AV networking technology provider Audinate Group Ltd (ASX:AD8) released their full year 2024 financial results today, following on from their update earlier in the month. Revenue of US $60 million was an increase of 28.4% on the prior period while net profit before tax was AU $12.1 million up from AU $1.4 million the previous year. The Audinate share price was also up more than 16% on receipt of the results, albeit still well below the price prior to the earnings guidance released earlier this month.
This year marks the first time since 2020 that Audinate’s second-half revenue fell below first-half levels. In 2020, this was due to the pandemic; this year, it seems to stem from a slowdown in demand and the revenue transition flagged by management earlier.
Management had noted in previous reports that gross margin would begin to grow after being under pressure for some time. It was encouraging to see this reflected in the results, with a gross margin of 74.3% for FY24, up from 71.8% in the first half. In the second half alone gross margin was 76.8%, a potential sign of strong competitive advantage.
All this of course was already released in their preliminary announcement, which sent the share price plunging from above $13 to below $8. The 2024 numbers were never the issue. What took the market by surprise was the extent of the downgrade for 2025.
Audinate announced that they expect to generate US$ gross profit marginally lower than FY24, while likely seeing a decline in revenue in FY25. On top of that, costs are expected to grow 7% – 9%, implying operating profit will be lower. For a company that has always had an extreme valuation with little room to miss, this was never going to be pretty. Management have forecast the decline based on a number of factors including:
- The preference for software-based Dante implementations is expected to increase during FY25, driving the business’s overall margin towards 80%. Software Dante implementations drive adoption via hardware cost savings for equipment manufacturers, however per-unit revenue is lower.
- Shortening order lead times, re-balancing of inventory holdings across the industry and the rate at which our manufacturing customers clear raw material inventory will influence our FY25 result.
- Expected end-of-life of Viper and MY16 products.
Management expects growth will return to ‘more predictable order patterns’ in FY26.
So what will drive these more predictable order patterns?
When I questioned on the call about said patterns, CEO Aidan Williams highlighted several headwinds for FY25. Those being the end of life for the viper product which provided US $2.8 million in revenue in FY24, a substantial over order of Brooklyn modules which brought forward significant revenue in FY24.
While it is unclear how much inventory remains in the market, Williams expressed confidence in the underlying measures in place, including new products, units shipped, and various training and certification programs, to drive growth in FY26.
So, what did we learn today from the 2024 accounts, presentation, and investor call?
Audinate Units Shipped, Revenue per Unit & Design Wins
Design wins continued to decline to a more normalised position following an inflated period during the Covid-19 pandemic.
Chip shortages and customers transitioning from the Brooklyn 2 to Brooklyn 3 product primarily drove that increase. Customers were required to update their products to address shortages. Management weren’t concerned by the drop, again pointing to the inflated figures of those earlier years.
With software predicted to take a higher portion of overall revenue, revenue per unit continues to fall.
I estimated this cost had dropped to around $41 per unit down from $44 per unit in the prior period in my coverage of the H1 FY 2024 Audinate results, a trend impacted by the increasing proportion of Ultimo chips. Ultimo chip revenue grew by over 70% for the full year.
Audinate Product Progress
Audinate has made significant progress in the video space while also advancing its first Software-as-a-Service (SaaS) product.
The progress in video adoption continues to be faster than expected.
Audinate achieved its FY24 objective to double the video ecosystem. The company ended the year with 54 Dante AV partners / OEMs licensed for video up from 34 at FY23. It had 84 Dante video products launched by customers at the end of FY24, up from 48 products. While those figures don’t quite add up to double, management were keen to highlight that it was the video ecosystem increasing by more than 2x, exceeding their targets.
It’s worth noting that the legacy Viper board is coming to an end and will be transitioning from hardware to software, driving lower revenue per unit growth.
Audintate is also working on scaling its first SaaS product, Dante Director. Dante Director is a cloud-based application for managing Dante audio networks, offering remote control, user security, device organisation, event logging, AV routing, and custom integration. Its key features include web-based access, device monitoring, user authentication, logical grouping, and integration with Dante Controller.
Shareholders will be hoping to see the successful SaaS integration which could drive higher quality recurring revenue.
Audinate’s Balance Sheet
Audinate continues to hold the cash raised earlier in FY24, with cash and term deposits of around $117m at 30 June 2024.
Audinate was also able to generate significantly improved free cash flow in FY 2024. Ignoring the capital raise and term deposit movements, If you were to use operating cash flow less property plant & equipment, intangibles and lease payments as a definition of free cash flow, then Audinate produced positive free cash flow of $6.9 million, which is an $11.2 million increase on the FY23 outflow of $4.2 million.
The initial plan post capital raise was to ‘deliver organic growth through continued strategic investment in new and innovative products, ‘Win in Video’ by building on early success and to provide flexibility to explore a pipeline of identified bolt-on M&A opportunities’. As of the end of June we have not seen any acquisitions, but according to management there are a number of opportunities with the potential for another transaction to occur this year.
This is on the back of two opportunities throughout the year where due diligence was performed but the parties could not agree on valuation.
Audinate has now hired a chief strategy officer to look at both internal and external opportunities. It will be important for it to remain patient and wait for the right opportunity. The risk might be that the new hire feels obligated to proceed witha transaction to justify his role, thus creating an incentive for the company to accept a suboptimal deal.
With the outlook for lower revenue and gross profit Audinate plans to implement a number of cost control strategies for FY25.
The company plans to restructure costs across marketing, sales and product development to keep cost growth lower while continuing to invest in new products like Dante Director and Dante Connect. The expectation is that cost growth will be in the range of 7% – 9% in FY25 which is down from the historic annual cost growth of 28.5% over the last three years. It’s a tricky balance to manage cost growth while still driving the return to revenue growth in the following year.
Audinate’s Management Incentives
Given the forecasted down year, it’s an interesting time to review management’s remuneration structure.
For FY24 the short term incentives (STI) were based on a group scorecard which included revenue, EBITDA, and video units shipped. All three targets were exceeded significantly and I don’t think you can argue against the FY24 performance. The long term incentives (LTI) are based over a three year period with the FY22 LTI tested at the end of FY24. The test was a revenue growth metric based on the compound annual growth rate (CAGR) over the three-year period. During that time revenue increased from US$25 million to US$60 million, reflecting a CAGR of 33.85%. This resulted in an FY22 LTI vesting outcome of 88.52%.
There are a few interesting changes coming up for the remuneration metrics.
With the transition from primarily hardware to software the LTI is shifting from a revenue target to a gross profit target. With lower revenue per unit but higher gross margin flagged it’s an easy one to follow as to why they would make the change but you would imagine over a transition period this may be an easier target to hit given the higher gross margins of the software product. The other and perhaps bigger change is the introduction of a relative total shareholder return metric introduced in FY25.
We won’t have all the details until the AGM, I do wonder if the measure will be from pre or post August 6 when the share price dropped over 30%.
Audinate’s Valuation & Outlook
After reaching a high of over $23 back in March the company traded at a price to sales multiple of over 22 times. These levels were only previously reached at the peak of the covid stimulus boom in late 2021. The resulting crash saw the share price decline from $10.30 in December 2021 to almost $5 six months later. A similar fate to the recent announcement.
Ultimately I still believe this is a high quality business that has suffered from the known risk of high valuation and missing expectations. The long term thesis of being a dominant ‘quasi monopoly’ player in my view is still intact.
The company still has significant tailwinds and is a disruptive player in digital technology. It is still founder-led, and it is still the dominant player with over 12 times the amount of total product compared to its nearest competitor. There are high barriers to entry and having products installed within original equipment manufacturers is a huge advantage.
Despite the sell off, the extreme valuation is also still there. At the time of writing the market has lapped up the presentation with shares up 11.43% to $10.53 and therefore a market capitalisation of around $864 million. On 2024 revenue alone the company is still trading on 9 times sales despite the expectation of no growth for FY25. It still remains below the three year average price to sales multiple of 16. All this of course was for a company expecting 25%-30% + revenue growth, not one that just announced a decline.
Editor’s note: since Nick submitted these words, the price gained another 5% or so to be trading just below $11, at the time of publication.
Are we seeing a fundamental change in the business? Or did market expectations just get too high?
I’m happy to continue to hold, with a cautious eye on the risk of future downgrades. I believe the market tends to work in extremes, particularly when it comes to Audinate. While it’s difficult to justify a valuation of $23 per share, the drop to $8.50 could be considered more reasonable.
Time will tell whether management can steer this transition to 2026.
Disclosure: The author of this article Nick Maxwell owns shares in AD8. The editor Claude Walker also owns shares in AD8. Neither will 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 Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).
Sign Up To Our Free Newsletter