New Products with Dante AV

Looks like some Dante AV products have finally hit the market. As someone that works in the industry, I'm eager to see these in a real-use scenario. As an investor, I believe Dante AV will be the next big growth driver for the business.

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.

• OEM products now numbering 3,008 is a great milestone. I remember a few years ago when you could read the entire list of Dante-enabled products in a minute or two!
• With 360 brands now offering OEM products, it is no suprise to me that that they have 17x as many products as the nearest competitor. And if you're talking about their nearest competitor in terms of the quality of product, then it's a whopping 89x!
• It's great to see the growth in AVIO, Broadway and Ultimo have partially offset the loss in Brooklyn II sales. For those unaware, these terms basically refer to the channel count of a product. AVIO maxes out at 2x2, Ultimo is 2x2/4x4*, Broadway is 8x8/16x16* and Brooklyn II is 16x16/32x32/64x64*. I've never seen it officially mentioned anywhere, but from discussions I've had with sales reps, I believe the cost per channel for them is approximately $8 USD. Audinate would get a much bigger fee on Brooklyn II products, but they're usually found in very expensive bits of gear with lifecycles in the range of decades. I'd much prefer to see growth in the AVIO, Ultimo and Broadway range of products.
• It still remains apparant to me that the next big long-term catalyst of Audinate will be tied to their success with video. It's great to see them focusing R&D efforts on the video.

* The smaller channel count is at 96KHz; the larger at 44KHz, with 16x16 on the Brooklyn II being at 192KHz.

Dante AVIO Adapters

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.

1Q21 Trading Performance

https://asx.api.markitdigital.com/asx-research/1.0/file/2924-02293959-2A1256469?access_token=83ff96335c2d45a094df02a206a39ff4

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.

Audinate strongly positioned to deliver on its strategy

https://www.asx.com.au/asxpdf/20200820/pdf/44lpfnps5wt859.pdf

FY20 results announced today, better than I personally expected.

Hightlights:

• Revenue of A$30.3million, up 7.1% (US$20.4 million)

• Gross profit (GP) of A$23.2 million, up 10.1% – improved GP margin of 76.6%

• EBITDA of A$2.0 million

• Net loss after tax of A$4.1 million, includes A$3.6 million tax losses written off

• Operating cashflow of A$4.8 million, up from A$3.6 million in FY19

• Cash on hand at 30 June of A$29.3 million, plus A$40 million gross proceeds from equity

  raised since year end

• Dante enabled products up 31% to 2,804 – a key leading indicator of future growth

Also a bit of hint in here that the recent capital raising may indeed be for AD8 to capitalise as best it can when the economy recovers. As for the outlook, it looks like there has been consistent revenue over the recent months, but not enough to see growth in FY21. 

"Since a marked decline in revenue in the month of May, the business has delivered consistent revenue in June & July and is placed to generate similar revenue for August. Whilst this performance is encouraging, it is currently below the level required to generate revenue growth in FY21. The impacts of COVID-19 are difficult to predict with any reasonable degree of certainty and a wide variety of potential revenue outcomes for FY21 are possible. Accordingly, Audinate plans to update the market through FY21 in response to changes in the trading environment."

Disclosure: I hold AD8.

https://www.asx.com.au/asxpdf/20200722/pdf/44kqwnvhf9b0wg.pdf

I'm not really sure what to make of this. The past month has been incredibly bleak in terms of sentiment from inside the industry. We seem to have reached a point where a lot of Dante's end-users, myself included, don't see ourselves returning to work in any previous capacity for at least 24 months. People are seeking new careers and businesses are looking to transition into providing other services. JobKeeper is really the only thing keeping local businesses solvent; international businesses without such a stimulus aren't as lucky.

Maybe Audinate are feeling the same way and want to strengthen their position to see out what could be a rough few years. I can't see an acquisition of any direct competitors; it wouldn't make sense. A partnership would be more likely, or the potential for white-label product integration that may require a certain amount of R&D on their side of things.

There is still sentiment that when events are viable again, it will explode out of the gate and business will be booming. It could be that they wish to use this period of time to strengthen their manufacturing base and increase R&D so that when things return to normal they will be positioned to capatilise on an industry in overdrive.

In regards to MrProcure's Straw regarding the recent episode of 'The Call from ausbiz', the statement made by Andrew Wielandt that the 'owner' is holding only $4,000 worth of stock isn't quite correct.

I believe the person referred to as the 'owner' to be Lee Ellison, who joined Audinate in 2008 and served as CEO until 2019. In the Final Director's Interest Notice, announced 13/09/2019, it notes that he held 820 fully-paid ordinary shares, now worth roughly $4,247.60. On the date of announcement he was also entitled to 2,368,410 unlisted performance rights and was the beneficiary of a trust holding 320,000 unlisted options.

The CEO position was filled by co-founder Aiden Williams. The Initial Director's Interest Notice, announced 16/09/2019, stated that Aiden held 1,910,907 fully-paid ordinary shares ($9,898,498.26) and 236,398 unlisted performance rights.

David Krall, the second co-founder and current Chairman of AD8, held 400,000 fully-paid ordinary shares ($2,072,000) and 80,000 unlisted options on the 08/10/2019, the date of the last Change of Director's Interest Notice regarding his interest in the company.

I can see how Andrew Wielandt could make the mistake in believing Lee Ellison to be the owner, but that is not the case, and the small number of shares owned by a retired CEO is not something I would consider as relevant to the future of AD8.

The share price at time of writing is $5.18. That is what the above dollar values are based on.

This is my first Straw, and I thought it should be on a company that is at the dead centre of my circle of competence. Prior to the pandemic, I worked as an audio system tech and wouldn't go a week without using Dante. I have a lot of experience using Dante as the backbone to audio systems in many venues, arenas, stadiums and festivals around Australia and have personally witnessed its expansion and growth of marketshare in recent years.

The main competition, AVB, has only a minor footprint and is regarded as an inferior product. Almost every major flagship product released in 2019 was Dante-enabled, with many consumer level products also entering the market. The level of investment into Dante systems by the biggest names in the game puts it at an almost 'too big to fail' level.

Financially, ending Q3 with $30mil in cash and no debt puts them in a great position to see through the pandemic. The recent move of 20-25% of their manufacturing to Malaysia lowers the risk of a supply chain hit from China closing down, although it is still a significant concern and will have a negative impact if we see a second wave in China.

Althought not as attractive as it was at a sub-$5 share price, I think long-term AD8 will recover and continue on the upwards trend it maintained throughout most of 2019.