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Resounding Comeback For Audinate

Small Caps | Feb 23 2021

This story features AUDINATE GROUP LIMITED. For more info SHARE ANALYSIS: AD8

After the shutdown of live entertainment bedevilled Audinate through the height of the pandemic the business has made a resounding comeback

-Support from a broader commercial recovery in AV
-Can design wins translate into subscription gains?
-Gross margins in software can ramp up further


By Eva Brocklehurst

A recovery is well underway for Audinate ((AD8)), as clients for its audiovisual offering re-open their businesses and the backlog of orders becomes evident. The company has pointed to strong trading conditions in the first half, setting aside the disruptions to its supply chain in the height of the pandemic.

UBS found the first half result and the V-shaped recovery a surprise and is now more aware of the importance of a strong digital audiovisual offering for the likes of corporate clients and educators.

Morgan Stanley stresses the importance of the company's leadership and underlying earnings power as it makes inroads in video. The business is supported by a broader commercial recovery in audiovisual and a backlog of orders.

UBS assumes a continued recovery in FY22-23 as confidence returns to the clientele. Credit Suisse notes revenue of US$11.1m is now back to pre-pandemic levels and, although no formal guidance was provided, trading conditions appear solid.

The company achieved strong traction in software revenue in the first half with a record number of design "wins" – 51 versus 20 over FY20. This is a material step higher and an even higher number is targeted in the second half.

Morgan Stanley asks whether the design wins can be translated to subscription gains and concludes this could occur, albeit further down the track. The broker reiterates a view that video enhances the software opportunity, and there is a clear path to monetising this via software-as-a-service.

Audinate continues to extend its lead over competing offers and Canaccord Genuity notes the number of Dante units shipped into original equipment manufacturer (OEM) products increased by 41% in the first half, making this the largest uplift in the company's history.

This was driven by software unit growth of 61% and reinforces the strategy of complementing physical hardware sales with software that increases the potential application of Dante.

Audinate intends to launch three OEM products in the second half and Canaccord believes a step-up in video R&D personnel illustrates the products are well received.

Morgan Stanley's estimates imply 10% growth in the second half and no live sound upside has been factored in, signalling estimates may be conservative. Strengthening fundamentals are key to the broker's view with trading recovering from cyclical troughs.

Shaw and Partners notes the number of Dante-enabled products in the market is now over 3000 compared with 553 in FY15 and believes over the longer term Audinate is a "ripper of a story", with its technology now the default global standard.

UBS incorporates 40% long-term penetration (FY30) for Audinate of the addressable digital audio market, and calculates every incremental 10% penetration adds around $3.25 to its discounted cash flow estimates and 3% to Audinate's 10-year sales growth rate.

Brooklyn Chip

While software revenue was higher than Credit Suisse expected, compositionally chips, cards and modules were weaker. The latter, the broker suggests, stemmed from weakness in the high-priced Brooklyn module, which has elevated exposure to the live events industry that was severely curtailed by the pandemic.

Canaccord believes the company will eventually overcome the material decline in sales derived from the Dante Brooklyn chip, probably by 2023, but in the interim the design wins, Dante video and impending product launches will mean positive revenue momentum.

The Brooklyn chip was sold into larger products, such as mixers and digital signal processors, and this was materially affected by the pandemic as live sound and concerts ceased.

There may be some short-term price pressure but Shaw believes the majority of the pandemic-related contraction is behind the business. Moreover, Audinate is well capitalised and has large gross margins of 77% that should ramp up even further in terms of its software.

Shaw and Partners, not one of the seven stockbrokers monitored daily on the FNArena database, has a Buy rating and $10 target. Canaccord Genuity, also not one of the seven, has a Buy rating and $9.00 target. The database has three Buy ratings with a consensus target of $9.93 that signals 11.4% upside to the last share price.

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