Audinate (AD8) is fast forging a reputation as a true Australian success story with their innovative products being adopted and sold globally. AD8's core ‘Dante’ audio technology (which is incorporated into other manufacturer's products) allows rich uncompressed media streams to be distributed through network cables on multiple devices with near zero-latency. In layman's terms, AD8's technology is used in audio applications such as concerts, sporting events, presentations, video links and audio conferencing, doing away with multiple cabling and compatibility issues.
So why do we like this business?
Impressive Financial Performance
In the FY19 the company achieved US$20m in sales (up 34%) although ASX investors have benefited from additional gains in currency with AUD growth running at 44%. Importantly, for investors such as ourselves that care about such things, the company achieved profitability at both the EBITDA line and on an NPAT basis and operational cash flow came in at a comforting +A$3.6m. This certainly does set AD8 apart from a significant cohort of loss-making Australian tech companies.
Balance Sheet Clout
AD8 took the opportunity during the year to raise A$24m in fresh capital which we would suggest appeared overly conservative, given the company ended the year with more than A$34m in cash on its balance sheet. We do not believe it's too much of a stretch to think this capital is earmarked to make EPS accretive acquisitions the next financial year which would no doubt pique additional investor interest.
Product Adoption and Deployment
The core measure of AD8 success is its adoption of its Dante technology in OEM products; in FY19 this increased 30% to more than 2,100 and provides a solid revenue base for FY20. Further, as one might expect for a fast growing technology company, AD8 has developed a significant pipeline of new products, most importantly being their entry into the visual marketplace which could be the next significant step-change in the business.
What has the Market Overlooked
One of the elephants in the room is the impact of US trade tariffs which is a risk to both volumes and profitability (in the shorter-term). Indeed AD8 indicated that they sensed that some sales had been brought forward into the FY19 on account of the uncertainty in trade negotiations.
The other factor investors need to consider is the fast paced nature of the AV industry and the requirement to constantly be engaged in, sometimes expensive, R&D. AD8 have been quite clear in saying they will be doubling R&D expenditure, which the company can easily afford, but will clearly impact bottom line profitability.
The biggest elephant, who is pretty much present in the room of every successful ASX listed tech company, is valuation. It is impossible to justify an almost A$0.5bn market capitalisation on any near-term sales or earnings multiples. Where investors can gain confidence is that AD8 has succeeded in becoming an embedded industry standard in the large and high-growth A/V industry. With a strong balance sheet, locked-in customer base and leading-edge technology, it appears all but guaranteed that the company will have more intrinsic value in 12 months time than it does today. The question is: will the market recognise that in the same way that is does today?