities over time. Note, this piece can also go in reverse, as is now forecast for FY25, but unlikely to drop for long as new products gain in popularity or are replaced by Dante enabled products that do and the market continues to grow.

2)   Design Wins in one year becoming sales in the next and subsequent years. This is likely the biggest driver of revenue growth and market penetration early on (especially for Video but more on that later).

3)   Software sales (SaaS) to end users, usually sound engineers, their employers or owners of networked installations (eg, Sydney Trains). The greater the ‘installed base’ from 1 & 2 above the higher the value proposition from Dante software to manage them. In time they’ll likely also / instead sell the protocol to OEM’s as software (licence per unit) rather than embedded in chips / hardware.

When an OEM designs a Dante chip into their hardware in Year 0 (aka a Design Win), sales of Dante CCM’s are triggered whenever new hardware is built. For Example, if a Pro audio equipment maker in South Korea makes 1,000 units of a Dante enabled product in Year 1 and ships 950 of these to distributors in US, Europe & Asia, 1,000 Dante enabled chips will be sent from Malaysia to South Korea, along with nuts and bolts from China, circuitry from wherever… to be assembled in South Korea. If these sell well, they might make 1,500 units in Year 2, so 1,500 Dante chips are sold for this product in this next year.

It seems existing sales in FY24 were brought forward to such a large extent by covid supply shocks that OEM’s have over stocked and won’t need to buy as many chips in FY25. Further this decline is unlikely to be made up for in new design wins (from FY24) or expected software sales in FY25.

The over earning in FY24 was a one off, FY25 should see lower Revenue AND Gross Profit, despite rising gross margin, so normalised revenue growth rates are probably something like the 22% average you get when you average the 6 years to FY25, including an estimate of -5% for next year.

3 Segments

Audinate split their market into Audio, Video & Software.

Audio is where they dominate with 12x the units in market of their nearest competitor. So even though they have less than 10% of the addressable market, they have 90% of the penetrated market and an even higher proportion of new units coming to market.

So there is 90% of the market still to be taken from the incumbent which is physical cabling of networked pro-Audio products.

Audinate’s dominance of this market suggests that Dante becoming the default Audio over Internet Protocol format is just a matter of time and management have said as much.

The key questions are how much of this 90% can they take, by when and what margins can they earn?

Video is the newest part of the strategy, the biggest focus for the business, the biggest opportunity, and the biggest risk.

This is off to a good start exceeding management expectations for units shipped and growing fast off a small base.

It probably needs some M&A to step up and compete against some of the larger competitors in this space. The $70m Cap Raise @ $13 in Oct-23 was to be used for this purpose but is still sitting on the balance sheet. More on that later.

Software is already a significant and growing piece of the Revenue mix (20% I think) and should grow well from here – just how far it can go will depend on the success of the Video strategy – at which point they can unify both formats under Dante as the Operating System for the Pro-AV Industry which is their stated longer term strategic aim.

I think of this as Audio being the foundation, funding source and playbook for Video penetration – this will be the battleground for dominance.

Video is the big opportunity as it potentially unites the industry under one format for Networking over IP and opens up the opportunity for high margin sticky software to manage a large installed base.