Why investors should stay plugged in to Audinate


This month we revisit Audinate, a business we first looked at in October 2020, in light of a strong trading update in recent weeks.

Audinate is a leading global provider of professional digital audio networking technologies.

Its Dante platform distributes digital audio signals over computer networks, effectively turning analogue audio networks with many cables and cords, into digital audio networks that connect through a computer network, enabling audio professionals to expand and contract these networks effortlessly.

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Dante product explained

Through the Dante product, Audinate sells a protocol, which is essentially a microchip and piece of software that work together so any piece of audio and visual equipment can interact. These software and hardware pieces are then included within the products manufactured by Audinate's customers which include the likes of Yamaha, Sony and Bose.

The Dante product can in many ways be conceptualised in similar terms to Bluetooth. However, imagine if Bluetooth was a company rather than something that was owned by a not-for-profit co-operative.

Revenues return to pre-COVID levels

While there was an understandable slowdown initially with COVID-19 seeing a rapid halt in demand from end-users in spaces such as large music and sporting events, Audinate's 2021 financial year report has confirmed a swift return to pre-COVID revenue levels.

This steady improvement in trading conditions since May leads us at Medallion to believe the worst has passed when it comes to the COVID induced slumber as manufacturers and end-users prepare for the re-opening in a post-COVID world.

Revenue bounce-back confirmed in trading update

Audinate has generated unaudited revenue of US$25 million for the 2021 financial year, up 23% from US$20.4 million in revenue for the 2020 financial year. This included a strong finish to the year with the final quarter up 74% on the prior comparable period.

Increasing component lead times and requests by chip manufacturers for demand visibility up to 12 months out have resulted in a record backlog of committed sales orders for the 2022 financial year as OEMs have placed orders further into the future compared to pre-COVID behaviour.

June marked the successful launch of the first Dante video products by Bolin Technology and Patton Electronics. Bolin launched a 4k and a full-HD pan tilt zoom camera, as well as two video decoders, while Patton launched a video encoder and decoder.

Clear market leader in rapidly growing space

As it stands, Dante is the global leader in enabling the transition to digital. In its January Medallion Report appearance, the business was achieving eight times the product adoption of its nearest competitor.

This figure in its first-half report released in February has confirmed that the figure has more than doubled to a very impressive 17 times.

At this stage, the business is still building scale but at this rapid rate of progression, it is conceivable in our view that the Dante product will emerge as an unregulated monopoly.

This is particularly positive news with market data forecasting the networked audio space is expected to triple from 2020 to 2024.

Further opportunity ahead in video

In simple terms the company's hardware and software allow professional audio equipment (speakers, mixers, mics, etc) to carry audio signals over a computer network, rather than using analogue cables.

Going forward, we see strong upside potential as Audinate management looks to replicate this audio success in the digital video space.

In January 2019 Audinate released to market its digital video offering on the Dante network, which opens up an opportunity to double the addressable market. To date, progress with Dante video licensees has been encouraging and a key focus highlighted by management in the medium term remains making Dante Video the technology of choice for OEMs.

It is important to understand that there is often a sizable lag between when work with the manufacturer starts and when the new products make it to market, starts generating sales and finally becomes profitable.

With the business continuing to develop next-generation Dante audio and video software implementations to address a sizable and growing market, we think investors can benefit from watching this space.

Audinate also fits the COVID re-opening play as large gatherings at the likes of music and sporting events eventually return to full capacity globally, further driving demand for its offerings.

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Michael Wayne is the managing director of Medallion Financial Group. With considerable experience in financial markets, Michael provides advice to a range of clients in both domestic and international equities, exchange trade funds (ETFs), managed funds and corporate deal flow.