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Audinate On Track For Substantial Share

Small Caps | Aug 27 2019

Audio technology provider Audinate has guided to similar revenue growth in FY20 and brokers do not believe the sell off in the shares was justified.

-Guidance likely to be conservative as FY20 will start with larger product and customer base
-Dante Domain Manager and video yet to contribute meaningfully to future earnings
-Business now profitable on all metrics


By Eva Brocklehurst

Audio technology provider Audinate ((AD8)) is on track to achieve substantial market share, and it is profitable. FY19 results beat guidance and the company expects similar revenue growth again in FY20. Yet the shares slipped and several brokers suspect the outlook statement may have spooked the market. The market is fickle, taking notice of outlook statements to dictate price action, Shaw and Partners asserts.

This may stem from issues surrounding quality, which can be subjective, but the broker believes it should also be about context. Morgan Stanley agrees, assessing the quality of the company's guidance is under appreciated, as revenue growth guidance of 26-31% is consistent with history.

Moreover, guidance is likely to be conservative, as the company will start FY20 with a larger product and OEM (original equipment manufacturer) base. Video revenue, an acceleration in existing software sales and the contribution from new software products will underpin FY20.

Morgan Stanley suspects declining legacy revenue masks the underlying trajectory in the business and the shortfall should be made up for by an acceleration of higher-quality growth.

Shaw and Partners acknowledges the shares had a stellar performance in the lead up to the results but finds no reason why this should not continue as DDM (Dante Domain Manager) and video are yet to contribute meaningfully to the future earnings trajectory.

The broker points out Audinate is in the best position in its history with no debt, robust cash flows and multiple products and revenue streams, and remains adamant investors should be grabbing the stock now, given a total shareholder return of 22%. Shaw and Partners has a Buy rating and $8.50 target.

Market penetration in FY19 was stronger than expected and Morgan Stanley reiterates an Overweight rating and $10.30 target. The structural growth story is in the early stages of maturing, although the broker points out Audinate is reinvesting to build a bigger network.

The company plans to enhance its training program to facilitate the structural shift to digital audio, with a focus on rolling out video and software as additional drivers of growth.

In this way, UBS believes the shipping of the video module by the end of 2019 could act as a catalyst for further OEMs to sign. As part of a capital raising the company will invest to double engineering and R&D functions over the next two years.

The impact of investment, UBS assesses, may result in effectively flat operating earnings in FY20-23 and, taking on board the recent capital raising, forecasts for earnings per share are reduced by -1-10%. The broker has a Buy rating and $9.60 target.

Regardless, Shaw and Partners considers the slump in the share price of -6% overdone and the stock a good entry point at under $7.00. The business is now profitable on all metrics and scale is likely to allow sales growth to exceed costs growth.

Furthermore, the company has outperformed in three areas in FY19, the chips business, which delivered around 30% volume growth, the AVIO adapters, which experienced strong demand, and software revenue, which improved 39%.

Hardware chips, cards and modules comprised 82% of revenue in FY19 while software, including license fees and royalties, delivered 16%. Maintenance was 2%. The number of Dante-enabled products on the market continues to grow, now 2,134 versus just 925 in 2017, and is now more than six times the market adoption of Audinate's closest competitor, CobraNet.

Shaw and Partners believes there is significant potential for the company to reach a 30-40% market share in a few years. The digital audio market adoption is only penetrated at a lowly 7-8% and this is a volume not margin game, in the broker's view, while the key is to reduce marginal costs while ramping up volumes in order to benefit from scale.

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