FWIW Morningstar has also updated their coverage on Audinate

Morningstar currently rate AD8 as a 5 Star stock with a Fair Value of $18.50 (so they see it is significantly undervalued)

Audinate Earnings: No Signs of Improvement Yet

Analyst Note

We maintain our AUD 18.50 per share fair value estimate for narrow-moat Audinate following its first-quarter fiscal 2025 update. The company indicated that it does not expect to meet its previously issued guidance for the full year, which it issued in August. Specifically, the company no longer expects to generate “slightly lower USD gross profit compared to fiscal 2024.” The company did not update its guidance but will update the market after the completion of second-quarter fiscal 2025 trading. Although the update is a further disappointment, we, like management, expect fiscal 2025 to be a transition year for the company and expect growth to reaccelerate from fiscal 2026. At current prices, Audinate shares screen as materially undervalued, as the market appears to believe the company’s current slowdown may signal a loss of competitive position or exhaustion of its addressable market.

We view the current slowdown as a combination of a resolved backlog of hardware products and a transition of the business from hardware-based sales to software-based sales. The former echoed the covid-19-induced chip shortage, which led to artificially high demand in fiscal 2024, which the company is now lapping. The second is more structural in nature. To increase market penetration, the company needs to offer original equipment manufacturers lower-cost ways of implementing the Dante protocol, primarily by allowing them to implement Dante through software instead of through separate hardware chips. We view this transition as analogous to what we have seen in many software-as-a-service businesses, where the transition initially led to slower growth but where the new price points unlock sufficient incremental volume to make up the difference.

Business Strategy and Outlook

We expect Audinate’s strategy to primarily focus on accelerating the secular transition toward digital audio networking. Secondarily, we expect Audinate to focus on building out its nascent business for digital video networking.

Audinate’s Dante protocol has become the world’s most widely used protocol for digital audio networking and boasts a more-than 10 times lead over its nearest competitor, Ravenna, in terms of the number of products enabled with the protocol. Given Dante’s dominant market share, we see little remaining upside for Audinate from gaining incremental market share from direct competitors in digital audio networking. However, we do expect Audinate to use its network effect, its existing customer relationships, and its scale on research and development to accelerate the AV industry’s transition toward digital audio networking. Specifically, we expect Audinate to continue creating new hardware and software solutions that unlock new device use cases and to continue developing new software solutions for AV professionals. We estimate Audinate has around 10% market share in audio devices, which leaves Audinate with a large and highly winnable market opportunity, as the industry digitizes. Additionally, we expect Audinate to gain significant pricing power, especially in its software segment, as its network effects continue to strengthen.

We also expect Audinate to continue developing its nascent digital video networking business, although we view this as a more uncertain and likely less profitable opportunity. Video networking has unique challenges compared with audio, primarily due to the larger data intensity inherent in video data delivery. Because of this, digitally networked video uses various compression technologies that are usually not compatible with each other and therefore hinders the establishment of network effects. However, we believe network effects from Dante’s audio solutions will help pull in AV professionals, who are already familiar with the Dante protocol, which in turn pulls in original equipment manufacturers, or OEMs.

Economic Moat 

We assign Audinate a narrow economic moat based on network effects in its digital audio networking protocol, Dante. We expect Dante to become the standard for digital audio networking, and for digital to continue to take share from analog networking.

Dante is the world’s most widely used protocol for digital audio networking. Over 400 OEMs, such as Bosch, Bose, and Yamaha, license the Dante protocol to enable digital delivery and management of audio for over 4,000 products, such as microphones, mixers, and speakers. Dante’s closest competitor, Ravenna, has fewer than 400 products enabled with its own protocol, and works with fewer than 100 OEMs.

Network effects arise from strong interoperability within networking protocols, and limited interoperability between them. When audio products are enabled with Dante, these products can be easily discovered by- and connected to the Dante- network and other Dante-enabled products on the network, which is required for their audio delivery to be synchronized. Such automated discovery and connection provides a compelling benefit for AV professionals because it allows them to easily add, move or remove audio equipment to their installations. This benefit may even exceed any perceived brand value toward specific OEMs. Products not enabled with Dante can still be added to the network through AES67, which is an industry standard for audio over IP, but the networking process is more cumbersome. Similarly, competing networks can add Dante-enabled products through a more cumbersome networking process. Given the limited interoperability between the various networking protocols, Dante’s leadership position of more-than 10 times in terms of the number of enabled products results in clear demand pull from AV professionals.

OEMs, in turn, need to cater to the preferences of AV professionals and are therefore increasingly choosing to enable their products with Dante, which leads to Dante’s leadership position expanding over time and a positive flywheel between supply and demand. Dante today enjoys a more than 10 times lead over Ravenna, in terms of enabled products, which is a significant improvement from a 6 times lead in 2017. We also expect Dante’s leadership in terms of deployed products to be even larger than its leadership position in available products, due to Dante’s larger network of interoperable products making its products more appealing to AV professionals.

We view analog networking as Audinate’s primary competition. In analog networking, AV professionals connect products by drawing physical cables between them. This cabling is usually many times pricier than digital networking because the cables need to be drawn the full distance between devices. By contrast, the Ethernet cables used to connect Dante-enabled devices can typically be drawn to the nearest Ethernet port in a building. Many devices also don’t require separate power cabling after they are connected with an Ethernet cable. This provides material savings in terms of hardware and labor costs. Additionally, over longer distances, analog audio cabling can suffer from reduced audio quality, which digital audio delivery does not suffer from. Unsurprisingly, the industry has been rapidly digitizing. We estimate that digitally enabled audio devices doubled their market share as a share of new sales to around 10% in 2023, from 5% in 2016. Analog networking continues to be the dominant networking technology, primarily due to switching costs from existing installations and digital networking being cost prohibitive for lower-value devices and use cases.

We don’t yet see similar network effects in Audinate’s video networking business. Video networking has unique challenges compared with audio, primarily due to the larger data intensity inherent in video delivery. Because of this, digitally networked video uses various compression technologies that balance speed, cost, data, and quality for specific use cases. As a result, products using different technologies are often not compatible, not just in their discovery and connection, but also in their data delivery. The industry is therefore still much earlier in its digital transition.

We do believe Audinate enjoys several distinct advantages in pursuing video networking. Audinate has existing relationships with hundreds of OEMs, many of which also make video products. We believe offering bundling deals through these established customer relationships has traces of an intangible moat. A subset of AV products also has networking needs for both audio and video, which makes them an attractive market entry point for Audinate. Also, over the years, Audinate has been training hundreds of thousands of AV professionals on its technology. These professionals already know how to work with Dante-enabled products and are familiar with the brand, which, we believe, makes for an appealing proposition for OEMs. So far, Audinate is demonstrating strong momentum on all relevant metrics for its video networking business. These include growth in the number of OEMs licensing the protocol, the number of products enabled with the protocol, and in the number of products shipped with the protocol. However, this is from a small base, and we consider the market still up for grabs.

Fair Value and Profit Drivers 

Our fair value estimate for Audinate is AUD 18.50 per share, implying an enterprise value/sales multiple of 18 on our fiscal 2025 estimates. We use a weighted average cost of capital, or WACC, of 9%, reflecting high revenue cyclicality, medium operating leverage and low credit risk.

We assume revenue to grow at an organic CAGR of 15% over the next decade, driven primarily by Audinate expanding the market for digital audio networking. We expect EBIT margins to expand to 38% by fiscal 2034, compared with 9% in 2024. We expect Audinate’s operating margins to expand because of sales and marketing spending, as well as research and development declining as a share of revenue, once its network effects strengthen. We also expect gross margin expansion as strengthening network effects result in increased pricing power and the higher gross margin software segment becomes a larger share of the business.

Risk and Uncertainty

We assign Audinate a Morningstar Uncertainty Rating of High.

The AV industry is still in the early stages of digitizing, which means there is still high uncertainty regarding the ultimate market opportunity for Audinate’s products. Given that we view competitive risk as low in digital networking for audio, due to Audinate’s economic moat based on network effects, our uncertainty revolves around the market’s ultimate size, rather than Audinate’s share within this market. Within video, we see additional uncertainty around Audinate’s ability to take market share.

We see high risk from economic cyclicality. Audinate’s devices or license designs are used in products which are highly discretionary. Although these products are often part of systems which eventually need to be replaced, customers can choose to defer these purchases in challenging economic times.

We see high risk from technological disruption. Audinate’s Dante protocol primarily uses Ethernet cables for data delivery. We cannot rule out other methods of data delivery eventually substituting Ethernet cables, such as wireless internet or other technologies.

Capital Allocation

Audinate has an Exemplary Morningstar Capital Allocation Rating, reflecting our assessment of a sound balance sheet, exceptional investment efficacy, and appropriate shareholder distributions.

Audinate’s balance sheet is sound. As of the end of June 2024, it held significant cash with no debt.

We rate investment efficacy as exceptional. Although Audinate is supported by network effects, when it started, it faced the traditional cold-start problem, whereby no AV professionals wanted to use Dante’s protocol because there were no products supporting it and no OEMs wanted to develop products because no AV professionals wanted to use them.

Audinate demonstrated exceptional execution to solve this problem. Audinate found the right entry points into the market, strategically attracted early customers by making them part owners of the business, developed a product portfolio with the right breadth and depth and delivered the right levels of customer service. All of these competing objectives were achieved with limited resources, which demonstrates to us exceptional capital allocation skills.

Audinate does not currently return capital to shareholders, which we view as appropriate given the opportunities for investment into the business.

DISC: Held in RL & SM

Some quick notes from some of the brokers who cover Audinate (I think @mikebrisy was looking out for this?)

Morgan Stanley: Overweight PT $10.50

1st look at AD8 AGM - large downgrade to FY25e + guidance pulled:

• Delivered 1Q25 US$7.2m gross profit + 2Q25 expected to be broadly similar

• AD8 currently run-rating at c.US$28.8m FY25e GP, a material miss vs VA cons of c.US$42m / AD8 guide of FY25 US$ GP "marginally lower" than US $44.5m FY24 GP

• Weak 1Q25 driven by customer inventory normalisation and soft demand - although 1Q/1H weakness was expected, magnitude still surprises negatively

While AD8 is making progress on adoption (design wins +22% / interest strong on Certification programs), uncertainty is high with 1Q25 seemingly a large shortfall vs internal expectations when FY25 guide given in August

Questions we have:

• What's changed between August guide and 1Q25 result noting a seemingly large gap?

• How has customer feedback / tone changed?

• Are there increased competitive pressures?

• Cyclical weakness across verticals?

• What are the "strong demand indicators" called out?

UBS: Neutral 12m PT $12.20

Headwinds ongoing despite incremental positives

A soft 1Q25 update, with further downgrades to GP g/dance - reflecting ongoing challenges including softer demand, shorter lead times, increased inventory and slower clearance of inventories from manufacturers. While AD8 expects this period to be transitory (FY26 return to growth), uncertainty (esp. regarding Audio growth) is likely to sideline some investors in the near-term (in our view). That said, there are some incremental positives, namely 1) 2H25 new AVIO products and a premium version of Dante Virtual Scorecard expected to contribute to 2H25 earnings; 2) 1Q design wins +22% y/y; and 3) Dante certification and training programs remain strong. Our view around the strength of the business, the competitive moat and the structural thematics underpinning the story remain unchanged, however we recognise that the near-term uncertainties need to be worked through

UBS analysis

1Q was always expected to be the weakest quarter, given the need to work through the over-ordering by a large customer (UBSe Qtrly 1Q $8.8m / 2Q $11.2m / 3Q $11.5m / 4Q $11.8m). However the run-rate of 1Q25 GP (US$7.2m / A$10.6m) is expected to continue into 2Q, which we interpret as another print of US$7.2m. This implies 1H25 GP ~US$14.4m -28%/-30% vs UBSe/Cons. Assuming current FX (AUDUSD $0.67) and cost growth at 7%, this equates to 1H25 EBITDA of A$-3.2m vs UBSe of A$4.2m. If we assume a continuation of the expected 2Q25 miss vs UBSe (ie US$-3.9m vs UBSe in 2Q25), our initial analysis suggests FY25E EBITDA of A$-5.8m (vs UBSe A$12.5m). Assuming an ongoing +US$2m quarterly improvement vs original UBSe in 3Q/4Q implies FY25E EBITDA of A$3.1m

1Q25 trading update

Key Points: 1) 1Q GP US$7.2m (A$10.6m), with headwinds to continue into Q2FY25 (run rate in line with Q1). 2) 7-9% cost growth (in line with prev. g/dance) expected for FY25, below annual cost growth of 28.5% over last 3 years. 3) Growth drivers include increasing adoption of Dante tech, and launch of new AVIO adaptor products and premium version of Dante Virtual Soundboard. 4) Design wins in Q1 FY25 up 22% vs PCP. 5) Dante Certification & Training programs remain strong, with attendance >4,000 per month a contributing driver of global Dante AV installations

Valuation: $12.20 PT, Blended 2yr fwd EV/Sales to sales CAGR / DCF valuation

DISC: Held in RL & SM

FWIW UBS's First Read of AD8's results out before this mornings conference call

UBS SnapShot: FY24 Results

ONE LINER: Majority pre-released, with a challenging year ahead. Incremental is good ongoing momentum in video

KEY NUMBERS (post AASB16): Rev. US$60m (+28% y/y) / A$92m (+31% y/y). U/lying EBITDA $20m (+85% y/y) vs UBSe & Cons $20m (in-line). U/lying PBT $12m (vs $0.9m pcp /UBSe $11m/ Cons. $10.6m). DPS 0cps (in line)

RESULT HIGHLIGHTS: 1) G/dance met: GP US$44.5m, +33% y/y vs guided ~26-31% growth (A$68m +35% y/y), but big deceleration in 2H24 (1H +49% / 2H +19%). 2H24 GM 76.8% vs 71.8% 1H24 driven by product mix & cost-down on Brooklyn. 2) CCM revenue +26% y/y driven by Brooklyn & Ultimo, Software +33% (IP Core, DEP, retail software) with 2H indicating deceleration. 3) Video: +18 video products in 2H24 (vs +18 in 1H), +4 OEMs in 2H (vs +16 in 1H). with g/dance met in 1H (>30k - no details on units shipped in FY24/2H24). 4) Continued strong audio ecosystem, 460 OEMs +161 developing shipping products vs 430 + 153 1H24 & 400 + 138 in 2H23, 4,176 products (+168 in 2H / +155 in 1H) 12x the closest comp vs 4k in 1H24. Trained professionals +48k / +22% to 271k in FY24, with acceleration in 2H24. 5) Op. cost control in line $48m vs UBSe $48m, with 2H24 EBITDA $10m vs UBSe $10m. 6) 3rd consecutive period of +FCF ($7m) & OpCF conversion 112%. 7) $48m cash, no debt

VALUATION: $10.90 PT, Blended 2yr fwd EV/Sales to sales CAGR / DCF valuation

GUIDANCE: Unwinding of FY24 revenue tailwinds to result in FY25 Rev decline y/y, marginally lower FY25 US$GP (flat to -9% y/y), with exp. cost growth of 7-9%. UBSe analysis suggests this implies an EBITDA range of $6.8m-$14.2m / -66% to -29% y/y. AD8 is actively exploring potential M&A opportunities

UBS COMMENT: Ongoing positive video momentum in 2H24 the real incremental in this release. Strong FY24E performance, however partially from a pull forward of FY25E sales, which combined with other headwinds creates a challenging year ahead. Based on FY25E g'dance, our analysis suggests LT GP CAGR reduces from prev. 24% to 20- 22% - which would give upside vs UBSe (incorporating +18%) and consensus. LT story looks attractive, ST lack of growth will understandably hold some investors back

DISC: Held in RL & SM

On Livewire today: Should you buy the dip on Audinate?

With Elston Asset Management's Justin Woerner

FWIW Morningstar has recently initiated coverage of Audinate at a four star (undervalued) rating with their fair value estimate of $23

Analyst Note | by Roy Van Keulen

We initiate coverage on Audinate with a fair value estimate of AUD 23 per share. We assign Audinate a narrow economic moat based on network effects. We forecast revenue to grow at a 10-year CAGR of 22% and EBIT margins to expand to 36% by fiscal 2033 from 1% in fiscal 2023. We use a weighted cost of capital of 9%. We assign Audinate a Morningstar Uncertainty Rating of High and rate its Capital Allocation as Exemplary. At current prices, Audinate shares screen as materially undervalued and not reflective of our view of Audinate as a well-managed high-quality company with a large and highly winnable market opportunity

Audinate’s Dante protocol has become the world’s most widely used protocol for audio networking. Today, there are over 4,000 products available which are enabled with its protocol, which is more than 10x its nearest competitor. Audio networking protocols allow professionals in the AV industry to connect, control, and manage their audio systems with minimal friction. Network effects arise from strong interoperability within networking protocols, and limited interoperability between them. In other words, products using the same protocol work well together, while products on different protocols experience more friction. AV professionals therefore prefer using products which are on the same protocol and prefer using protocols with a large catalogue of available products and widespread adoption. Given Dante’s extensive lead over its competition, we see AV professionals gravitating towards the Dante protocol. OEMs, in turn, prefer building products which are in demand by AV professionals, thereby creating a network effect. Because of these network effects, we consider the audio networking market as highly winnable

Business Strategy and Outlook

We expect Audinate’s strategy to primarily focus on accelerating the secular transition toward digital audio networking. Secondarily, we expect Audinate to focus on building out its nascent business for digital video networking

Audinate’s Dante protocol has become the world’s most widely used protocol for digital audio networking and boasts a more-than 10 times lead over its nearest competitor, Ravenna, in terms of the number of products enabled with the protocol. Given Dante’s dominant market share, we see little remaining upside for Audinate from gaining incremental market share from direct competitors in digital audio networking. However, we do expect Audinate to use its network effect, its existing customer relationships, and its scale on research and development to accelerate the AV industry’s transition toward digital audio networking. Specifically, we expect Audinate to continue creating new hardware solutions and reference designs that unlock new device use cases and to continue developing new software solutions for AV professionals. We estimate Audinate has around 10% market share in audio devices, which leaves Audinate with a large and highly winnable market opportunity, as the industry digitizes. Additionally, we expect Audinate to gain significant pricing power, especially in its software segment, as its network effects continue to strengthen

We also expect Audinate to continue developing its nascent digital video networking business, although we view this as a more uncertain and likely less profitable opportunity. Video networking has unique challenges compared with audio, primarily due to the larger data intensity inherent in video data delivery. Because of this, digitally networked video uses various compression technologies that are usually not compatible with each other and therefore hinders the establishment of network effects. However, we believe network effects from Dante’s audio solutions will help pull in AV professionals, who are already familiar with the Dante protocol, which in turn pulls in original equipment manufacturers, or OEMs

Economic Moat

We assign Audinate a narrow economic moat based on network effects in its digital audio networking protocol, Dante. We expect Dante to become the standard for digital audio networking, and for digital to continue to take share from analog networking

Dante is the world’s most widely used protocol for digital audio networking. Over 400 OEMs, such as Bosch, Bose, and Yamaha, license the Dante protocol to enable digital delivery and management of audio for over 4,000 products, such as microphones, mixers, and speakers. Dante’s closest competitor, Ravenna, has fewer than 400 products enabled with its own protocol, and works with fewer than 100 OEMs

Network effects arise from strong interoperability within networking protocols, and limited interoperability between them. When audio products are enabled with Dante, these products can be easily discovered by- and connected to the Dante- network and other Dante-enabled products on the network, which is required for their audio delivery to be synchronized. Such automated discovery and connection provides a compelling benefit for AV professionals because it allows them to easily add, move or remove audio equipment to their installations. This benefit may even exceed any perceived brand value toward specific OEMs. Products not enabled with Dante can still be added to the network through AES67, which is an industry standard for audio over IP, but the networking process is more cumbersome. Similarly, competing networks can add Dante-enabled products through a more cumbersome networking process. Given the limited interoperability between the various networking protocols, Dante’s leadership position of more-than 10 times in terms of the number of enabled products results in clear demand pull from AV professionals

OEMs, in turn, need to cater to the preferences of AV professionals and are therefore increasingly choosing to enable their products with Dante, which leads to Dante’s leadership position expanding over time and a positive flywheel between supply and demand. Dante today enjoys a more than 10 times lead over Ravenna, in terms of enabled products, which is a significant improvement from a 6 times lead in 2017. We also expect Dante’s leadership in terms of deployed products to be even larger than its leadership position in available products, due to Dante’s larger network of interoperable products making its products more appealing to AV professionals

We view analog networking as Audinate’s primary competition. In analog networking, AV professionals connect products by drawing physical cables between them. This cabling is usually many times pricier than digital networking because the cables need to be drawn the full distance between devices. By contrast, the Ethernet cables used to connect Dante-enabled devices can typically be drawn to the nearest Ethernet port in a building. Many devices also don’t require separate power cabling after they are connected with an Ethernet cable. This provides material savings in terms of hardware and labor costs. Additionally, over longer distances, analog audio cabling can suffer from reduced audio quality, which digital audio delivery does not suffer from. Unsurprisingly, the industry has been rapidly digitizing. We estimate that digitally enabled audio devices doubled their market share as a share of new sales to around 10% in 2023, from 5% in 2016. Analog networking continues to be the dominant networking technology, primarily due to switching costs from existing installations and digital networking being cost prohibitive for lower-value devices and use cases

We don’t yet see similar network effects in Audinate’s video networking business. Video networking has unique challenges compared with audio, primarily due to the larger data intensity inherent in video delivery. Because of this, digitally networked video uses various compression technologies that balance speed, cost, data, and quality for specific use cases. As a result, products using different technologies are often not compatible, not just in their discovery and connection, but also in their data delivery. The industry is therefore still much earlier in its digital transition

We do believe Audinate enjoys several distinct advantages in pursuing video networking. Audinate has existing relationships with hundreds of OEMs, many of which also make video products. We believe offering bundling deals through these established customer relationships has traces of an intangible moat. A subset of AV products also has networking needs for both audio and video, which makes them an attractive market entry point for Audinate. Also, over the years, Audinate has been training hundreds of thousands of AV professionals on its technology. These professionals already know how to work with Dante-enabled products and are familiar with the brand, which, we believe, makes for an appealing proposition for OEMs. So far, Audinate is demonstrating strong momentum on all relevant metrics for its video networking business. These include growth in the number of OEMs licensing the protocol, the number of products enabled with the protocol, and in the number of products shipped with the protocol. However, this is from a small base, and we consider the market still up for grabs

Fair Value and Profit Drivers

Our fair value estimate for Audinate is AUD 23 per share, implying an enterprise value/sales multiple of 21 on our fiscal 2024 estimates. We use a weighted average cost of capital, or WACC, of 9%, reflecting high revenue cyclicality, medium operating leverage and low credit risk

We assume revenue to grow at an organic CAGR of 22% over the next decade, driven primarily by Audinate expanding the market for digital audio networking. We expect EBIT margins to expand to 36% by fiscal 2033, compared with 1% in 2023. We expect Audinate’s operating margins to expand because of sales and marketing spending, as well as research and development declining as a share of revenue, once its network effects strengthen. We also expect gross margin expansion as strengthening network effects result in increased pricing power

Risk and Uncertainty

We assign Audinate a Morningstar Uncertainty Rating of High

The AV industry is still in the early stages of digitizing, which means there is still high uncertainty regarding the ultimate market opportunity for Audinate’s products. Given that we view competitive risk as low in digital networking for audio, due to Audinate’s economic moat based on network effects, our uncertainty revolves around the market’s ultimate size, rather than Audinate’s share within this market. Within video, we see additional uncertainty around Audinate’s ability to take market share.

We see high risk from economic cyclicality. Audinate’s devices or license designs are used in products which are highly discretionary. Although these products are often part of systems which eventually need to be replaced, customers can choose to defer these purchases in challenging economic times

We see high risk from technological disruption. Audinate’s Dante protocol primarily uses Ethernet cables for data delivery. We cannot rule out other methods of data delivery eventually substituting Ethernet cables, such as wireless internet or other technologies

Capital Allocation

Audinate has an Exemplary Capital Allocation rating, reflecting our assessment of a sound balance sheet, exceptional investment efficacy, and appropriate shareholder distributions

Audinate’s balance sheet is sound. As of the end of December 2023, it held significant cash with no debt

We rate investment efficacy as exceptional. Although Audinate is supported by network effects, when it started, it faced the traditional cold-start problem, whereby no AV professionals wanted to use Dante’s protocol because there were no products supporting it and no OEMs wanted to develop products because no AV professionals wanted to use them

Audinate demonstrated exceptional execution to solve this problem. Audinate found the right entry points into the market, strategically attracted early customers by making them part owners of the business, developed a product portfolio with the right breadth and depth and delivered the right levels of customer service. All of these competing objectives were achieved with limited resources, which demonstrates to us exceptional capital allocation skills

Audinate does not currently return capital to shareholders, which we view as appropriate given the opportunities for investment into the business

DISC: Held in RL & SM

Well "the market" obviously liked the announced results (currently up ~19% so far today) - FWIW what did the brokers say today ...

I'm aware of three Investments Banks which cover AD8:

UBS: Buy, 12m PT $21.05

Strong growth momentum ahead of UBSe and consensus

An impressive 1H24 result, with rev and EBITDA both strongly ahead of UBSe and cons. Momentum in both audio & video is strong, with healthy design wins (+54 norm. post CV), ecosystem build and strong initial uptake from video cust. (hit FY24 target by 1H24). In our view, g/dance appears conservative given 1H mom. (1H24 GP +53% y/y vs g/dance implied 2H24 +7-18%). While mgmt prev commented on a higher portion of 1H rev vs normal 45/55% split given sales backlog, we highlight upside risk given 50/50 split implies +33% y/y growth already. While the sales backlog is normalising, we expect: 1) ongoing strength in audio; 2) video expansion; and 3) penetration of low channel count devices via software delivery, to underpin LT growth, although we recognise macro uncertainty remains a risk near-term. FY25E EV/Sales of 10.8x, looks expensive h/ line, but AD8 offers strong 5yr (FY25-30E) GP CAGR of +22%, maintain Buy

1H24 result highlights

1) Material beat at both rev & EBITDA - Rev US$30m (+48% y/y) / A$47m (+51% y/y) +13% beat vs UBSe / +11% vs Cons; EBITDA $10.1m (+137% y/y) +37% vs UBSe / +20% vs Cons. 2) GM 71.8% (72.8% 2H23 / 71.2% 1H23), impacted by lower mgn pent-up Ultimo demand (3x 1H22 vol). 3) CCM rev +46% y/y driven by Brooklyn & Ultimo, Software +56% (IP Core, DEP, retail software). 4) Very strong growth in audio ecosystem - 430 OEMs +153 developing (total 583) vs 400+138 at 2H23 (538), 4.0k products, 12x the closest comp vs 3.9k at 2H23. 5) Strong video mom., reached FY24 tgt for >30k units in-field/shipped already (6mth earlier), indicates early traction for customer uptake. 6) 2nd consecutive period of FCF +ive ($3.4m), OpCF conv. >100%. 7) Outlook: US$ GP$ growth consistent w/ historical for FY24 (UBSe 26-32%), ongoing +ive OpCF, additional h/count of up to 15%, transition to software by OEMs expected to recommence, sales order backlog reducing to reflect shorter lead times post CV, actively exploring M&A ops ($118m cash & term dep, no debt)

Changes to forecasts

We have increased our ST forecasts for FY24-25E (Net impact FY24/25/26/27E - EBITDA +8/3/3/4%, EPS +82/17/8/7%). We also upgraded MT/LT growth expectations for both audio/video given larger mkt sizing (FY30 EBITDA +20%). Our LT assumptions incorp FY34E penetration of 20% for audio, 14% for software and only 3% for video

Valuation: $21.05 PT (vs prev $13.55) – maintain Buy

We have rolled fwd vals, extended to FY34E (prev FY32E) and increased LT f/casts (FY30 EBITDA +20%). We derive our PT using a $19.03 base (blended 2yr fwd EV/Sales to sales CAGR / DCF) + $2.01 to reflect +2% share of potential digital video networking opp

Macquarie: Neutral, 12m PT $15.80

What's new

• CCM revenue (+45.6% on pcp). Driven by Brooklyn volumes (+50% on pcp) and Ultimo volumes (>200% on PCP, 3x 1H22 volumes). Ultimo volumes driven by fulfilment of pent-up demand
• Software revenue (+56.2% on pcp) driven by IP Core (+100% on pcp), Dante Embedded Platform (+60% on pcp) and retail software sales (+75%)
• Gross Margin (+60bps on pcp to 71.8%) driven by mix. Brooklyn 3 COGS improvements still to come in the 2H FY24.
• Strong reported EPS beat (+49% to Macquarie and +263% to VA cons)

Why it matters

• Strong adoption of Dante Video, with 66 products in market. FY24 of 30k units shipped achieved early
• Dante Pro S1 and Dante Director launches. Next gen low channel count Audio solution and broadcast software solutions

What now

• No Guidance upgrade despite strong 1H FY24 numbers and assumed AUDUSD of US$0.70. We are looking for more detail here on the call

Morgan Stanley: Overweight, PT $13.30

AD8 1H24 delivered another strong beat across the board today

• Rev US$30.4m, +4% beat MSe / +10% VA cons
• GP US$21.8m, +6% beat VA cons
• 71.8% GM lower than historical c.75%, headwind from backlog release of lower-margin Ultimo chips
• GM expected to improve in 2H
• EBITDA A$10.1m vs A$8.4m cons - opex right in line with MSe
• Self funding - positive A$3.4m 1H24 FCF, improving on A$2.5m 2H23 despite annual bonus payments in 1H

Video adoption provides further conviction on medium-term growth

• Video OEM adoption at 50, from 34 at FY23
• Initial objective to double video ecosystem over FY24 achieved 6mths earlier in 1H.

Guidance reiterated

• 26-31% FY24e US$ GP growth implies US$42m GP at low end or 52/48 1H/2H skew vs historical 2H skew
• US$42m low end implies c.3% lift to US$40.9m cons
• While 1H24 GP growth was helped by backlog release, we continue to see elevated 2H growth driven by a stronger video trajectory + new product releases / revenue streams + overall robust 2024 industry outlook

We are OW AD8

DISC: Held in RL & SM

Quick research note updates for AD8 from both Morgan Stanley and Macquarie - basically talking about the TAM expansion ($1B -> $2B) mentioned in Audinate's AGM presentation

Morgan Stanley:

FY24e guidance reiteration of growth in US$ gross profit dollars consistent with historical, which we take to mean c.26-31% revenue growth (VA cons c.28-29%)

TAM materially upgraded to US$2bn, from A$1bn previously

• Audio valued at US$330m, implying 9% AD8 share
• Video and Software materially upgraded to US$780m and US$890m
• respectively (vs. c.$400m each previously)
• Video TAM upgrade likely driven by higher prices and volume - we note TAM
• is estimated at the revenue line, but again flag the shift to software implementations for Audio and Video (same GP$ per unit, but lower ARPU and higher GM%). This could imply greater endpoint proliferation and a larger GP$ opportunity.
• Software - least appreciated in our view. Our questions:
• 1. How much of TAM is SaaS vs upfront (e.g. DDM historically);
• 2. What does software product look like at maturity (e.g. modules, functionality);
• 3. Buy vs build 

Macquarie:

What's new

Audinate's AGM presentation was released. It does not include a trading update. It includes an expansion of the Total Addressable Market (TAM) from ~USD1b to ~USD2b. Post the recent equity raise, additional data was provided on the rationale for M&A to accelerate AD8's growth strategy

Why it matters

TAM expansion is driven by the Video and Software segments. Underpinning this is previously unavailable data, reflecting the larger Dante product set and post-Covid trends. This estimate is based on the existing product set using current prices and excludes adjacent market opportunities. These factors reinforce key focus areas for M&A

to accelerate the existing strategy: Video & Software. The additional opportunity to address Dante software strategy is not included in the TAM expansion

AD8's outline of opportunities in Video & Software markets highlights desired capabilities for M&A. AD8 outlined the opportunities in Video as cameras, displays, projectors, signal routing and switching products. In Software, the opportunities are in management control software (Dante Domain Manager) and Dante PC/Mac software

Market growth is estimated to be higher than the long-term historical average of ~7-8%

What now

Validation and expansion of the market opportunity provides confidence in longer-term outlook, although execution risk is heightened with an M&A- centric strategy. Silex acquisition and integration provides some evidence of a disciplined approach to M&A. With the recent A$70m equity raise, Audinate has dry powder in a market that is offering more attractive multiples for M&A opportunities. We expect acquisitions in FY24 in line with management commentary 

DISC: Held in RL & SM

A short piece in Livewire today by Donny Buchanan from Lakehouse Capital includes some commentary on AD8

https://www.livewiremarkets.com/wires/3-small-caps-with-significant-runway-for-growth

Following on from @harryd's Analyst View straw...

At least three major Investment Banks cover AD8 and have published updated research reports in the past day so here's some snippets for what it's worth ...

Morgan Stanley: Overweight, Price Target: $13.30 (upgraded from $11 previously)

FY23 beat across the board, positive 2H FCF with strong outlook + FY24e guide. The stock price reflects this, so where's the opportunity + what are the debates? 1. 100% LTI vesting implies FY25e revenue 20% above cons, 2. Superior mature margins, and 3. Winning in video as AD8 has in audio

UBS: Buy, 12M Price Target: $13.55 (upgraded from $10.35 previously)

Strong result on all fronts, outlook +ive with supply overhang largely resolved

A strong result all round, delivering a 10% rev beat vs consensus and +39% at EBITDA. Supply chain impacts are largely resolved, through a combination of easing chip supply and redesigns - removing a constraint on already high rev growth (FY23 +40% vs +32% FY17-22 CAGR, exc. COVID impacted FY20). The sales backlog remains close to record levels (despite the dissipation of supply constraints), providing good rev visibility in 1H24, although the order window should narrow over time. Video is also gaining good traction, with 48 products launched (vs 20 at 1H23 / 7 in pcp) and we expect product releases to translate to units shipped in FY24E. Margins in FY24E should also be supported by COGs reduction (vol benefits from new B3 model + easing supply) and transition to software (flat GP$ but higher mgn). Design wins are at all-time highs (142 vs 126 FY22) and AD8's total product ecosystem is still much larger than the nearest competitor (12x more). FCF turned +ive in 2H23 and mgmt expects a marginally +ive outcome for FY24E. We remain positive on the structural story and video op. Trading on FY24E EV/Sales of 9.8x, offering 3yr (FY24-27E) GP CAGR of +26%, maintain Buy 

Macquarie: Buy, 12M Price Target: $13.50

Key Points

• Backlog is at near record levels & supply chains have normalised
• Guidance for gross profit dollar growth in the historical range. Gross margin is broadly an outcome of mix, but there are tailwinds in FY24
• FY24 headcount growth (15%) is focused in the Philippines. Coupled with efficiency initiatives, there is strong scope for operating leverage in FY24

We think AD8 is at an inflection point in earnings, driven by delivery on their strategy of growing the Dante-enabled network. The FY23 result is evidence of operating momentum accelerating, which should support strong double-digit FCF growth over the forecast period. We reiterate Outperform. 

DISC: Held in RL & SM

Very few brokers and investment banks cover Audinate but at least two have come out with updated reports today

Morgan Stanley - Overweight with a Price Target of $10

UBS - Buy with a 12m Price Target of $10.20

Some snippets from their respective update reports

UBS:

ONE LINER

Solid - strong beat vs UBSe at both rev and EBITDA, but noting UBSe more conservative vs VA cons. US rev +3% / A$ EBITDA +19% vs VA cons. Good progress on video

VALUATION

$10.20 PT; Buy (2yr fwd EV/Sales / DCF / 10% share dig. net. opp.)

GUIDANCE

Maintaining FY23 guidance: US$ rev in-line with hist. range (26%-31%) vs UBSe +26%, VA cons. +29%, continue to target >200 employees (+12% y/y), video rev >US$3m

UBS COMMENT

We were more conservative on potential 1Q impact from prev. strong 4Q rev.. A strong result given sales still being impacted by supply constraint issues, core beat at opex line (stronger op leverage) - also had FX tailwind. Already made US$2m vs >US$3m video rev target - strong momentum. Less OEMs shipping, but this is long tail - shouldn’t have material impact on rev. FCF the key miss - but mkt should be willing to overlook this

Morgan Stanley:

Base case - average of SOTP and DCF: A$10.00

SOTP (EV/sales):

Audio (core business) - 10x FY24e: Structural penetration story tempered by near-term headwinds

Video - 20x FY24e: nascent large opportunity with long runway

Software - 7x FY24e: early-stage penetration and synergies with Audio and Video support multiple above Software peer average but below group

DCF: WACC 10.8%, terminal growth rate 3.5%

Risks to Upside

• Meaningful acceleration in Audio
• Initial sales in Video
• Expansion of Software opportunity
• Adjacencies that further expand TAM
• Shift to FCF generation

Risks to Downside

• Macro weakness causes quicker deceleration in growth and cash losses
• Execution missteps in Video mean slow ramp-up
• Potential increase in competition
• Key management churn 

DISC: Held in SM & RL

In an article in todays AFR on Inflation hedges

https://www.afr.com/wealth/personal-finance/how-to-stop-inflation-getting-away-with-your-wealth-20220410-p5acdf

Nathan Bell from Intelligent Investor takes a slightly contrarian view on the traditional hedges (large cap commodities & defensives)

"familiar inflationary champions are now mostly priced for low returns, if not losses”. These include companies with pricing power, cyclical stocks and resource shares

“Beating inflation and higher interest rates means buying value, and there’s a lot more value in small caps after recent share-price falls than there is among the big names, which are generally very expensive,” says Bell

He nominates RPMGlobal, a mining-software company, as an example of small-cap value. “RPM trades at a fraction of typical software companies,” says Bell. Another preference is 360 Capital, a listed property group. “It trades on a 6 per cent fully franked yield and at around its net tangible assets, which means you get its funds-management business for free”

Audinate, a digital audio company, is another preferred small-cap. “Audinate should produce very high margins as the business matures over the next decade,” says Bell

DISC: RUL & AD8 held in SM & RL