Dust off your drum kit because Audinate Group Ltd (ASX: AD8) posted good results for this half-year (1H21) but the share price moved sideways. Is this the beginning of a crescendo for the Audinate share price?
Audinate develops and manufactures software and hardware solutions to distribute and manage digital Audio and Visual (AV) networking signals between devices. Its flagship technology platform is called Dante (Digital Audio Networking Through Ethernet).
Chances are, you will know the long black analogue cables connecting speakers, microphones, and other audio equipment at music concerts. Audinate develops chips and modules that can be integrated into such equipment, eliminating the need for cables to distribute signals.
Key metrics rise to pre-COVID levels
Despite the challenges imposed by COVID restrictions on live entertainment, Audinate managed to record an increase of US$100,000 in its gross margin compared to the prior corresponding period, first-half of FY20 (1H20).
As expected, revenue had dropped in the second half of FY20 (2H20) but rebounded from US$9.3 million to pre-COVID levels at US$11.1 million for 1H21.
Audinate’s improved margins and revenue resulted in a small jump of US$100,000 in EBITDA relative to 1H20. This figure excludes COVID government grants received, including Job Keeper.
The drop in demand for Audinate’s solutions within the live entertainment segment was offset by a rise in demand across the educational and corporate conferencing segments.
Audinate’s network grows
The number of original equipment manufacturer (OEM) customers and Dante-enabled products continues to grow. There are currently 360 OEM customers, a jump of 27% compared to 1H20. And the number of Dante-enabled products rose by 23% to 3,083 for the same period.
Even though Audinate’s network expanded, this did not translate to greater revenue. The company notes this was due to the adverse impact of the pandemic on customers’ willingness to upgrade their systems.
In saying that, it’s still encouraging to see Audinate continue to consolidate its leading position in the market. Its closest rival, CobraNet has less than 400 audio products, a stark contrast to Audinate’s 3,083.
This is important because the market leader will be in a strong position to become the de-facto standard.
Being the leader can be taxing
The physical nature of the products and solutions that Audinate develop is quite labour intensive. These tiny cards, chips and modules still need physical parts and labour.
Whilst Audinate is the current leader, it has incurred significant research and development costs to get to where it is today. Further, it continues to incur substantial R&D costs to maintain its leading position.
If you look at the cash flow statements for the last four financial years, R&D costs have taken a 15% to 23% cut of cash receipts. And for 1H21, it appears R&D costs will likely hit the higher end of this range for FY21.
One other factor that will likely drive R&D costs higher is Audinate’s foray into the video networking market. Audinate reported it attracted and established a team of 11 employees in the UK to execute this vertical.
Management is cautiously optimistic
Audinate CEO and Co-founder, Aidan Williams said, “Whilst we remain wary of the potential near-term impacts of COVID, we are cautiously optimistic that the pandemic may serve as a catalyst for an acceleration of the transition from old school analogue cabling to networked audio and video. This bodes well for Audinate’s long term growth opportunities, and we are excited by the path we see ahead for our business.”
I think it’s positive that Aidan Williams remains focused on executing the long-term vision of the company with measured optimism on the short-term impacts of COVID.
AD8: are things looking up?
I can understand why investors were a little upbeat by this result given the resilience shown by Audinate’s business in the last year. Also, once live entertainment returns back to normal, demand for Audinate’s solutions will likely surge.
However, I think Audinate is still a fair way off from hitting an inflection point given the continual rise in R&D costs, especially with Audinate’s current penetration in the video networking market.
For the time being, I’ll stick on the sideline until Audinate shows signs of reining in its R&D expenditure and developing progress in the video networking market.
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