1H21 Investor Presentation
This one has been pretty well covered by other Straws, so I thought I'd mention a few notable thoughts from an end-user of Dante.
* The smaller channel count is at 96KHz; the larger at 44KHz, with 16x16 on the Brooklyn II being at 192KHz.
Audinate returns to pre-COVID revenue levels
Key 1H21 highlights:
Not really anything market sensitive, but Audinate have recently released two new consumer-level adapters; one for USB-C, and another that features Bluetooth 5.0.
I think both these products will sell like hot cakes, especially the Bluetooth adapter, and help Audinate capture more revenue from the weekend warriors, meaning less reliance on productions and installations at the big end of town.
Audinate Trading Update for first half of FY21
Audinate Group Limited (ASX:AD8), developer of the professional AV-industry leading Dante® media networking solutions, is pleased to provide the following trading update. Audinate has generated unaudited US dollar revenue of US$11.1 million for the six-month period ended 31 December 2020 (H1FY21), up from H2FY20 (US$9.3 million) and in line with H1FY20 (US$11.1 million). The strengthening AUD / USD exchange rate has adversely impacted unaudited revenue in AUD which amounts to approximately A$15.4 million.
Ben Clark from TMS Capital is watching the infrastructure space closely saying it is a safe bet for investors. Audinate is also on the watchlist. He discloses that TMS have recently bought into AD8 and his views on why begin around the 6 minutes and 30 seconds (6:30) mark of this video.
15-Oct-2020: AGM Presentation & Trading Update
Audinate (AD8) closed up +99c (+16.64%) today - at $6.94 - on the back of this update, making them one of the day's best performers.
Excerpt - starting at slide #11:
1Q21 Trading Performance
Focus areas for FY21
--- click on the link above for the full presentation, with pictures ---
[I do not hold AD8, but they are on my Strawman.com scorecard. I would hold them in real life if I had more money to invest. I like the longer term story a lot. However, patience is the key with this one. It's going to take time for their full potential to play out. Limited capital, so limited number of real life holdings.]
1Q21 Trading Performance
Key things from the announcement today for me are that Audinate appear to be back to trading at pre-COVID levels, even without the revenue generated from the live sound industry.
I was going to post a Straw recently regarding the amount of consumer products currently sold-out or on backorder, but deemed it somewhat immaterial. It appears that I have misjudged that.
I expect video to the big focus from Audinate's R&D team over the remainder of FY21. Dante has revolutionised the industry with the capabilties it has introduced to AoIP; I have no doubt it can do the same for video.
FY21 first quarter update
US$5.2 million revenue in the first quarter of FY21.
Increased Growth compared to FY20 for several products: Adaptors, Ultimo, Broadway and Retail Software Sales.
Brooklyn revenue is down because of the live sound exposure.
Nice steady growth from a very good company but not exactly what it's been priced for. If the share priced halved I still couldn't get near the valuation.
AD8 has all the ingredients you want in a long-term investment; growing economic moats, strong pricing power, operates in an industry experiencing a long-term structural shift, sound balance sheet and founder-led focused on long-term growth.
It has enormous potential to strengthen its economic moats by continuing to develop innovative intellectual property and educating end users to amplify its network effects, driving higher switching costs for customers.
However, I am not yet convinced of AD8’s ability to compete in the video networking market given the high rate of increase of intangible development costs, which will be monitored. Another purpose of monitoring this metric is to ensure AD8’s foray in the video networking space does not erode its core competency in the audio market over the long-term.
This is definitely a business that I would like to invest for the next five to seven years but not at its current price. I believe the COVID-19 economic headwinds on live sound entertainment will drag AD8’s revenue to lower levels for the next 12-18 months and will enter at a cheaper price once I see signs of declining intangible development costs and plans to reinstate live sound events free of COVID-19 restrictions.
I really do think this could surpass $15 over the long-term given AD8 currently only has 26% of the audio networking market and the video networking market presents a long runway of growth.
In May 2019, former CEO, Mr Lee Ellison announced his retirement effective from 13 September 2019 and the board determined that the co-founder, Mr Williams was the best candidate to take the helm. Mr Ellison’s retirement was a big loss as he helped significantly grow AD8’s customer base over 11 years of strong growth. A brief overview of Mr Ellison’s experience shows he was able to leverage his global sales experience to grow AD8’s sales, which is something that Mr Williams lacks.
As mentioned earlier, Mr Williams was the brains behind the ground breaking digital audio networking technology, Dante. So, it is interesting to see that the former CEO with strong sales experience was replaced by the innovator. Although sales does not appear to be Mr Williams’ key strength, I believe the sales experience factor is less important now as AD8 has already built a strong reputation within the audio networking market and more focus needs to be placed on developing products for the video networking market.
Mr Williams’ compensation structure is strongly aligned with long-term value creation as he currently holds 2.81% of equity and annual performance objectives are 70% weighted to the achievement of corporate financial goals and 30% to individual key performance objectives. The corporate financial goals for FY20 were as follows:
· Gross margin
I note no annual rewards were paid in FY20 as management failed to achieve the above financial goals due to the impact of COVID-19.
Mr Williams appears to be a measured, pragmatic leader focused on achieving long-term growth. His measured and pragmatic approach is reflected in his views on COVID-19 and a potential merger or acquisition at the recent investor conference in August 2020. Mr Williams provided investors with a measured view on AD8’s future performance, noting that revenue could be lower next financial year given the adverse COVID-19 impact on live sound entertainment. I think providing investors with a realistic expectation of future performance was a sensible approach. As noted previously, Mr Williams advised investors that they had decided against proceeding with a potential acquisition because of the lack of synergies and failure to agree on a price, which illustrates his pragmatic approach to value creation.
Mr Williams has reiterated the importance of utilising the capital raised to transform hardware-based solutions into software format to drive future growth. This is a strong indicator of Mr Williams’ focus on achieving long-term growth.
A study by three professors at Purdue’s Krannert School of Management showed strong evidence that S&P 500 companies where the founder is still the CEO are more innovative, generate 31% more patents, create patents that are more valuable, and are more likely to make bold investments to renew and adapt the business model. The below graph shows an index of S&P 500 companies in which the founder is still deeply involved performed 3.1 times better than the rest over the past 15 years prior to 2014.
The professors also interviewed number of executives and founders around the world, analysing another 200 founder-led companies with the help of an expert who knew each company well. They identified the following three reasons why found-led companies outperformed.
· Insurgent vision – identifying and building a purpose that attempts to disrupt industry norms e.g. Google’s mission to organise all the world’s information. The study found that employees were much more likely to be engaged if there was a clear purpose.
· Frontline obsession – being focused on monitoring what is going on in the frontline e.g customer experience and building a culture that empowers those in the frontline.
· Owner’s mindset – founders know the details of the business and have better instincts, so they are in a better position and personally invested to focus on building a company that lasts.
Rising payments for intangibles
Even though AD8 has a healthy cash balance, close attention must be paid to the amount of payments for intangibles, which is predominantly comprised of capitalisation of development costs. As you can see below, payments for intangibles are growing at a much higher rate compared to cash receipts. Also, it is concerning that payments for intangibles as a percentage of cash receipts is rising.
These trends appear to indicate that the costs required to develop new products are steep but why is this so? Since 2017, AD8 has been committing resources to develop video capabilities in Dante to penetrate the video networking market but it seems like it requires significant time and materials. In the latest FY20 annual report, the auditors reported the capitalisaton of development costs ($10.47M) as a key audit matter and the auditors were required to assess the appropriateness of costs capitalised, which include material costs, overheads and engineers’ hours (internal & external). This makes me wonder whether AD8 is finding it difficult to compete with the bigger players in the video industry, especially since it does not have a competitive advantage in this space. It appears the video industry is much more competitive relative to the audio industry based on comments by Fury13 on a HotCopper thread, who appears to work in the industry. My biggest concern is the risk of AD8 channeling its focus away from its core competency in audio to a new market that is dominated by the stalwarts, potentially reducing its competitive advantage in the audio space over the long-term.
In July 2019, AD8 announced the commercial availability of two key Dante video products, however it appeared to not have a significant impact on AD8’s revenue given it only increased by 7%. AD8 recently disclosed that they released the first demo of the Dante video camera and attained 20 initial video and software design wins, so there is still a long way to go before AD8 establishes ground breaking products.
As you can see in the table, I have used PushPay Holdings (PPH) and Xero (XRO) to gauge whether AD8’s intangible costs are reasonable. I note both PPH and XRO operate as a software as a service business, the former providing donor management systems to the faith sector and the latter providing accounting software, which is what AD8 is striving to achieve. Both these businesses still incurred significant intangible costs in absolute terms but they managed to hit an inflection point and the rate of increase in intangible costs declined substantially thereafter. I believe the reason why AD8 has been struggling to contain intangible costs is due to the nature of the business model and industry. As outlined earlier in the business overview section, AD8 offers chips, cards, modules, adapters and software solutions. This is quite an extensive range of solutions available to OEMs, which indicates the wide range of customer needs that AD8 attempt to meet. When you scroll down the list of products on the AD8 website, there are ten different product solutions available for OEMs and four different software solutions. This is a stark contrast to the product offerings of PPH and XRO. PPH offer four different solutions, all of them being software and Xero only sell one product.
Given AD8 is still in the primitive stages of developing quality and superior products in the video market and also attempting to transform existing hardware units into software format in the audio market, I expect intangible costs to continue to rise in the next few years.
Once the rate of increase in intangible payments decreases for two years in a row, I think this is strong indicator of AD8 hitting an inflection point in developing high quality and standardised products.
COVID-19 impact on AD8's customers
COVID-19 will significantly decrease demand for audio equipment manufactured by AD8’s customers due to the headwinds faced by the live music industry as illustrated by the closures of a number of theatres. I believe the live music and performances industry will not be financially sustainable even with COVID-19 measures in place, which is echoed by Charlotte St. Martin, president of the Broadway League, the trade association that represents the Broadway industry, “Broadway will not be able to socially distance. It’s just a physical impossibility—the same with the Metropolitan Opera. Our financial model is so [dependent upon] attendance and revenue. In order to socially distance, we would have to completely break the Broadway model. That would mean lower wages, lower rent at theaters, lower fees from designers and specialists. And that’s going to be coupled, of course, with lower ticket prices and lower attendance, and I don’t think anybody thinks we can do that.”
This potential impact is reinforced by the projected decline in demand and revenue for AD8’s biggest customer and second largest shareholder, Yamaha Corporation.
Yamaha reported the following in their investor briefing for the first quarter of FY2021 on 5 August 2020
· Professional Audio equipment slumped but equipment installation in Japan was robust.
· Yamaha expect stay-at-home demand to grow but professional audio equipment faces headwinds. Yamaha also expected professional audio equipment to decline with no recovery in sight for the live performance market but more music production products are projected to arise.
· Yamaha predicts double digit growth in sales of conference systems.
Notwithstanding, I believe this adverse impact will be short lived and live music will eventually return to normal in 12-18 months. In this regard, I think it’s more likely than not (60% chance) that AD8’s share price will drop consistently over the next 12-18 months due to lower rates of growth, which will present a great opportunity to buy shares at a discount.
 Page 71 of the AD8 FY20 annual report
The 2017 prospectus indicated AD8 had 25 patents (with a further 13 applications filed, in the key markets of USA, UK, Germany and China). AD8 listed eight different types of inventions that are either patented or the patent application was pending at that time.
Since AD8 listed on the ASX, they have grown the number of patents significantly as illustrated below:
AD8 appears to have a decent track record of developing patents that relate to a diverse range of applications. Such a competitive advantage is difficult to overcome by competitors as it takes significant time and costs. The costs relating to researching and developing inventions have been growing exponentially, which should be monitored.
OEMs take 12-24 months to design and develop new products embedded with Dante. If an OEM is already manufacturing and offering Dante embedded products to its customers, imagine how significant the lost time and cost would be to design and develop products with a different platform.
Considering AD8 already has such a strong foothold over its competitors in terms of the number Dante enabled audio products, other OEMs are likely to follow the herd to ensure they provide their customers with the best product offering. As the number of Dante enabled audio products grows, Dante will become more entrenched as the industry standard.
AD8 also offers free official Dante Certification training courses to enable end users to operate Dante networking solutions. This is another factor that would drive switching costs for the OEMs as end users will likely become frustrated if they need to relearn a completely different platform.
In the book, “The Little Book That Builds Wealth” written by Pat Dorsey, a business has a competitive advantage in the form of a network effect where the ‘value of a good or service increases with the number of people using it, then the most valuable network-based products will be the ones that attract the most users, creating a virtuous circle that squeezes out smaller networks and increases the size of dominant networks’. Some famous examples that spring to mind include, Paypal, American Express, Microsoft and eBay etc.
AD8 benefits from network effects through an increase in the number of users, being the OEMs and the end consumers of the equipment e.g music producers, universities. The increase in the number of OEMs adopting Dante will produce more Dante enabled products available to consumers to purchase, leading to an increase in the likelihood of an end consumer picking a Dante enabled product. On the flipside, when more end consumers purchase Dante enabled equipment, this will exert pressure on OEMs to continue manufacturing Dante enabled equipment because it will be influenced by the majority of what its end consumers prefer.
These network effects are being played out in the private Facebook group, Dante Users Forum, which was created in October 2017 and already has 12,000 members to date. A majority of these members are end users trying to set up the Dante platform, which can get quite complicated depending on the user’s existing equipment and needs. There are daily posts of queries and a lot of the members are very helpful. As more issues arise and become resolved, Dante becomes more ingrained as the predominant networking solution preferred by consumers. Once end consumers fully adopt Dante, they will want to ensure any future equipment they buy is Dante enabled, generating additional revenue for AD8 in the future. The only other competitor that has a similar forum is the Milan AV Community Forum (https://milanavcommunity.proboards.com/), however it only has 135 members and it is not really active.
AD8 has a proven track record of developing innovative products with the potential to deepen and widen its moat as more OEMs and end users adopt Dante. I will be using the following lead indicators to monitor AD8’s economic moats.
On 21-Aug-2020, Livewiremarkets.com recorded a "Buy Hold Sell" segment with Ben Clark of TMS Capital and Victor Gomes of Eiger Capital. This week they discussed small-cap stocks that are marching to the beat of their own drum.
The stocks discussed include 1) A technology company that trades at a forward PE of 73x and pays a small dividend (Appen), 2) An essential service which is paying a reasonable dividend (CWY), and 3) A company flying under the radar (HUB). As usual, the guests brought along two stocks that fit the recession-resistant thematic. Ben's company was AD8. Here's the link:
Ben discusses Audinate (AD8) from around the 4:20 mark, and presents a short but pretty compelling bull case for them.
Interestingly, on the same day, Livewiremarkets.com also published this article:
There are clearly a few fundies who don't agree with Ben's assesment that AD8 are growing 8 times faster than their nearest competitor.
Personally I like AD8, and I wished I'd bought some in March when they were sub-$3. I think they look reasonable at around $5 to $5.50, but I don't currently own any. I think they might get cheaper from here due to COVID. At least I hope they do. They are on my Strawman.com Scorecard - added at lower price levels than where they are today. When I think of Audinate, I always go back to that analogy with Bluetooth - i.e. if Bluetooth was a traded company, or was owned by a traded company, what would it be worth. Answer: A LOT!! AD8's Dante platform is very likely to be as dominant as Bluetooth is - in their own respective niche area of digital AV/media networking in a few years time (every major AV - audio visual or audio/video - brand will have incorporated Dante into their own products), so if you look at it that way, they are still cheap at current levels. If I had unlimited funds, I would certainly hold AD8 personally, but I don't. I reckon I'll be buying them at some point in the next 18 to 24 months however.
23-7-2020: Audinate Group Limited (“Audinate”) (ASX:AD8), developer of the professional AV-industry leading Dante® media networking solutions, is pleased to announce that it has successfully completed a A$28 million fully underwritten Placement at an issue price of A$5.15 per share (“Placement Price”), representing a 5.1% discount to the 5-day volume weighted average price (“VWAP”) of the Company’s shares traded on the ASX up to and including 21 July 2020 of A$5.43 per share.
The Placement will result in the issue of approximately 5.4 million new fully paid ordinary shares (“New Shares”). New Shares will rank equally with existing ordinary shares on issue and allotment is expected to occur on 28 July 2020. Eligible existing institutional shareholders who bid for an amount less than or equal to their ‘pro rata’ share of New Shares under the Placement were allocated their bid in full, on a best endeavours basis. The Placement was undertaken within Audinate’s existing placement capacity under ASX Listing Rule 7.1 and accordingly, shareholder approval was not required.
Proceeds raised from the Placement will be used to:
Audinate’s CEO Aidan Williams said: “We would like to thank our existing shareholders for their ongoing support and we welcome new shareholders to our register. We also look forward to eligible retail shareholders having the opportunity to participate in the Equity Raising via the SPP. Following the Equity Raising, Audinate will be well-positioned to weather further potential COVID-19 impacts, accelerate its growth plans and deliver on its medium-term strategic priorities.”
As announced on 22 July 2020, Audinate is also offering Eligible Shareholders the opportunity to acquire up to A$30,000 in New Shares in the non-underwritten SPP to raise up to a further A$12 million (which may be varied or subject to scale back at the Company’s absolute discretion). This represents an increased offer size, both on an absolute and relative basis, from the oversubscribed A$4 million SPP completed in July 2019 and recognises the strong ongoing support from our retail investor base.
The SPP issue price will be the lower of:
The SPP Booklet and Application Form will be released on the ASX separately and despatched to Eligible Shareholders on or about 29 July 2020, being the date on which the SPP offer will open. Application Forms and payments are due no later than 5:00pm AEST on 11 August 2020.
Further information can be found in the announcement and investor presentation titled “Audinate Equity Raising - Investor Presentation” released to ASX on 22 July 2020.
--- click on link above for the full announcement ---
17-May-2020: The risk/reward trade-off now at $5.50 to $6/share is obviously not as compelling as it was sub-$4 in March, but I think the investment thesis is that the Dante platform has developed such a market share now that their competition is really irrelevant.
It is highly likely that Dante will continue to be the dominant platform for scalable, flexible, digital AV networking into the future. I'm not the first person to say this, however it's probably really useful to think about it this way: If Bluetooth was a listed company, what would it be worth now? Bluetooth are completely dominant in wireless data transfer over short distances and device manufacturers don't have much choice - they have to include Bluetooth connectivity in their devices or else immediately be at a commercial disadvantage to their competitors. AD8's Dante platform will be similar. Everybody in the industry will be using it - as long as it continues to be the dominant platform for digital AV, and they don't currently face any SERIOUS competition. They of course DO have competition but that competition is largely irrelevant because of Dante's dominant market share.
They are a juggernaut that has been temporarily coronered, but their ascendancy will continue. They don't have any structural issues, only temporary ones that everyone else in the industry is also facing.
In their own words, Dante replaces point-to-point audio and video connections with easy-to-use, scalable, flexible networking. Adopted by hundreds of manufacturers in thousands of professional products, Dante is the de facto standard for modern AV connectivity.
That's the investment case. How big can they get. Enormous I reckon, but I don't know how long it will take. I think there's a better than 90% chance they will get taken out by a much larger company at some point at a very healthy premium to their share price at that time, but I very rarely buy into companies on takeover speculation or potential. The fact is that AD8 have developed and are rolling out a technology that WILL almost certainly be the dominant platform in the future (as it is already) and it's hard to imagine the upper limits of what that's going to be worth in future years, but it's almost certainly a lot more than their current share price.
That future potential is very hard to value accurately today, but trying to come up with a half-sensible valuation for Bluetooth (as if it was a listed company) might be a good starting point.
Just on your #Bear Case straw @Foolednomore, I would just point out that AD8 has only risen to around the same level as they were 12 months ago ($6 to $6.40) but that they were trading at over $8/share for most of the 3-month period from 21-Nov-19 to 17-Feb-20, and they got up to $9 twice during those months. They were sold down to as low as $2.51 in March, and the strong rise since that low point is just a reflection that they were very oversold at that level. The market has the ability to look through the current crisis now that the indiscriminate selling has stopped. In March there was a mad rush to liquidate any assets that could be sold, and so good companies got sold down along with bad ones. With the larger cap stocks, there are often some longer-term thinkers sitting on the sidelines waiting to snap up good companies at bargain prices, which can put some sort of a floor under those stocks. With the smaller companies, especially the microcaps and the nanocaps, the liquidity can be so thin that there is often no safety net - or floor - and there's no limit to how low they can be sold down. The only thing that stops the fall is often that there ends up being NO buyers at all. But that was March, and this is April, and a lot can change in a couple of weeks. We're still in the middle of the COVID-19 crisis, however the panic has stopped, at least for now, and people are looking through the crisis at whether companies are going to be permanently affected by this, and - if so, how much? Companies with little or no debt who can ride out the storm and come through it with much the same business and business model as they had when they went into it - are now being evaluated in terms of where they are likely to be trading in around 12 months' time. Growth stocks and disruptors, companies with new tech that has had growing acceptance and good market penetration - such as AD8 - are probably going to resume their upward trajectory when this is all over - in terms of business fundamentals improving, and their share price will follow the same trajectory. So even if you assume they was already a few years worth of future growth priced in at $8 to $9, many people are going to think, "well, they're probably worth at least $7..."
So, to summarise, yes, the near term is certainly challenging for AD8, but their longer-term growth prospects are probably relatively unchanged, and they were clearly oversold. Personally I think they're getting back towards fair value now, and I don't think I'd be buying them at over $7, but they looked really good at $2.51 to $4!