Audinate Group Limited (AD8) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining our call today. My name is Aidan Williams. I'm co-founder and CEO at Audinate. And with me is Rob Goss, our CFO. In the first part of the call today, we'll be talking through the Investor Presentation that accompanied our financial statements, both of which were lodged with the ASX earlier today. [Operator Instructions] At the end of the presentation, we'll collate your questions and answer as many as possible in the time we have available. As many of you are aware, Audinate provides networking technology to manufacturers of professional AV equipment. Our technology distributes audio and video signals across standard IT networks, eliminating the need for a traditional specialized audio and video cabling. We're primarily a networking software company, although we have traditionally packaged our software for sale into electronic chips, cards and modules so that the equipment manufacturers can readily incorporate our technology into their hardware designs. Our customers are primarily manufacturers of professional audiovisual equipment like Yamaha, Bose, Bosch, et cetera and audiovisual professionals around the world who design and installed visual -- audiovisual systems for clients. As you can see on the map, we are a global company with headquarters in Sydney, Australia. Our second largest office is in the Philippines, and we have local offices in the U.S.A., U.K., Belgium and Hong Kong. Before getting into the details of the presentation, I'd like to draw your attention to 4 highlights in our first half results. Firstly, we have achieved excellent first half financial results, creating new milestones for revenue, EBITDA and operating cash flow. 3 of chip supply constraints, we converted continuing demand for our technology into EBITDA, again highlighting the operating leverage that's inherent in our business model. Second, I want to highlight the strong adoption of Dante video. Following the recent ISE trade show, there are now 66 Dante video products released by our manufacturing customers. We have tripled the number of products available over the last 12 months. We also achieved our full year goal of an accumulated 30,000 video units shipped 6 months early. It is very encouraging to see healthy traction with Dante video. Thirdly, we continue to deliver results in our core audio business with very strong shipments of our Ultimo chips. The units for those were up over 200% in the last half as we fulfilled pent-up demand. We also launched our next-generation Ultimo-style product called Dante Pro S1, and that is for low channel count audio products. Finally, another exciting development at the recent ISE trade show was the launch of Dante Director, a beta trial. Dante Director is our cloud-based remote management platform, and it is strategically important as we move into network management products and services. We expect to release the full version of Dante Director before the end of FY '24. I'll return to these points later in the presentation. We've included Slide 4 to give you a sense of the broad range of applications for Dante technology. I won't talk too much to this slide other than to note that Dante technology is integrated into millions of devices in thousands of audiovisual installations around the world, with the full alphabet of applications ranging from A for arenas and stadiums that you can see on the slide there; b, for broadcast through zed or Z for zoos. Slide 5 shows updated TAM information that we first published in October 2023. At the past AGM, we presented the information shown on this slide. It is based on market research we commissioned from Omdia and our own internal estimates. The audio and video market segments represented on this slide represent the total addressable market for manufactured products that could take a Dante audio or video networking solution. This is essentially the business we're in today. The combination of audio and video networking exceeds $1 billion. The software opportunity segment for professional AV relates to products we would consider to already have on the shelf. So for example, PC and Mac at Dante Application software or the Dante Domain Manager software for managing on-premises Dante systems. The fuzzy circle on the right represents the potential long-term upside for Audinate should we succeed in our vision to provide the dominant platform used to deliver software-based audiovisual products and services. Slide 6 shows a high-level product or a map of Audinate's products and customers. On the left, you can see a vertical column where we have categorized our products into those that are purchased by our manufacturing customers and those that are primarily purchased by audiovisual professionals. The bottom row in the green characterizes products for manufacturers into audio and video and further breaks those categories down into chips cards and modules, which is some kind of electronics and software. Dante solutions for manufacturers end up embedded into thousands of AV products and form the bedrock of the Dante platform. The products shown in the middle row are primarily purchased by AV professionals or users of AV equipment. AV network adapters enabled Dante technology to be added to an existing brownfield installation in a cost-effective manner, pulling through other Dante products. In addition, we provide a full complement of PC and Mac software products to connect computers and application software to Dante systems. The top row is the category for configuration and management software and includes the very widely used Dante Controller software, which is needed to initially set up a Dante system. And it also includes Dante Domain Manager, which AV professionals use to manage on-prem Dante systems at scale. By way of applying this map, I'd like to highlight the launch of Dante Director, the beta of Dante Director, our new cloud-based remote management platform for Dante installations. You can find it in the top right in the system software category, and it is sold to AV professionals and consumers, which is the pink box on the left. Slide 7 summarizes Audinate's financial results for the first half. Again, I want to draw your attention to 3 points. The first is the excellent revenue results indicating continued demand for our technology. Unconstrained chip supply enable us to fulfill the pent-up demand for Ultimo in particular, which was up over 200% in the half. Ultimo is expected to revert to a lower run rate demand in the second half. The second thing I want to point out is the improvement in gross margin percentage, up to 71.8% from 71.2% in the previous corresponding period. But I want to note that, that was held back by the fulfillment of pent-up Ultimo demand. Gross margin percentage has been impacted during the COVID period by variations in product mix, a need to prioritize reliable supply over price and design changes to mitigate chip shortages. Ultimately, we believe gross margin percentage will return to the historic average and continue to rise with an increasing proportion of revenue coming from Dante software designs. Finally, the improvement in operating cash flow is consistent with the scalability of the business with increased revenue dropping through to improved EBITDA and operating cash flow. Notably, Audinate generated a record $10.1 million EBITDA in the first half, and Rob will speak in more details of the financials later in the presentation. Slide 8 shows operating -- or operational highlights for the first half. As a reminder, the Audinate sales cycle involves an OEM design win followed by a period of 12 to 24 months for completion of product design, followed by a repeat revenue model from the point of manufacture. During the period, the number of OEMs in the process of developing their first Dante products increased to 153, up from 129 in the previous corresponding period. Furthermore, the number of OEMs shipping Dante products increased to 430, up from 391 in the previous corresponding period. As a result, the total number of Dante-enabled OEM products across the 4,000 barrier, it increased to 4008, reflecting a net increase in products of 155 for the 6 months ending on the 31st of December. And that increase was compared to 78 net products added during the previous corresponding period. This growth is important to consider as it continues to drive revenue growth in future periods. Slide 9 summarizes our progress against our FY '23 objectives. Again, I won't cover everything in this slide, but I would like to hit a few highlights. At the top of the list is faster-than-expected video adoption. It's immensely pleasing to have hit our 30,000 accumulated video products shipped or in field more than 6 months early. This is off the back of solid manufacturer interest and design wins for our newer software video solutions, things like Dante AV-A and Dante AV-H. Both Dante-AV-A and AV-H our software solutions and in many cases, can be delivered without hardware redesign. Dante Connect was recently released and enables broadcasters and content producers to use Dante in the cloud for audio production. Several household name broadcasters and content providers are now using Dante Connect with our channel completing 9 proof-of-concept projects and building a larger pipeline of additional opportunities. We continue to develop -- to deliver initiatives to improve the scalability of our cost base, notably adding an engineering headcount in the Philippines as a lower cost development location. We've also in-sourced our website management, and we have a process improvement project around product release management in flight at the moment. Slide 10 highlights 2 recent product releases. As I mentioned before, Dante Pro S1 is our next-generation Ultimo-style solution for low channel count devices. Alongside Ultimo, we now have 2 dual source chip options for manufacturers of low channel count audio devices. Pro S1 and Ultimo use chips from different manufacturers. Additionally, Pro S1 is available in an image-only form like a software blob for high-volume customers. So we don't need to provide -- we don't need to be in the chip supply chain for Pro S1 for high-volume customers. I've mentioned Dante Director a couple of times already in this presentation, but I was really excited to see the launch of our beta trial at the ISE trade show. Dante Director is a SaaS product, enabling remote management of Dante installations. It builds on the existing functionality of Dante Domain Manager, which is an on-prem product and substantially lowers the friction of getting started with Dante management software through a hosted delivery model. Dante Director creates a new value stream for Audinate, the management of Dante installations. It also provides a platform for a wide range of manufacturers to innovate and deliver IoT-style connected products -- connected AV products without standing up their own bespoke management services. Slide 11 summarizes recent progress in Dante video. You can see a range of logos on the screen. These are companies that have adopted Dante video. Many of these are well-known and positively regarded brands in the industry. 50 manufacturers have now licensed Dante video, up from 30 in the prior comparable period. 66 Dante video products have been launched by manufacturers, up from 20 products in the prior comparable period. That's a tripling of the Dante video products released by manufacturers over the last 12 months. As I've said on previous occasions, we aim to build out a complete toolbox of video product offerings that mirrors our capabilities on the audio side, and this means an appropriate suite of hardware and software products for manufacturers, integrators and end users. We will continue to refine our Dante video software stacks for the H.26x and ASPEED chipsets, those 2 video software stacks are called Dante AV-H and Dante AV-A. And satisfyingly, the first high-performance Dante AV Ultra product using the technology we acquired with the Xilinx acquisition came to market at the recent ISE trade show. I'll now hand over to Rob for the finance section.

Thanks, Aidan, and good morning, everyone. Over the next few minutes, I will be explaining the first half FY '24 results and were lodged with the ASX earlier today and are summarized in the accompanying investor presentation. The financial information I will be covering is set out on Slides 13 to 18. I'll start with Slide 13, which sets out some of the key revenue information for the business. In U.S. dollars, revenue was $30.4 million, growing nearly 48% from $20.6 million in the prior corresponding period, hereafter referred to as pcp. The Aussie-U.S. dollar exchange rate was favorable relative to pcp, resulting in Aussie dollar revenue growth of 50.1%. The main driver of the increase was 45.6% growth in chip, cards and modules revenue, which is abbreviated to CCM. The main products responsible for the increase were Brooklyn modules, Ultimo chips and, to a lesser extent, AVO adapters. As Aidan has already earlier commented, Ultimo chips were supply constrained in first half '23, but these pressures have gradually eased, and the backlog of pent-up demand was satisfied over the second half of FY '23 and the current period. Therefore, it is expected Ultimo revenue will revert to lower run rate demand in the second half. Software revenue grew 56.2% to $7.3 million from pcp of $4.7 million. The product is responsible for this increase with Dante Embedded Platforms, IP Core and retail software sales with all of these products growing revenue well in excess of 50%. The overall gross margin percentage increased 71.8% -- to 71.8% from 71.2% in the previous corresponding period, held back by the fulfillment of pent-up Ultimo demand. Further improvement in margin are expected in the second half due to cost-down initiatives and favorable product mix shift. From this point onwards, all amounts quoted will be in Australian dollars. We have included an EBITDA bridge on Page 14, which shows the main factors driving the increase in EBITDA from $4.3 million in first half '23 to $10.1 million in first half '24. Operating expenses increased by 32% to $23.4 million in the first half year ended 31 December 2023. The key movement was a $3.6 million increase in employee costs as headcount grew from 186 to 204 at period end, salary increases and the annualization impact of new headcount over the period. Slide 15 shows that operating leverage in the cost base is again evident as additional revenue drives EBITDA growth. This is also obvious in the dotted yellow line showing that both R&D and operating expenses as a percentage of revenue declined in first half '24. Slide 16 shows a traditional income statement with detailed explanation of individual line items. Having already commented upon the key drivers, I will leave you to review at your leisure. The only other item to note is the other operating expenses, which has increased from $2 million in first half '23 to $3.4 million in first half '24. Relative to pcp, the increase is driven by increased travel, software subscription and professional services costs. It is worth noting that this line item is flat relative to second half '23 when other operating costs also amounted to $3.4 million. As a result of all of the items I've discussed, the net profit after tax was $4.7 million for the half year period ended 31 December 23 compared to a pcp net loss of $0.4 million. On Slide 17, you will find the cash flow statement, which shows operating cash flows of $11.8 million compared to pcp of $1.8 million. Pleasingly, there are some favorable working cap movements in interest income which resulted in over 100% cash conversion in the first half. It's also worth noting that operating cash flows in the first half are seasonally lower due to the payment of annual bonuses. The balance sheet is set out on Slide 18. From our perspective, it remains a clean balance sheet with no debt. It reflects the impact of the $70 million capital raise completed during the period that resulted in cash and term deposits of over $111 million at 31 December 2023. I will now hand back to Aidan to cover the outlook for the second half.

Thanks, Rob. Okay. So Slide 20 summarizes our priorities for FY '24. So Clearly, delivering video products to our customers continues to be a priority. It's great that we hit our goal of shipping over 30,000 accumulated Dante video product 6 months early. However, we will continue to drive product launches and design wins and see where we can get to with video adoption over the rest of the financial year. We will also continue to deliver video product releases and improve video support in our PC and Mac software offerings, notably Dante Studio. On the cloud product side, a key product delivery to look for in the second half is that of Dante Director. So we're aiming to get that from the beta to a fully released GA product, certainly by the end of this financial year. Dante Connect has had a promising start and we aim to ramp up delivery of that solution in the second half. Our channel has a pipeline of proof-of-concept projects we aim to convert into paying customers, and our relationship with Amazon, which is essentially a marketing relationship, is going well. A constant theme for Audinate is managing growth and continuing to scale by improving and automating our internal processes. The more efficient we are, the more we are -- we will be able to translate ongoing demand for our technology into improved profitability and cash flow. Turning to the FY '24 outlook on Slide 21. As we've been saying through this presentation, unconstrained supply chips has really enabled us to deliver pent-up demand for our product. And that's particularly Ultimo, also Brooklyn, but that has translated into excellent financial results for the first half of FY '24. However, we also expect demand to return to a more typical run rate over the second half. And so we view the outlook for the full year FY '24 as consistent with the statements we made at the release of our FY '23 results. We continue to be watchful of softening economic conditions, not because we're sort of doomsayers or doom casters. What's going on here is that unconstrained chip supply means a return to shorter lead times for our customers and a natural reduction in sales order backlog for us. And so the tricky thing there is that it complicates management of any softening in economic conditions because it's not easy for us to unpick this natural reduction in the backlog from potential slowdown or reduction in demand. We continue to explore several M&A opportunities, buoyed by a stronger balance sheet from the recent capital raise. We will continue to maintain focus on improved operating efficiency, profitability and operating cash flow, and we expect growth in U.S. dollar gross profit dollars for the full year FY '24 to be consistent with historical performance. Financial results for the full year FY '24 are expected to be consistent with current market expectations. Overall, we had a standout first half, both financially and with product adoption, and I look forward to further success through the remainder of FY '24. And with that, I'll hand back to Rob to coordinate questions.

Thanks, Aidan. So we've got a number of questions lined up in the chat, which we'll run through. Aidan, if you like to take a look at that bottom second question and we'll [indiscernible] third. I'll deal with the first two. So the first question, obviously, chip shortages in '22 and '23 increased design wins, is the continued drop away of any concern? So that detail is set out in the appendices. We had consecutive half year periods, which were significantly boosted by design wins for the Dante Embedded Platform product where that was seen as an alternative to an Ultimo. And then secondly, there was where everyone was subscribing to the new Brooklyn 3 product. So those are sort of artificially inflated those numbers. Second half '23, we did do outstandingly well with extra design wins and some carryover of Brooklyn. I would look to the middle graph on that page, where you can see the number of customers -- new customers designing products is increasing. So that's come up to 153 during the current period. And then the overall number of OEMs, either developing product or shipping product increasing. So understand calling it out, but not a cause for concern. Second question here is, do you -- do we have any idea how big the TAM could be for Dante Connect? Adjacent software products not included in the current TAM calculation. Yes. So it is an existing product. So in theory, it could be included in the $890 million. There isn't market data on that product as there isn't really an equivalent existing market for that. And it was sort of different to being able to source information around the existing sales of audio and video units. So very nascent, but we do view it as a product that could make, I guess, meaningful revenue contribution in time.

And as we get adoption with Dante Connect, I think we're in a better position to have some thoughts about what the TAM for that might be.

So you might want to deal with both question 5 and question 6.

Yes. Cool. Okay. So question 5 is, can you provide more details on the virtual ASSP model? Thank you. So the virtual ASSP model -- so we have our first product that's come to market with the virtual ASSP model. So that was the Dante AV Ultra video product that got launched at the ISE trade show. So we're in the market with it. So the idea with that is the customer buys the chip from the manufacturer. In this case, it will be from a Xilinx, manufacturer of FPGA chips. And then we supply software components, which is a software blob and that's the virtual ASSP model. So the concept is that an ODM manufacturer of white label manufacturer can take that blob, combine it with the chip that they purchased from the chip supplier and then build out a complete product. So the idea there is that we're not in the supply chain for the chip, but we do provide the software piece. The other question for me to answer is, are you seeing any signs of potential softening macro starting to impact AV industry now? Or are you just conscious that it could be in the second half? So I think the thing for us is where we sit right now is that we're -- I would say that we're sort of in a position of being not sure of where the kind of macro direction is going. So if it were sort of 2 or 3 months ago, I think we had data from the industry association AVIXA, which seem to be clearly showing that there was softening in the U.S. market, but that didn't seem to really jive with what seemed to be a pretty successful and thriving trade show that we were just at in Europe. So I suspect actually, it's uneven globally around the world. And so that's one of the reasons why we've been very -- we've had a very conscious and strong gaze at our backlog and what's happening with our orders. So that's what's behind the comment I made around the natural shortening of supply -- well, the natural shortening of lead times, reducing our backlog confounding, I guess, signals from us about demand coming from our customers. So I think -- I don't think we see specifically at this point. We couldn't say that there is going to be a downturn. But for the second half, we have certainly been wondering about potential softening. And for us in our business, it's -- the signals are confounded with this reduction in backlog associated with the supply chain normalizing. So I think making opinions about whether there is softening or not, it's probably above my pay grade, but that's how I see it from inside Audinate.

Very good. I think a number of these seem to be for me, Aidan. So there's sort of two questions which are very similar. Help us understand how much backlog release, Ultimo backlog helped U.S. GP dollar growth in first half '24. Please clarify Ultimo backlog has been fully worked through in the first half and place this result, we will return to normalcy across the whole product set. Yes. So in the -- I guess if we come back to the comments made with the release of our FY '23 results in August, we did flag that we did see a little bit more revenue coming into the first half than ordinarily would be the case where we've traditionally had a 45-55 split. Without knowing exactly what it might look like, I guess we sort of surmise that it might be more in the range of something like 48-52. Remains to be seen exactly how the second half plays out, but we've maybe overperformed a little in terms of just pulling a few more Ultimo shipments into the first half that customers need it rather than being sort of delivered early this second -- in the second half. So I would say Ultimo and then the second factor there is sort of the VIPER Board product which is coming to the end of its life as we flagged. There's a little bit of revenue for that product in the second half. But essentially, they were the 2 factors which probably contributed to a result that was a bit better than expectations in the first half, albeit that we had always factored that revenue into the full year result. In terms of normalcy for Ultimo, yes, that's what we're expecting in terms of second half run rate. There is clearly still backlog for that product, but the backlog now represents what we would see as being the normal lead time for that product rather than being pent-up demand that we're not able to satisfy. Another question here. Up to 15% headcount increase implies 235 plus 31, an analyst who is good at math. Very good. What portion of these roughly would you expect to put in the Philippines? Yes, we've gone -- we're actually at 217 at the end of January. So whilst we might have looked to be a little bit high in hitting that target, we're going pretty well. In round terms, there's probably 10 to 12 of those roles, maybe even a few more going into the Philippines. The other factor for those keenly calibrating an employment cost line. The way that we account for the long-term incentive expense is that it is expense relative to the revenue growth, so there is a bit more expense taken in the first half given the outperformance relative to pcp. Guidance for FY '24 is broad. What does consistent with historical performance mean? Are you referring to first half, second half earnings splits GP margin percentage or both? Thank you and congrats on an excellent result. When we talk about historical performance, we referenced the U.S. dollar gross profit dollar growth. Historically, we've been in the range of between 24% and 32% growth. Clearly, we're well placed to achieve the upper bound. Congrats on a very strong result. Can you provide more color on video units shipped, video sales in first half '23? Yes. Aidan, you might like to add to this. But effectively, where the outperformance has come has been some very large substantial orders from some new video customers for the Dante AV-A and Dante AV-H product, lower dollar than the VIPER revenue but very encouraging in terms of their anticipated sort of demand for those products.

Yes. I think I would add to that by saying that we built those software products, AV-H and AV-A, in order to tap into an existing product designs and chipsets that were in use in the market. And so it's really satisfying to see adoption of those. And as Rob said, I think we landed both design wins and some large -- some chunky up-front orders from some very credible players in the industry. So that's what's driven that faster-than-expected achievement of the 30,000 Dante video units coming to market.

Okay. Yes. So one last question here. So we might draw a close on the call after this one, Aidan. Over to you for this.

Yes. So the question is video, you already beat that 30,000 target. Is there a new target? Sound like a board member. Can you talk to the feedback you've had from the industry, feedback from system designers and integrators in terms of design and combined Dante audio video systems? So I think the feedback generally is that if you are -- so our major market segments are things like corporate unified communications, the higher education sector, commercial installed installations of various sorts. So for those big applications like conference rooms and lecture theaters and university scenarios, there absolutely is a substantial benefit for people being able to manage AV equipment using 1 platform. So that provides an incentive for system designers for integrators and for the support people who are looking after potentially thousands of devices in a Dante installation at a university campus, for example. To want to use Dante audio because of the 4,000-plus products that they can buy, huge catalog Dante video because they get to use the same kind of tools and networking for managing the devices and things like Data Domain Manager and Dante Director. So I would say that there is an ecosystem effect which kind of builds from the millions of dump audio products in the field, but then translates across into Dante video products but also into the software management tools like Dante Domain Manager and Data Director. So feedback from integrators has been great. Like certainly the ones that I have spoken to, once they wrap their heads around what you can do with Dante Director, they kind of click. And integrators have always been telling us, "please make a video solution that works the same way as the audio solution." So I think we are lined up pretty well with what integrators are looking for. Cool. I think that's it with respect to questions. So thank you for joining the call this morning. I appreciate your time, and we look forward to speaking to you again in the near future. Thank you very much.

Thank you.