Audinate Group Limited (AD8) Earnings Call Transcript & Summary

Well, good morning, everybody. Hopefully, all the technology is working and that you can hear me. Thank you for joining our call today. My name is Aidan Williams. I am co-founder and CEO here at Audinate; and also online is Rob Goss, our CFO.

Thank you, everyone.

In the first part of the call today, we will run through the investor presentation just lodged with the ASX. [Operator Instructions] Well, what a year it has been for all of us, I guess. The past 15 months have been somewhat of a unique operating environment for Audinate. However, we are very pleased with our financial performance in FY '21, and particularly with the resilience of the business in the face of COVID-related challenges. Internally, we have adapted to a variety of restrictions around the world. And we've had a renewed focus on employee well-being as staff have adjusted to the challenges of working remotely. It's encouraging to see confidence returning to the AV industry, and our core audio business has continued to grow strongly. We were particularly pleased to see strong revenue growth coming from our next-generation Dante software products. That's the Dante Embedded Platform and Dante IP core. For those of you who've been following Audinate, you've probably heard us talk about those over a couple of years. So it's good to see the fruits of that effort. Our focus going into the year was to drive design wins, which are a leading indicator of future revenue growth. And so it was, therefore, very satisfying to see the change to a subscription pricing model drive record numbers of design wins during FY '21. The establishment of a new video development team at Cambridge in the U.K. and the launch of our first Dante video products from our manufacturing customers were substantial milestones in the life of the company, bolstering our development capacity on the video side of things and providing strong momentum for our video offering going into FY '22. So we will be talking through the investor presentation that accompanied our financial statements. Both of those were lodged with the ASX earlier this morning. And in response to increasing interest in ESG matters from investors and other people, relevant disclosures have been made in the directors' report around supply chain management and diversity. So if we move to Slide 2, you will see a summary of Audinate's core business. So Audinate is a technology company. We provide networking technology to manufacturers of professional audio and video equipment. We are primarily a networking IP and software company, although we have traditionally packaged our software for sale into chips, cards and modules so that equipment manufacturers who make hardware can readily incorporate our technology into their hardware designs. Our customers are manufacturers like those shown on the slide, Yamaha, Bosch, Bose, but also a host of other major brands in the professional AV industry, which might not be such household names. So the first step in our typical sales cycle with the manufacturer is the design win step. And this is where we sign up a manufacturer to use one of our chips, modules or software products. So you can see the products there, the chips, modules and cards and software on the screen Then it typically takes 12 to 18 months for a manufacturer to complete a new product design incorporating our technology. Once the new product is available for sale, the manufacturer regularly orders chips and modules or pays [ premium ] software royalties each time they build products, and that creates a repeat revenue stream for Audinate. As you can see on the map, we are a global company with headquarters in Sydney, Australia. We have several locations around the world, providing -- primarily providing sales and support functions. But notably, we have recently created our first product development location outside Sydney, in Cambridge in the U.K., and that team will be focused on the development of new video products. So Slide 3 shows the key operational highlights for FY '21. Over the last 12 months, the number of Dante-enabled products on the market grew from 2,804 to 3,255. And this is now over 19x the number of products of the next closest competitive digital audio networking technology. Even though supply chain pressures slowed new product releases in the second half of the year, the number of manufacturers shipping Dante products increased to 371 up from 328 a year ago. Pleasingly, the company achieved a record 105 design wins, including an impressive 66 net new OEMs. The growth in design wins was facilitated by the introduction of an annual subscription payment model for Dante licenses, new software audio products and video products. Dante certification and training continues to be an important way to educate the market and drive end-user demand for Dante networking technologies. In FY '21, 112 webinars were conducted which helped train approximately 33,000 AV professionals on Dante. Of these, 13,000 were trained in languages other than English and 12,000 received training on our new Dante video products. Slide 4 shows highlights -- financial highlights for FY '21. I think the key takeaway from this is that we have returned to U.S. dollar revenue growth of 22.5%. And that return is really off the back of a general recovery in the professional AV industry globally. There was strong 43% growth in the number of Dante units sold, and that 43% growth outstripped U.S. dollar revenue growth, reflecting a shift in revenue mix towards software products with no COGS component. The chart that you can see on the slide shows historical gross margin dollars and gross margin percentage to highlight that ongoing shift in product mix towards software-style solutions. As this transition occurs, gross profit dollars are expected to become a better measure of financial performance than top line revenue growth. Accordingly, we were pleased to see software revenue grow strongly at 62%. Overall, it was really pleasing to see broad improvement across our financial metrics even as we continue to invest strongly in product development and scaling the business. So Rob is going to speak in more detail to the financials later in the presentation. Slide 5 summarizes various significant business activities that we undertook this year. So we had a number of these -- we shared a number of these objectives earlier in the year. So at the beginning of the year, if you cast your mind back, we were facing substantial uncertainty around the impact of COVID globally. And so several of our objectives were really geared around constructively doing what we could for the future, so particularly driving design wins, whilst looking for short-term revenue and managing our cash expenditure. So I'll speak to the design win side of it and Dante video in the following slides. During the year, we also completed a AUD 40 million capital raise to enable us to continue to invest strategically in the business. This has set us up well to invest in the video development team in Cambridge in the U.K. and to be able to explore potential M&A opportunities. The year also saw a substantial strengthening of business systems with the implementation of a merchant of record payments facility, good progress towards implementing a CPQ system and completion of the first phase of work in our information security framework. And these activities will enable efficient scaling of finance and operational functions. Slide 6 shows the sales cycle and repeat revenue model that is Audinate's revenue engine. So I think I touched on this a bit earlier in the presentation, but this slide kind of drills into a little bit more detail. So the design win is a key point in the sales cycle when the manufacturer commits, and that means pays money, in order to use a particular incarnation of the Dante technology in a product that they ultimately intend to make. Once 1 or more products made by that manufacturer hit the market, Audinate receives per unit revenue from each products as chip, card or module components are purchased or software royalties are paid. At the start of the year, we felt that it would be strategic for us to drive as many design wins as possible to unlock future revenue even if FY '21 revenue turned out to be negatively impacted by COVID. Offering an annual subscription model for that technology access charge at the design win phase has turned out to be a very good strategy for us. It's reduced the barrier to entry for manufacturers, and it has helped us to deliver a record number of 105 design wins during the year. We expect each design win to translate to 1 or more products on the market and repeat revenue associated with those products in future years. Slide 7 highlights the progress that we made during the year on new video products. So I think it's hard to understate how much of a milestone this is for Audinate. It is a major milestone to release completely new product to the market. And Dante video products are actually a completely new set of products for us. So it was a huge milestone. And we saw this year, the release of 6 video products from 2 manufacturers. Those manufacturers are Bolin Technology and Patton. And that consists of 2 cameras and 4 network video encoder/decoder devices, which take video signals and take them on and off the network. And those 2 cameras and 4 encoder/decoder devices are now available on the market. And AV system designers can use Dante networking as a single integrated solution for video and audio signal distribution in their projects. The pipeline of Dante video design wins is growing and has been stimulated by the launch of these 6 products. However, COVID has been a bit of a headwind, mainly because it has prevented in-person demonstration of what to some is -- to some manufacturers is a new and relatively unfamiliar solution. A significant corporate development activity also related to video during FY '21 has been the establishment of a new development team in Cambridge in the U.K. This team was established to accelerate video product development and is another major milestone for Audinate as it is the first product development group outside our Sydney headquarters. In addition, we have recruited a corporate development role in Cambridge, focusing on strategic partnerships with an emphasis on video. Dante video and audio technology was recently showcased by the Blue Note Group in a series of distributed performances where musicians played live with each other from 3 different venues simultaneously. Those venues were in New York, Washington, D.C. and Nashville. The system used Dante audio so across this distributed network so that musicians could hear each other as if they were in the same room and Dante video so that they could see and interact with each other as if they were sharing a stage and Dante Domain Manager was used to glue it all together. On the slide, you can see the top photo shows one of the stages. And if you look carefully, you can see that there are 3 musicians playing on the stage, and there is a TV screen on the left of the picture with a singer and a keyboardist who were playing with them from a remote location hundreds of miles away. The bottom photo shows all of those 3 locations stitched together as a single performance, which appears to be on a single stage. And so that's what a person watching the concert would have seen in the bottom photo. So the reactions from the musicians were fantastic, and the whole project shows that our first Dante video products can make this type of solution viable in a way that it never has been before. So moving to Slide 8. This shows -- just basically gives you the pictures of the recently released Dante video products from Bolin and Patton. Each of the products shown on the slide incorporates the Dante AV module, which is also pictured in the center, on the slide. And that module transports, audio and video signals across standard IT network using Dante Technology. Both Bolin and Patton are original design manufacturers that can offer white label versions of their products to other manufacturers. And this is significant because it enables other manufacturers to get to market quickly with their own Dante video, their own branded Dante video products. And with that, I'll hand over to you, Rob, for the finance section.

Thanks, Aidan, and good morning, everyone. Over the next few minutes, I will be explaining the FY '21 financial results that were lodged with the ASX earlier today and are summarized in the accompanying investor presentation. In particular, the information I will be talking to now is set out on Slides 10 to 15. I will start with Slide 10, which explains some of the key revenue information for the business. In U.S. dollars, revenue was $25 million, growing 22.5% from $20.4 million in the prior year. In Australian dollars, revenue was up 10.1% on the prior year with a differential growth rate due to currency headwinds as the Aussie dollar strengthened against the U.S. dollar. As Aidan mentioned earlier, we expect to see further long-term margin improvement as growing proportion of our revenue is generated by software products. For this reason, growth in gross profit dollars is an increasingly important measure of performance rather than revenue growth alone. During FY '21, gross profit dollars grew 23.1% to USD 19.2 million and the gross margin percentage was 76.4%, which is consistent with the prior year. From this point onwards, all amounts quoted will be in Aussie dollars. Growth in Dante units amounted to 43%, outstripping revenue growth and reflecting the shift to software products. We use the term Dante units as a catch-all expression for the number of unique AV products and computers with Dante inside, whether that be in the form of a chip, card, module or increasingly, software. Software revenue grew almost 62% in FY '21, driven by greater than 50% growth in royalties and greater than 30% growth in retail software and Dante Domain Manager revenue. Chips, cards and modules revenue grew at around 13%, whilst units of chips, cards and modules shipped grew at 26%. This reflects a mix shift towards lower channel count products, offsetting a 16% decline in our highest revenue product, the Brooklyn module. AVIO adapters delivered significant revenue growth of greater than 50% and there were strong revenue contributions from our Ultimo and Broadway products, which both grew in excess of 35%. Geographically, revenue growth was strongest in the Americas, followed by Europe and the Middle East. Revenue from Asia was impacted by customer concentration in live sound and large events. Consistent with previous commentary, the vertical markets driving revenue growth were corporate conferencing and higher education. In terms of the income statement set out on Page 11, you can see that we delivered 50% growth in EBITDA, which amounted to $3 million for FY '21. Operating expenses grew 6% for the year and amounted to $22.5 million. The main reason for this increase was growth in employee expenses, primarily as a result of the recruitment of the video development team in Cambridge U.K. which amounted to approximately $1.1 million for 6 months. The other factor driving growth in employee costs was a return to paying staff bonuses in FY '21 based on improved financial performance. Headcount at the end of the year amounted to 135 staff. And pleasingly, we have recruited a further 14 since year-end, putting us in good stead to reach our headcount goal of greater than 170 by the end of FY '22. Aidan will touch on this again later on. In terms of other expense trends, you can see a 32% decrease in sales and marketing costs due to savings on travel and trade shows as well as favorable FX impacts. Consistent with the prior year, we are not in the position of recognizing tax losses. Hence, the large movement noticeable in the income tax expense line from the write-off of tax losses in the prior year. Overall, the group recorded a net loss after tax of $3.4 million compared to a loss of $4.1 million in the prior year. On Slide 12, there is an EBITDA bridge outlining the key movements driving the 50% increase in EBITDA in FY '21. Please note that we've shown the growth in revenue dollars at the same FX rate as the prior year and then quantified the impact of FX headwinds separately. The other factors on the graph have already been explained in my earlier commentary. On Slide 14, you'll find the cash flow statement, which shows operating cash flows of $6.7 million, which is a 39% improvement on operating cash flows of $4.8 million in the prior year. The group undertook capital raise at the beginning of FY '21 and the gross proceeds of $40 million are disclosed in financing activities. Some of the proceeds were invested in term deposits with maturities of greater than 3 months, and under the accounting standards, are not considered cash, hence, being reflected as a $27 million outflow in investing activities. The statement of financial position is set out on Slide 15. From our perspective, it is a clean balance sheet with no debt. At 30 June, we had $65.4 million of cash and term deposits, which provides the company with a strong balance sheet to consider M&A and other corporate development activities. I'll now hand back to Aidan to cover the outlook for FY '22.

Thanks, Rob. So if we turn to Slide 17. So I think the summary, the really top-level summary here is we see increasing demand, but risks still linger going forward. So really that's due to a combination of recovery from downturn and customers placing orders further ahead to de-risk component supply. That has resulted in us having a record backlog at 30 June. So that's the demand side. The recovery and customers putting in orders early really has given us a strong backlog going into FY '22. We're seeing the benefits of that in the trading performance was strong in July. However, some orders ended up being deferred to later months due to a temporary shutdown of one of our manufacturing lines in Malaysia, and this was caused by local COVID cases. So there were some COVID cases in the factory, they shut it and cleaned it and so it was out of action for a week or so. August demand is also strong. However, we are now allocating our Ultimo products to customers due to global chip supply constraints. So although there is a record demand for our products, we do expect chip shortages and potential COVID-related manufacturing disruptions to affect our ability to supply during the first half of FY '22. The good news is that the bulk, the vast bulk of our manufacturing customers, have new products, new Dante products under development according to a recent customer survey that we carried out, and you can see the results of that shown on the slide. However, global supply chain pressures are causing our manufacturing customers to focus on product redesign in attempts to address part shortages in their existing products, so to try and design -- redesign those products to use alternative parts that they can't -- from the ones they can't currently get. And that potentially defers the launch of new Dante products. The diversion of engineering resources may also adversely impact new design wins for the next 6 months, including Dante video design wins. But in the near term, we do not expect new product delays or a slowdown in design wins to impact revenue, essentially because of the ongoing strong demand from end users and high backlog of unfulfilled orders. So Slide 18 summarizes our priorities for FY '22. As always, a key objective is to get new design wins over the line for Dante-enabled products, and that's to unlock repeat revenue from per unit sales in future years. We continue to believe in the long-term value of the business and intend to increase staff to over 170 to support ongoing growth and to continue to invest in video and cloud product developments. I won't read this slide, but rather I'll summarize by observing that our priorities here fall into 3 broad themes. The first theme is to drive new Dante products and services; the second is to increase Dante adoption and reduce friction; and the third is to set our business up to structure it to grow, to manage growth over the next few years. So in summary, on Slide 19. Strong demand for our technology continues as the AV industry recovers from the downturn, and that is very encouraging for Audinate's long-term outlook. In the short term, however, we expect continued supply chain uncertainty to affect us and our manufacturing customers throughout the remainder of the calendar year, this calendar year '21. And whilst this may limit revenue growth in the near term, we remain confident that Audinate can deliver U.S. dollar revenue growth in the historical range for FY '22. Overall, the launch of the first Dante video products, record numbers of design wins and the establishment of a video product development team in Cambridge in the U.K. are significant milestones as we execute our strategy to revolutionize the AV industry. And with that, I think we have some time for Q&A. So Rob will be coordinating the Q&A.

Yes. Thanks, Aidan. So we might start off with a couple of questions, which are relatively similar in nature. So these are both for you. One is, can you please expand on the following comment, completed infrastructure for infield activation for audinate.com. Please explain what progress was made during the year. And then there was a related question, which someone asked. In-market Dante-enabled products able to be over the wire updated for new software upgrades.

Yes. So I'll start with the latter one first because that's fairly simple. The answer to that is yes, all Dante products in the field. It does depend a little on the exact approaches used by different manufacturers, but all Dante products are upgradable, software upgradable over the network. And that gives us, I think, uniquely in the industry, the ability to deliver new products and features into the existing Dante products that are deployed in the field. The first part of the question, I think, was around the infield activation comment. So we have been wanting to enable the sale of increased Dante functionality, so more channels or to be able to turn on Dante in the field for some time. So this financial year, we did quite a bit of internal work on the engineering side to develop prototypes from proof of concepts of that. And one of the key things behind that is to reduce friction. So to be able to offer Dante in very cost-effective products where you don't want to burden the price of the product with the Dante functionality out of the gate, but yet gives the end user the opportunity to turn that on at a later date. So we've had a number of prototypes and we've also had, this year, some validation from 1 key customer around that particular structure and strategy. And so we think that in the next financial year, we'll be able to offer that sort of functionality to at least some products with some manufacturers in the field. One other comment I would make is that the new software products that we have with Dante Embedded Platform and Dante Application Library are well suited to this type of functionality, and we already have customers -- a customer like QSC, for example, who are actually offering infield upgrades, but they're using their own mechanisms to do that. So this particular activity is about us being able to offer that in-field upgrade and enablement functionality to all manufacturers in the industry.

Thanks, Aidan. There's a couple of financial questions, which I'll -- I'll deal with. So question understanding the GM change from half to half. Second half GM was down slightly versus almost 77%. Please explain the second half fluctuations. So there are a couple of things which went into it. So there were some spot purchases of materials at a higher cost, and that did have marginal sort of impact on the gross margin percentage. The main other thing that happened was really strong increasing volumes around chip, cards and modules revenue, in particular, adapters and Ultimos, which do have a lower gross margin percentage. So a change in the second half was really that sort of mix shift. In the first half, we did also have some more sort of upfront design win revenue under the old model, which had a favorable impact on the GM margin. Longer term, there's sort of no change to the previous commentary that we've made where we expect that shift to continue in that GM margin to go up in the medium term, but it might move around just based on fluctuations in product mix. Other question regarding the 33,000 professionals in FY '21. Trained 16,000 in the second half, but also trained 12,000 on Dante Video. Is that inclusive of the 33,000 of the video? So 33,000 who were trained in total, within that 33,000, there were 12,000 of those 33,000 who undertook some form of training, which covered Dante video. So the video is a subset of the 33,000. Aidan, a couple of questions for you, sort of around chip shortages. So will chip shortage drive a faster conversion to software? And where was the other question?

There was a question around, does it cause people to design out?

Yes.

Or switch from hardware to software implementation, that type of thing. So I guess it's kind of related. Yes. So I think what's -- so I think potentially, but I don't see that happening with our customers at the moment. I think the -- the thing is that your average AV product, like one of our adapters, for example, our little AVIO adapters, has got like 120, 150 separate parts in it, components. So it could be any one of those parts potentially that you can't get access to, unfortunately. And it isn't just like silicon chips. There can be other components, too. So the redesign that's being engaged in is often to make sure that there's -- you can have more than 1 type of power supply chip or more than 1 type of network, connect or components, things like that, and not so much a wholesale shift of the products from hardware to software implementations of Dante. I think it's certainly the case that if you're going to do a redesign then, I guess, once that sort of Rubicon has been crossed, then manufacturers are certainly open to doing -- more open to doing redesigns than they were in the past because they just had -- they've exercised that muscle recently. I think it's -- the redesign piece is probably not driving a shift to software. But I think the ability to deliver software across a wide range of products. I mean the software solutions, I think, are driving their own demand. So I don't think it's being -- it's been particularly driven by the chip shortages. Hopefully, that answers those 2 questions.

Yes. Thanks, Aidan. I might pick up on a few questions around of video. So there's questions around new video products expected to be released over FY '22. How important the video solution is for Audinate's long-term market dominance? And then a question around sort of market lead over competing video solutions.