Is The Worst Now Over For Audinate?

Australia | Jun 09 2022

Following a fourth quarter trading update from Audinate Group, brokers remain Buy-rated and positive on the outlook.

-Shaw and Partners suggests the worst is over for Audinate Group
-Trading update shows strong demand and manageable chip supply 
-FY22 revenue guidance beats the consensus forecast
-Supply constraints may linger and labour inflation may weigh
-Earnings visibility improved by revenue backlog

 

By Mark Woodruff

Shares of audio-visual company Audinate Group ((AD8) began falling late last year, and eventually more than halved in value upon reaching around $5.00 in May.

Apart from the general downdraft for technology shares caused by the prospect of rising interest rates, concerns largely centred on supply-chain pressures and chip availability.

Since those May lows, shares have resumed an upward trend, further boosted by a fourth quarter trading update this week that revealed supply constraints remain at manageable levels and strong demand has continued into the fourth quarter.

This update follows another in late April, which showed strong trading conditions during March and April, following replenishments of chip supplies in March. At the time, Morgan Stanley became more confident that revenue was reaching a nadir, due to improvements in both the supply of chips and the product mix.

Now, Shaw and Partners suggests the worst is over, and expects significant earnings upside over the coming years, while Canaccord Genuity points out Audinate is one of the few stocks that is seeing incremental revenue upgrades within the ASX technology sector.

The group develops and sells digital audio visual (AV) networking solutions to end users that include universities, corporates, convention centres, theatres, stadiums, theme parks and recording studios. The company also supplies original equipment manufacturers (OEM) such as Bose, Yamaha, Shure and Sony, who on-sell Pro-AV products (speakers, amplifiers and mixers) to system integrators.

Importantly, as the structural shift to networked AV unfolds, network effects are becoming more relevant, and it becomes harder for users and OEMs to adopt alternatives.

As part of the trading update, Audinate guided to more than US$30m of FY22 revenue compared to the consensus estimate for US$28.5m. Morgan Stanley estimates US$8.7m is attributable to the fourth quarter, which was also in excess of the US$7.2m consensus forecast.

Canaccord attributes the better-than-expected trading update to elevated product demand, price rises in March (up 25% for Brooklyn/Broadway) and better inventory sourcing for chips in March.

Providing a note of caution, Buy-rated UBS suggests supply constraints may linger into FY23 and highlights the risk of more meaningful labour inflation. Nonetheless, demand is expected to remain strong and continue for the medium-to long-term, and the broker retains its $9.85 target price.

Revenue backlog

Revenue visibility has improved for Audinate, according to Canaccord. It's estimated the revenue backlog (orders yet to be filled) stood at US$25m in April 2022, which compares to a US$15m balance in October 2021 and US$2.5m prior to the onset of covid-19.

The backlog highlights that with no new sales, the company’s revenue run-rate stands at more than US$7m per quarter, and the broker now forecasts US$9.5m per quarter for FY23.

Product investor day

A shift in revenue mix to more software sales over hardware sales, and ongoing investment in new products and features to enhance the company's Dante ecosystem, were key takeaways for Canaccord from last week’s technology day held by Audinate.

Software sales now account for 25% of group revenue, up from 16% in FY19, and are growing at a 50% five-year compound annual growth rate (CAGR). This has resulted from new releases of software/cloud products (Dante Cloud, DVS, DDM, Via) and an increasing proportion of software-based implementations.

The benefits of Dante and networked audio have been conveyed via the training of around 15,000 industry personnel by Audinate. In addition, a more valuable ecosystem has been created, explains the broker, via the quantum of new product features, which entices more OEMs to place Dante into their products.

The outlook

There appears to be no problem with product demand, observes Canaccord, and supply issues being experienced will inevitably abate. Meanwhile, there's expected to be a material step-up in revenues as the company’s US$25m backlog unwinds, design wins continue and Video revenue ramps up.

Finally, Shaw likes the entrenchment of Dante as the global default standard in AV and believes the company will be a major reopening beneficiary following the covid downturn. In terms of long-term rewards, the analyst concludes Audinate Group is a very attractive stock to own.

Two FNArena database brokers cover the stock and each have Buy (or equivalent) ratings for a consensus target price of $10.17, which suggests 36% upside to the last share price.

For those brokers that are not updated daily in the FNArena database, Canaccord Genuity and Shaw and Partners are Buy-rated and have set target prices of $8.00 and $11.75, respectively.

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