Small Caps | Jul 20 2020
Audinate has signalled the trough in income during the June quarter was not as deep as previously anticipated and this augurs well for the company's earnings trajectory in FY21.
-Opportunity to gain market share continues
-Lingering concerns regarding risks to demand
-Despite restrictions, new product released and webinars ramped up
By Eva Brocklehurst
Refreshingly, audio developer Audinate ((AD8)) has indicated the trough in earnings during the June quarter was not as severe as previously expected and conditions improved in June versus May.
Preliminary indications of revenue and gross profits were stronger than brokers expected for FY20, although the outlook for FY21 still encompasses some caution, considering the pandemic remains active.
Shaw and Partners takes a conservative stance and cuts FY21 sales estimates by -11% but when the pandemic wanes Audinate is considered one of the key longer-term choices in the small cap space.
Total global revenue for professional audio equipment, the broker notes, was estimated growing to $10.7bn in 2021 and in this the company's addressable market is estimated growing to $455m. Moreover, this estimate is specific to audio, and adding in software and video increase the total addressable market for Audinate to over $1bn.
As a result, Shaw, not one of the seven monitored daily on the FNArena database, believes the stock has many positive attributes and there are several catalysts for the business which will play out over the longer term.
The broker has a Buy rating with a $6.75 target and argues that the company is in the best shape in its history, with no debt and an expected earnings trajectory that is now being fulfilled.
Credit Suisse, too, continues to like the business because of an attractive structural shift and opportunity for market share, which should help it maintain robust margins. Nevertheless, in the short term revenue may be challenged, although the broker acknowledges being surprised thus far, particularly regarding the recovery in June.
There are lingering concerns about the risks to end-market demand and the pressures that face many customers because of restrictions resulting from the pandemic. The broker would become more confident if there was more understanding about the shape of the cycle.
The company has indicated FY20 revenue of US$20.4m and a second-half gross profit margin of 77%. Audinate reports in US dollars so, adjusting for Australian dollars, sales were around $30.3m. Morgan Stanley calculates $29.3m in cash as of June 30, which signals FY20 cash break-even, and observes strong traction continues on the qualitative drivers of the business.
The healthy gross margins reflect favourable product mix of higher software sales and fewer low-margin Ultimo chips, Shaw notes. Uptake of software sales was holding up as a percentage of overall sales, while there was continued moderation in chips/cards/modules. The number of Dante-enabled products grew 31%.
UBS continues to believe there is an opportunity for the company to strengthen its competitive position through Dante/digital AV training, further entrenching the Dante network and the video opportunity.
During the second half Audinate release new Dante products and expedited the development of new video hardware design and software development. The company's training program was also ramped up and a low-cost office has been opened in Manila to centralise back-office functions and provide some scale for future development.
FNArena's database has two Buy ratings and one Hold (Credit Suisse) for Audinate. The consensus target is $6.90, suggesting 30.2% upside to the last share price. Targets range from $5.40 (Credit Suisse) to $7.80 (UBS).
See also, Audinate Resonates Despite Downturn on April 9, 2020.
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