The past six months have been an interesting time for Audinate (ASX:AD8). If you’re interested in the full backstory, you can refer to my article from August 2, 2024 – you can read it here, where I outlined my expectations. Shortly after, on August 6, the company released a trading update with a disappointing outlook. This was followed by a soft Q1 FY25 and another underwhelming update at the AGM on October 22, 2024.
Claude published an article on October 30 explaining why he planned to buy Audinate shares after the disappointing AGM- you can read it here. My view was slightly different—I expected the 1H FY25 results to disappoint further and drive additional weakness in the share price. I outlined my thought process in an article just a few days ago, which you can read here.
However, this morning, Audinate released its 1H FY25 results, and the market reacted strongly, with the stock surging 25% to an Audinate share price of around $9.60 at the time of writing. So, what changed, and is the worst now over for Audinate?
Audinate’s Growth Strategy
Audinate’s growth strategy is built on three key pillars:
- Expanding the Core Audio Business – This includes selling chips, cards, and modules, and software to audio equipment manufacturers.
- Developing the Video Market – Strengthening its presence in video-based solutions.
- Control and Management Tools – A relatively new offering that isn’t yet materially contributing to revenue or gross profit but is crucial for long-term market share and differentiation.
Inventory Headwinds Are Easing
The core audio business and a small portion of the video business faced significant headwinds from existing manufacturing customers. Many pre-ordered large quantities of chips, cards, and modules (CCM) in the last financial year, leading to excess inventory. These customers are working through accumulated inventory balances, leading to a dampening in short term demand for CCM products. This has temporarily affected revenue as customers utilise existing inventory rather than placing new orders. Audinate’s on their latest investor conference call informed that six of its top ten customers have resumed ordering CCM, with expectations that the remaining four will follow as inventory clears throughout FY25. Normal trading is anticipated from FY26 onwards.
Market Expectations vs. Actual Results
Audinate’s prior market guidance included:
- Q1 FY25 headwinds persisting into Q2 FY25, implying 1H FY25 gross profit of approximately US$14.5 million.
- Operating cost growth of 7%-9% for FY25.
- A positive long-term outlook.
Today’s 1H FY25 results showed:
- Gross profit of US$15.5 million, exceeding the guided US$14.5 million.
- Operating costs reduced by 3%, contrary to the previously expected 7%-9% growth,although costs could grow in the second half.
This positive surprise in gross profit and cost control has improved market sentiment significantly, along with strong long-term indicators.
However, If you look at the result in isolation – it is ugly result without a doubt but the benefit it has is very low market expectation and high short interest in the company. With that in the background, let’s dig deeper into the financial and operational performance of the business.
Financial Performance Breakdown
Given Audinate’s transition from hardware to software, gross profit is the most relevant metric for evaluating performance rather than revenue growth.
Gross Profit Growth
The following graph shows gross profit growth. It looks very ugly, but Management actually set the market expectation even , so this was positive relative to expectations.
Audinate H1 FY 2025 Breakdown
Although gross profit is the key metric, understanding revenue contribution from software and its transition is also important.
The following graph shows the revenue contribution from CCM, software, and other sources. The positive is that software revenue has been tracking along nicely and has grown ~30% compared to the pcp.
Operating Expenses
The most surprising part for me is that management successfully reduced operating expenses, performing better than guidance, though one could certainly argue that they deliberately set conservative market expectations at the AGM.
The Long-Term Thesis For Audinate Shares
The simple long-term thesis for Audinate is that it will become the de facto networking standard for the Audio Visual (AV) industry. This will enable the company to command pricing power, achieve high net margins, and generate substantial cash flows at maturity.
For this thesis to play out, Audinate must:
- Be adopted by more manufacturing partners in their product designs.
- Ensure that manufacturers ship increasing numbers of Dante-enabled products.
- Continue training AV professionals through its Dante certification program.
At 1H 2025, Audinate has more than 290,000 professionals trained on Dante, and every month, 4000 professionals are getting trained on Dante. For adoption within OEM following two graphs show that the trend is going in the right direction. The number of brands shipping Dante Products was up 3.4% half on half to 476.
And the number of products in the Dante ecosystem grew almost half on half 4.7% to 4,372.
Audinate Stock Valuation
Audinate has approximately 83 million shares on issue and holds $111 million in cash with zero debt. At a share price of $10.00, this equates to a market capitalization of $830 million and an enterprise value (EV) of $719 million.
For a company expected to generate roughly $65 million in gross profit for FY25 and remain unprofitable, valuation can be seen as highly subjective. Depending on the assumptions one makes about future growth, operating leverage, and market dominance, Audinate can either appear extremely expensive or quite cheap.
Some may argue that paying a high multiple for a currently unprofitable company is excessive, especially when the near-term earnings profile remains weak. Others may look at the long-term trajectory, assuming strong gross margin expansion and software transition, and see significant future cash flows that make the stock look like a bargain.
Ultimately, valuing Audinate comes down to belief in its ability to cement itself as the de facto standard in AV networking. If that vision materializes, current valuations may seem irrelevant in hindsight. If not, the current price could prove steep.
What I Did After Seeing These Audinate Results
Since I had already outlined my expectations in my preview article, I want to disclose that I added to my position on Monday morning at $8.99, after the H1 FY 2025 Audinate results were released. (I was too slow for the order—I had my order ready for $6.50 in hope, but as it started moving, I tried grabbing at $8.30, then $8.60, but it was too fast.) I believe investor sentiment has now turned positive, and with a relatively large short position outstanding, further upside is possible. However, this is a tactical position, and I plan to reduce my holding at some point in the future.
Let’s see how this plays out.
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Disclosure: The author of this article owns shares in AD8 and will not trade AD8 shares for at least 2 weeks following the publication of the article. The editor Claude Walker also owns shares in AD8 and will not trade AD8 shares for at least 2 days following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 343937).
The information contained in this report is not intended as and shall not be understood or construed as personal financial product advice. You should consider whether the advice is suitable for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement. Nothing in this report should be understood as a solicitation or recommendation to buy or sell any financial products. A Rich Life does not warrant or represent that the information, opinions or conclusions contained in this report are accurate, reliable, complete or current. Future results may materially vary from such opinions, forecasts, projections or forward looking statements. You should be aware that any references to past performance does not indicate or guarantee future performance.