AD8 full year results analysis below and some note from the earnings call. Note it is stock of the day on The Call (Ausbiz) today with Gaurav Sodhi who is a bull on it providing comment. See announcement from jwrostagno27’s straw earlier today plus a good graph.
FY21 Results Analysis
· Orange Flag: The results were solid given Covid and was driven by growth in software as expected/hopped but margins were flat YoY which concerned me. Given all the growth YoY was from software which has no COS and it went from 20-27% of sales, you would expect margins to improve. Margins dropped from 76.9% in H1 to 76.0% in H2, I note that software sales were flat HoH while Chips, Cards & Modules grew 27% so that explains H2 Vs H1 but not the YoY. From listening to the results call it seems that the reason is the switch to a new annual subscription model rather than upfront access fee in H2. This provides a more attractive entry point for OEM producers but means that software revenue was lighter in H2. On margins management said that they are expected to grow as software becomes a more dominant part of the business. I will be watching this, but back management at this point.
· Sales: Up 10% in A$ to A$33.4m but +22.5% in US$ to US$25.0m, which sales are based. A solid result given how hard Covid hit the industry. Software sales were up 61.9% from US$4.2m to US$6.8m or from 20% to 27% of total sales was great to see.
· Margins: GM% flat at 76.4%, management talked to margin $ growth as the key indicator for growth on the call, rising from 15.6m to 19.2m YoY, suggesting that unit shipped was becoming less meaningful with an increasing software approach.
· EBITDA: A$3.0m, 50% better than last year but FX headwinds were a big factor, impacting EBITDA by -A$2.4m and the addition of the Cambridge video development team added A$1.1m in costs. The CEO was keen to point out the video opportunity doubles the TAM for AD8 and they will continue to invest in people to support growth across the business targeting a headcount of 170 up from the current 135.
· NPAT: -A$3.4m, better than last years -A$4.1m loss but the improvement was mostly due to having to write off tax losses LY, with tax expense 2.1m better than LY. Higher depreciation (+2.1m) was a factor and driven by growing amortisation of capitalised development spend. Of the $10.7m in R&D spend for the year (Vs 9.1m LY), $7.4m was capitalised (Vs 5.9m LY), management said to expect to see this trajectory of spend continue.
· Cash & FCF: $65.4m cash thanks to a capital raise during the year provides more than enough for funding growth (organic and acquisition), which is good because FCF continues to be negative at -A$1.3m. Management talked to acquisitions but made it clear that price and fit were very important, and they had said no to several on this basis, nice to hear.
· Outlook: Supply chain issues around chips are expected to persist and management raised the issue of factory shutdowns due to Covid as a wild card on predicting the next 12 months. They remain focused on the long-term objectives, improving design, reducing adoption friction and improving accessibility to non-English speakers for scalable growth. Note also that management has been focusing on the “Design Win” part of the sales cycle where the customer commits to using Dante, it’s then 18-24 months to product release, so increased head count flagged will take time to convert into growth.
AD8 is a significant position for me, up 160% and fast approaching my Feb21 valuation, I will have to update my valuation this week. The sales growth and margin growth were below what I was looking for but it was a tough year with Covid and given the industry lead AD8 has (19x nearest competitor) plus the opportunity in AV, I am in no way concerned that the results indicate any long term issues and that the investment thesis remains intact.
