Audinate Group Limited (AD8) Earnings Call Transcript & Summary

[Audio Gap] CEO at Audinate. And with me is Chris Rollinson, our Chief Financial Officer. 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. You can ask questions at any time by typing them into the Q&A box. And at the end of the presentation, we will collate the questions and answer as many as possible in the time we have available. Before getting to the nuts and bolts of the presentation, it is worth reflecting on the significance of our longer-term strategy. In a year where we were working through an inventory overhang, we shipped another 1 million Dante units, matured our first cloud-based management platform called Dante Director, and completed the strategic acquisition of Iris. Our long-term strategy is to capitalize on the growing installed base of networked AV devices and provide the software platform used by the industry to deliver audio-visual products and services globally. AV installations are generally understood to require 3 kinds of functions, audio, video, and control. And today, including the Iris acquisition, more than 8 million audio and video devices are available in our product ecosystem. The time has come for us to invest in the third leg of the stool, the control function, and this has financial implications for FY '26, as you will see later in the presentation. With the completion of the Iris acquisition and the onboarding of a crack team of industry veterans to spearhead our platform strategy, we have put in place key capabilities and talent that will advance our long-term vision of providing an interoperable audio, video and control platform for the AV industry. I'll cover results highlights and strategy before handing over to Chris to walk through the financial results in more detail. Turning to Slide 4. I'm pleased to report that we have returned to half-on-half growth, with a U.S. dollar gross profit increasing 12% over the first half. During FY '25, our manufacturing customers have worked through their stocks of Dante chips and modules, and we believe that inventory rebalancing is largely complete, positioning Audinate for a return to growth in FY '26. Pleasingly, underlying demand for Dante remains strong. Demand for our software products and particularly embedded software used by our manufacturing customers, grew steadily throughout the year. Unlike hardware, embedded software products are delivered essentially on demand without lead times and are less impacted by industry levels. The 15% growth in embedded software revenue indicates continued growth in demand for Dante technology and is especially pleasing in light of slowing industry growth, highlighted by AVIXA's reduction in their growth outlook to 3.9%. Leading indicators for the business remain positive with design wins increasing by 12% and an additional 427 new Dante products coming to market during FY '25. Each design win, which occurs when a manufacturer signs up to use Dante, and every new product coming to market represents future repeat revenue for Audinate. Overall, there are now 4,603 different Dante-enabled products on the market for AV professionals to choose from when designing their systems. The gap to the next nearest competitor continues to widen with 14 Dante products on the market for every competitor product. Interest in Dante from AV professionals remains strong. In particular, we're consistently training and certifying around 4,000 AV professionals every month, with a total exceeding 300,000 trained and Dante certified professionals globally. By way of a brief summary, the third column describes the strategic opportunity for Audinate. We are engaged in what we like to call a profitable land grab, proliferating Dante audio and video networking technology into a wide range of network products. As the number of Dante devices grows, platform software will become increasingly important to manage and deliver AV installations at scale. The industry shift from analog to digital networking is still in relatively early days, and our video and platform software products are at relatively early stages of development and maturity. Therefore, as we have said before, the bulk of the market opportunity for Dante technology remains ahead of us. Turning to execution during FY '25. As you can see in the left-hand column, it has been another really busy year with product launches and improvements. The first 3 products relate particularly to that control and management function I mentioned at the beginning. And these are needed in pretty much all AV systems. During the year, we built out a range of features in Dante Director, and we established the organization to support our first SaaS product globally. Dante Director is a cloud platform that monitors and manages AV installations. Dante Controller is the face of Dante to AV professionals around the world. It is software used to configure and troubleshoot AV installations and benefited from a facelift with a modernized look and feel and improved usability. Dante Device Link is new, I think, for investors. We haven't talked about it before. It enables remote configuration and control of a wide range of features inside audio-visual products. The devices or the features don't have to be Dante related. They might be a temperature fault indicator, a volume control, or perhaps an exposure setting for a camera. Device Link is closely coupled with Dante Director and has received strong interest from both manufacturers and AV professionals alike. During the year, we also extended our successful range of adaptor products with a new range called Dante AVIOs for installation. These are optimized for installation contractors with clips and screw brackets to simplify mounting and installation. We also extended our Dante Virtual Soundcard PC and Mac software, doubling the number of channels and introducing a recurring revenue model for the product. And that's -- that was a good -- it was a relatively simple thing for us to do, and it enabled us to increase revenue from a mature product. If you've been following Audinate, you know that we raised capital in late 2023, and have been evaluating a variety of M&A opportunities. I'm really pleased to have closed the Iris transaction since it is so well aligned with our long-term strategy, and the team is basically excellent. Iris is a leading cloud-first remote video production platform that enhances our AI driven video capabilities and aligns beautifully with our vision for unified audio, video, and control over networks. The Iris product is expected to launch publicly in the '26. Through FY '26, we'll invest in go-to-market and product development to drive adoption and scale, bringing audio, video, and control closer together under a single interoperable platform. Finally, our financial position gives us the flexibility to invest without overreaching. We ended the period with AUD 109 -- just under AUD 110 million in cash and a pro forma balance of AUD 72.8 million post the Iris acquisition. That provides a strong financial capacity and optionality to invest strategically in product development for future growth. In short, we had a year where there were meaningful product launches, strategically meaningful acquisition, and we retained the financial strength to execute, and this positions Audinate to capitalize on the opportunity ahead. Slide 6 shows key financial highlights for FY '25. The full year revenue result of USD 40 million is consistent with previous market guidance. As we have been saying, FY '25 has been a transitional year for us with financial performance temporarily impacted by inventory overhang at our OEM customers and overall a more softening AV industry growth rate. The solid 7.9 points increase in gross margin percentage is largely due to a products mix shift toward high margin software products. As we've been saying for several years, manufacturers using Dante in high volume products are increasingly shifting to embedded software implementations. And this was again apparent during this financial year, with 15% growth in embedded software revenue and an improved GM percentage. Note that the cash position of AUD 109 million on the slide is prior to the Iris transaction close. Chris will speak in more detail of the financials later in the presentation. Slide 7 breaks down hardware and software performance further. The charts graphically tell the story of inventory overhang after the return of chip supplies in FY '24. They also highlight the ongoing growth in embedded software, both in revenue and unit terms. We believe our manufacturing customers have largely worked through their accumulated inventory balances, and we expect a return to growth in FY '26. However, industry growth forecasts have moderated largely due to concerns around the potential impact of tariffs on demand. Slide 8 highlights second half versus first half performance. As you can see, hardware chips, cards and module products were impacted by overstocking, particularly in the first half. Embedded software sales show relatively consistent half-on-half growth, a trend we expect to continue. Embedded software growth largely looks through stocking issues to underlying demand for Dante. Slide 9 recuts our product portfolio financials in a new way. We're now splitting out our hardware products into 2 categories. The first is adaptor products sold to end users, and the second is embedded hardware products sold to equipment manufacturers. Likewise, we're splitting out software products sold to end users from embedded software products sold to equipment manufacturers. We believe that this categorization makes sense going forward and better reflects the main components contributing to Audinate's performance. I'll leave the rest of this slide for your reference. However, it is worth highlighting the strong second half performance as -- of adaptors as stocking issues alleviated. Lastly, the Dante for AVIOs -- Dante AVIOs for Installation product range, that's the new range that we launched this year. It was launched relatively late in FY '25, and we expect a larger revenue contribution from it during FY '26. Slide 10 highlights ongoing strength in our core business metrics. As a reminder, Audinate's sales cycle involves an OEM design win followed by a period of 12 to 24 months for product design to be completed, followed by repeat revenue derived from the ongoing purchase of chips or royalties as each new unit is manufactured. And that goes on for the sales lifetime of the product once it hits the market. So the 3 charts on the slide show the key metrics in the sales pipeline, starting with design wins, followed by product development, and then the ultimate launch of that product for sale on the market. As you can see, these indicators have tracked well through FY '25 with 129 design wins representing manufacturing brands signing up to use Dante technology in their products, 194 brands currently developing their first Dante-enabled product, and 427 new Dante-enabled products hitting the market during FY '25. So just as a reminder, each new product for sale generates repeat revenue for Audinate. So the strength in these core business metrics bodes well for FY '26 and beyond. On Slide 11, you can see progress against our FY '25 objectives. Given the headwinds in the first half, we focused on sales and marketing activities that could drive revenue. Notably, that's deepening the relationships with system integrators. These are the folks who design AV systems and specify what technologies and equipment gets installed. Secondly, we have continued to drive video adoption and video product development, launching multichannel support in our Dante AV-H and Dante Studio products. This enables significant conferencing and higher education use cases. And I'll say more about Iris later in the presentation. Thirdly, we launched the first in a range of installer friendly adaptors. These have different connectors and mounting options that are suitable for installation under tables. We also delivered Dante Connect into a number of cloud-based audio production applications, and we developed new features enabling audio contribution and monitoring users using standard web browsers in Dante Connect. Finally, we have invested in Dante Director, maturing its product features and building the organizational structure to support our first SaaS product globally. Through the year, we delivered an improved user experience for Director with streamlined onboarding, multi-language support, and remote performance monitoring. We have included Slide 13 as a one-page summary for Audinate. I won't talk too much to this slide because we've actually touched on many of the things on this slide already, other than really to highlight the breadth of applications for Dante technology listed in the column on the right-hand side of the slide. Just as a reminder, we benefit from this diversity. For example, during COVID, corporate conferencing and higher education experienced tailwinds. And while corporate conferencing remains a significant market for us, it has moderated since the COVID days. But on the other hand, the live sound market has recovered strongly. This slide is also included for your reference. We've touched on each of these product developments earlier in the presentation. One thing I would point out, though, is if you look at the bottom right of this slide, you'll see a couple of images of our new Dante AVIOs for Installation product range. Slide 15 is also included for your reference. It shows the major features of Dante Director broken into a Standard tier and a Professional or Enterprise tier. Dante Director is our first SaaS product, and it's aimed at monitoring and managing audio-visual installations, as I said before. It is, as a reminder, it is a strategic first step in our plan to offer a portfolio of management and monitoring functions for Dante installation. Dante Director has been in the market for just over 12 months with an initial launch targeting smaller scale systems. Over the next year, we will be building out a series of enterprise security features in Dante Director that will enable a variety of larger scale corporate IT applications. Pleasingly, there is a strong pipeline of Beta customers for the Enterprise version of Dante Director. And we think that's -- there should be good conversion with those customers. Dante Video continued to grow during FY '25. A total of 122 Dante Video products were on the market at the end of FY '25, with a total of 64 brands licensing Dante AV in some form. During the year, we continued to improve our product portfolio, delivering a multichannel version of Dante AV to manufacturers and a multichannel version of Dante Studio to end users. Multichannel support is particularly useful in conferencing and live applications. Clearly, the Iris acquisition is very significant to our video strategy, and notably, it brings an ecosystem exceeding 1 million units into our product portfolio. As with the Silex acquisition that we undertook a few years ago, Audinate will continue to support our customers, particularly our manufacturing customers who are relying on Dante or Iris video functionality in their products whilst we merge the 2 product portfolios over time. Slide 17 summarizes the Iris transaction. In terms of strategic fit, Iris strengthens our video capability and accelerates our vision for interoperable control and management. It aligns with Dante's core markets today in corporate, education, entertainment, sports, government, house of worship, and extends the value of Dante Director and Dante Studio. As a product, Iris is cloud-based. It is a control-first AV platform with a simple browser-based monitoring and control function. Like Dante, it is manufacturer agnostic and has -- and launches with advanced camera features, including AI auto-tracking, color correction, and cloud recording, with a roadmap to expand into a variety of other devices, including video encoders, decoders, and vision mixing products. With respect to traction and go-to-market, Iris has strong early adoption from 14 leading camera brands with a white label of the version of the Iris product being launched in April 2025. Public launch of the Iris branded product is targeted for the first half of FY '26, and it will use a SaaS model with monthly and annual subscriptions. The team is frankly excellent. It is founded and led by Noah Johnson, who has prior experience founding a remote production or remote video production services company in a similar space. The Iris and Audinate teams are an exciting combination of capability and talent with a shared vision of the future. It's an exciting time as we look to accelerate and deliver that vision together. And now I'll hand over to Chris for the finance section.

Thank you very much, Aidan. So, look, I'll take you through the financial results for FY '25. And first, we'll look at the income statement, and we're presenting these -- the income statement in Australian dollars. So revenue for the year was AUD 62 million, gross profit of AUD 51 million, and that represents a gross margin of 82.3%, which is up from 74.3% in the prior year. Operating costs were $50.5 million, an increase of 6% on the prior year. And overall, this results in underlying EBITDA of $651,000 for the year. So if we break revenue down further, as already alluded to by Aidan, revenue from our chips, cards and modules products was $22.1 million, which was down 50% on the prior year and this is a reflection of the impact of the OEM inventory rebalancing that's taken place throughout the year Pleasingly, though, our software revenues were $17.1 million which represents a growth of 11% year-on-year, and again highlights the underlying demand for Dante products, which is strong and shows performance where there's minimal impact from the inventory fluctuations. Encouragingly important, performance as the year has progressed has improved. Second half revenues and gross profits were up 12% on the first half, and this provides a really solid base as we look towards growth in FY '26. Turning to our gross margin, the transition to software continued to reshape our revenue mix and gross margins expanded to 82%, driven predominantly by sales from high margin software categories. And again, in FY '26, we expect to maintain margins above the 80% range. And finally, on our cost base, operating costs of $50.5 million, an increase of 6% on the prior year. And this reflects our continued investment in products to drive growth in the future. The headcount increased from 225 to 235, supporting product development and go-to-market capabilities. And primarily this investment sat with the Dante Director product. We also increased our marketing expenditure with a focus on supporting product launches and also expanding our industry training initiatives, which are very important in building the network effect. So turning next to our cash flow statement, Audinate delivered positive operating cash flow of $7.5 million for the year compared to $25.4 million for the prior year. So after investment in intangibles and fixed assets, Audinate had a free cash outflow of $11.3 million during the year compared to a positive free cash inflow of $6.9 in million the prior year. So the choice to continue our strategic investment in new products such as Dante Director, such as video to drive future growth opportunities has clearly had an impact on cash flows in the current period. But as we've demonstrated in prior years, Audinate has a business model that's able to scale and also to deliver positive free cash flow as revenue volumes increase. And finally, on the financial section, just turning to the balance sheet. The key highlight here is that at 30 June, 2025, we had $109.9 million in cash and term deposits. And after accounting for the acquisition of Iris, which will take place in July -- has taken place in July. So on a pro forma basis, cash was AUD 72.8 million. So Audinate is well funded to execute on our strategy. And I'll now hand you back to Aidan.

Thanks, Chris. So if we turn to Slide 23, this summarizes our priorities for FY '26. Firstly, it is imperative that we continue to drive the core of our current business, shipping Dante audio and video units to manufacturers. The total ecosystem of installed products is the foundation for a future software platform business. Related to that is a goal to partner deeply with our manufacturing customers and deliver combinations of products and services that fits specific applications and market segments like a glove, for example, in higher education or conferencing applications. Third, it is critical that we support the Iris team through product launch and scale up. This will initially involve building out go-to-market functions in sales, support, channel management, and marketing. In the short-term, we will continue to support Dante and Iris video customers with the stacks that they are using as we plan to merge the 2 technologies in an orderly fashion. Finally, building on the successful launch of Dante Director, we aim to deliver a roadmap of expanded features. We're also building out the organization and processes necessary to operationally deliver and scale both Director and Iris products globally. Slide 24 summarizes the FY '26 outlook. I won't talk through all of the bullets on this slide. From a big picture perspective, ongoing strength in the core metrics cited earlier indicates continued progress in what we like to call the profitable land grab part of the business, with U.S. dollar gross profit growth expected to be between 13% and 15% over FY '26. This represents 2x to 3x the overall industry growth rate, which is itself slowing due to tariff related uncertainty. As I said earlier, our long-term strategy is to capitalize on the growing installed base of Dante devices and provide the software platform that the industry uses to deliver audio-visual products and services globally. The acquisition of Iris, the maturing of Dante Director, and the onboarding of industry veterans, specifically to develop our platform business, are strategic moves aimed at delivering our long-term vision. Making these moves involves investing, and we therefore expect operating costs in FY '26 to increase by 25% over FY '25. Over the medium term, we expect operating leverage to return as these investments scale with revenue growth outpacing cost growth. So to wrap up, there is an industry shift underway, and that's from proprietary AV hardware to more IT style networked software driven solutions. I can't think of a company that's better placed than Audinate to drive and capitalize on this industry transition. And I'm excited by the talent and capabilities we now have at Audinate to make our vision a reality. And with that, I'll hand back to Chris to coordinate questions.

Thank you, Aidan. So the first question, anonymous, what are the growth expectations for Iris? Given the purchase price, you must believe adoption by customers will be strong. Yes. Look, in terms of Iris, I think, we break that down into 2 parts. So I think the public launch for Iris will take place at the end of this calendar year. Ahead of that launch, there's more cost to invest into Iris to ensure that that launch is going to be successful. But certainly in terms of expectations for Iris and more broadly the video category, we do expect very strong growth, not necessarily in FY '26, but as we look towards the outer years in '27 and beyond.

Yes. So actually, I might jump in and -- because it relates to another question, which is a question from Michael Wu. So there's a question. Iris white label product has already launched under the PTZOptics Hive linked brand. What was the initial customer feedback been like and what are you learning from these early deployments? So I would say that there's a few things that make us optimistic about the revenue prospects for Iris. One is that it is a different business model. So Iris is actually monetizing the end user. So they have a vertical software application for managing video production. So it's sold to the end user, much like Dante Director is sold to an installation or an end user. So compared to our current business model where we are a component inside a manufacturer product, it has a different revenue profile, and it is also a SaaS oriented service with recurring revenue as well. So it has quite a different structure in terms of its business model. So Iris is at a really relatively early stage, and the questioner notes that Hive has already launched. And that is actually one of the things that gives us good confidence about the product market fit and that these guys have an application which can grow and scale over time. The company is at an early stage, and it's certainly -- we need to invest in its go-to-market in sales and marketing functions, but we do expect a good response. And the prior -- the track record of the founders in essentially a services company that does this kind of live production gives us quite a lot of confidence that they've got a good product market fit and that we'll be generating not necessarily loads of revenue. We'll see initial revenue in FY '26, but it will be really FY '27 and beyond, when we start to see significant revenue from the Iris product range.

Yes. Next question from Tim Plumbe, just in relation to inventory destocking. So an update there and just giving some flavor around OEMs that have paused orders for Brooklyn and Ultimo, and whether they're back in the market. And just given the current trajectory, when we would expect that we work -- that Audinate works our way through these headwinds? So what I'd say in relation to inventory restocking, I think at the start of the financial year, we certainly outlined that we expected the impact of the inventory challenges to last throughout FY '25. And that's certainly been the case. I think a couple of data points, we have seen certainly an improvement as we've progressed throughout the year in terms of our revenue profile. Certainly, if you look at first half, second half, we've seen an improvement 12% on revenue. And if we look at our OEMs, we look at our top 20 customers for Brooklyn and for Ultimo in FY '24, and of those top 20 customers, 12 have reordered. So we're still working our way through that. But certainly, we are seeing an improvement is probably the best way to describe that, Aidan.

Cool. Okay. That one's answered. A question, can you quantify the impact you've assumed from U.S. tariffs in FY '26 on the top line GP growth?

Look, I think tariffs are somewhat unknown in terms of their impact. So we're working through our supply chain and ensuring that we are manufacturing in markets and locations that make most sense. I think the biggest impact from a tariffs perspective, from an Audinate perspective, is just the somewhat unknown as to the impact it's going to have on the U.S. economy, U.S. market and AV demand more broadly. I think we'll certainly have a better understanding of that as we work our way through the first half of this financial year.

So there's another question, which is, is Dante Director tracking according to expectations? Platform software was up only 4%. So I could quip, I guess, that it depends on expectations. So from my point of view, the way I think about Dante Director is in the context of AV systems overall. So I mentioned that AV systems generally have an audio, a video, and a control component in them. So Dante Director is really extremely important from us from a strategic perspective to be able to deliver control and management functions. So we have an on-prem version of the product called Dante Domain Manager, and we've got a cloud version of that product. We launched Dante Director at -- with really aiming at small scale audio-visual systems, and our intent was to really reduce the friction on onboarding that that type of management solution at the low end. So we have got customers with that. We've learned a lot from doing that. But we have found that one of the significant areas of interest is actually from larger scale system and corporates in particular. So I think Dante Director, I guess, hasn't disappointed me in the sense that as a product, we have matured it and it's got traction in the market. But we think that there's a significant opportunity in the larger scale systems and corporate and IT applications, in particular. There was -- there's probably a couple of questions around -- so new video products released from OEMs slowed quite a bit from the previous half. Is this likely to be temporary? And I think there was another related question was, how do we feel about the video land grab? Has this been in line with expectations? Are we able to find strategic investments similar to Yamaha did in audio back in the day? So I would combine these together. I think we have had promising growth on our video units in the past, and it is true that it has slowed in the last half or so. In terms of have we been able to make strategic investments? Absolutely. And that's part of the rationale for Iris. So Iris really has 2 pieces. One is that even though they are offering a cloud-based remote production product, there is an ecosystem of interoperable products associated with that Iris ecosystem. And that base of camera products is something like a 1 million products. So Iris both jumps our video addressable units in terms of the number of units in the Dante ecosystem forward by 1 million units and also provides a control oriented, vertically integrated solution. So Iris is hitting both the video land grab side of things and also the control and management side of things. So from that point of view, it is an extremely strategic acquisition. So I think the thing with Iris is that we need to manage the transition. We've got customers using Dante AV today. We will continue to support and manage those software stacks. Iris actually also has a device stack as well. So clearly, there are synergies that we can have between the product development we have today with Dante AV and the Iris software stack and solution that we can exploit going forward.

There was just a follow-up question around Iris' costs for FY '26 and the additional step up in FY '27. I think we're going into '26 with a base level of costs that we think will allow the launch of Iris to be successful. And then based on that -- based on revenue we'll -- that's generated from Iris will have an impact on the additional costs that we invest into the Iris business. So at this stage, we're factored in the cost for '26. And based on revenue, we'll adjust our estimates accordingly as revenue come through.

So there's a question here. Have you experienced or seen within the industry any impact of AI on your hardware and software? If so, have you made allowance for SaaS revenues' impact? For us, SaaS revenues are quite early. And so I see technologies like AI as ultimately enabling us to grow our SaaS revenues or enabling us to jump ahead of the way people do things in the industry today. I think there's lots of interest in using AI in the industry. There are some early products that are out there around, particularly in the control and management space, sort of diagnosis systems trying to automatically fix some fault, for example. But I think it is super early days in the industry. I think that AI is the kind of technology which is going to bring quite a lot of disruption to an industry that today is largely driven around physical pieces of equipment that get installed and plumbed into audio-visual systems. So a technology company like us who provides audio and video signals into software is very well positioned to take advantage of AI and to disrupt the incumbent kind of hardware model for shipping and installing boxes into the industry.

Yes. I have a question just in relation to, did you see any pull forward demand in the second half for hardware sales as U.S. importers sought to get ahead of tariffs? I think the answer was no. Overall, around 40% of our revenue is shipped into the U.S., so it's not an insignificant amount. But in the second half of the year, we haven't seen any significant material pull forward. And that's been consistent with what we've heard throughout the AV industry as well through the industry body of AVIXA.

I think maybe I'll add another comment to that. I think one of the things that's going on for importers is that there have been various exemptions and things that have been applied. And so I think the musical chairs hasn't quite stopped and people haven't figured out what the final tariffs will be. And for manufacturers, that situation is also the case too. So I think one of the things that's likely to happen over the next -- so for example, the tariffs on China imported electronics and materials that was kicked down the road another 3 months. So I think it's November when that decision -- the deadline has been extended to. So one of the things I think that will be the case is that the simple arbitrage between manufacturing in China and not manufacturing in China, that arbitrage will close. And so I think many manufacturers are currently just sort of waiting for the musical chairs to stop. And then once they do, they'll figure out what to do in terms of reconfiguring their supply chains.

Have you addressed that one?

I have not. So there's a question, is Iris only generating revenue from Hive at the moment before the public launch? That's correct. And Iris is -- it's essentially -- well, it's not quite pre-revenue, but it is relatively small amounts of revenue at this point.

Question from Chenny, just in relation to long-term incentives imply a spike in growth in FY '27. What's going to drive this? I think this relates directly to the investment and the increasing cost base that we are forecasting in FY '26. So we have a number of new product launches that have launched in '25 and again in '26. And again, it's that investment in Dante Director and in particular Iris where we're expecting to see an increase and acceleration of growth in FY '27. I don't know if you'd add to that.