Audinate’s Recurring Revenue Opportunity

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Following disappointment in August, new research highlights upside potential from new market opportunities for Audinate Group.

-Upside from Audinate Group’s new revenue model
-Dante Director seen providing value beyond network installation
-Dante Media Encryption software also due for release
-FY24 results and FY25 outlook

By Mark Woodruff

New research highlights not only the current competitive advantage of Audinate Group’s ((AD8)) Dante solution, with the largest footprint across audio and video networking solutions combined, but also upside potential from new market opportunities.

Having established a dominant lead in audio networking and using that base to establish a presence in Video networking, the newly released Dante Director launches the group into a new market providing software services directly to enterprises under a recurring revenue model, explains Moelis.

Management’s strategy is to offer services across the growing ecosystem of six million Dante enabled devices, unlocking revenue streams from fresh customers, and expanding into new markets.

The Dante platform distributes digital audio and video signals over computer networks and is designed to bring the benefits of IT networking to the professional audio-visual (AV) industry.

As well as hardware and software to connect AV devices, the group also provides network management software tools.

Overall, Audinate benefits from growing demand for AV signals over internet protocol (IP) networks (AVoIP), which generate efficiencies for end-users including universities, corporates, convention centres, theatres, stadiums, theme parks and recording studios.

AVoIP lowers initial outlays for these end users, explains Moelis, providing flexible and fast deployment, as well as software enabled network management.

Currently, original equipment manufacturers (OEMs), including Bosch, Bose, and Yamaha, license the Dante protocol to enable digital delivery and management of audio for over 4,000 products, such as microphones, mixers, and speakers. These OEMs on-sell Pro-AV products (speakers, amplifiers, and mixers) to system integrators.

Over FY24, OEM brands licensing Dante technology increased by a record number to 621, and as Canaccord Genuity highlighted at the time of the results, each new design win provides another layer of future recurring revenues.

Illustrating an expanding ecosystem, OEMs in the process of developing a Dante enabled product stood at 161 at FY24’s close, the highest level since FY20.

The number of certified AV professionals rose by 22% to 271,000 with the recently launched cloud-based Dante Director targeting these integrators who manage the network.

New markets for Audinate

Launched in early-June, Dante Director extends Dante’s value proposition beyond network installation, explains Moelis, and provides Audinate with recurring revenue streams direct from enterprises.

Dante Director is a SaaS solution for remote management of Dante networks allowing administrators to configure channel subscriptions, control user access and monitor network security from anywhere.

Director, which replaced Dante Domain Manager (DDM) Silver, is a manufacturer-agnostic, web-based network management platform. Such platforms are increasingly important, Macquarie suggests, as security becomes central to the industry.

Another new market opportunity is the soon-to-be-released Dante Media Encryption.

The underlying premise of providing encryption services to network users rests on Dante’s interoperability and broad adoption. The newly released Pro S1 chip (suited for use in nodes such as microphones and speakers) should provide a leading indicator for Dante Media Encryption.

FY24 result

When delivering pre-released FY24 results on August 6, management’s disappointing FY25 outlook came as a shock to followers of the stock.

In Macquarie’s view, the sharemarket itself was to blame as it whipsawed to capitalising cyclically low earnings from previously treating cyclically high earnings as structural growth.

While the business experienced a contraction in demand after a heightened FY23/24 growth period that proved unsustainable, there were positive signs for the gross margin.

For broker opinions at the time the reader may refer to https://fnarena.com/index.php/2024/08/12/first-shock-of-the-season-whats-next-audinate/

As Macquarie was ahead of other brokers in warning about Audinate’s valuation prior to pre-released FY24 results, the analyst’s latest thoughts may hold greater weight.

After actual results on August 19, Macquarie noted leading indicators for growth appeared “solid”, particularly the metric for units sold per Dante-enabled product in market, which had returned to normal levels in the second half of FY24.

Anticipating “choppy” sales in FY25 as customers work through inventory, the broker also felt the release of new AVIO adaptors in the second and third quarters of FY25 would support ongoing gross profit growth.

Management highlighted a gross margin of 80% should be attained in the near-term thanks to a mix shift to software implementations. Guidance for an 85% gross margin guide in the long-term was also reiterated.

Lower average selling prices (ASPs) in software should help grow the number of Dante-enabled devices in the field, explained Macquarie, by lowering the marginal cost to OEMs of including Dante in products.

For FY25, management reiterated guidance for FY25 gross profit to be “marginally lower than FY24” with a return to growth and a “more predictable order pattern in FY26”.

The outlook

UBS likes the long-term opportunity provided by the structural shift to digital from analogue, the deep moat, and Audinate’s strong leadership position, while Morgan Stanley highlights the expanding user software capabilities and monetisation.

Moelis sees significant strategic value and longer-term growth in Audinate’s leading solution though expects revenue uncertainty will weigh in the short-term.

Following the pandemic, the shorter-term outlook is being obscured by the ongoing normalisation of supply chains, explains the analyst. It’s thought earnings will be skewed to the second half of FY25.

Canaccord Genuity noted the first half of FY25 will be Audinate’s toughest period to cycle given the strong previous corresponding period which benefited from supply chain normalisation, resulting in a record backlog unwind.

Of the four brokers monitored daily researching Audinate Group in the FNArena database, both Macquarie and Morgan Stanley have Buy ratings (or equivalent) and UBS and Shaw and Partners are on Hold.

The average target of these four brokers is $11.53 which suggests just over 18% upside to the share price, but price targets range between Macquarie’s $14.60 and Shaw and Partners’ $9.30.

Outside of daily coverage, Moelis begins research coverage with a Hold rating and Canaccord Genuity rates the stock a Buy, with targets of $10.50 and $12.00, respectively.

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