Earnings Update – Sell Audinate Group Ltd (AD8)

Date: 17/02/2025

*** GENERAL ADVICE ONLY***

Facing Transition Challenges

Audinate Group Limited reported 1H25 earnings that exceeded market expectations, particularly in terms of EPS (-$0.02 vs. -$0.12 expected). However, the company remains in a transitional phase, dealing with ongoing inventory overhang from OEM customers while seeing promising growth in software revenues and product mix shifts.

Key Financials: Sharp Declines, but Above Guidance

• Revenue drop (-38% YoY) primarily due to OEM inventory corrections, with lower demand for Chips, Cards & Modules (CCM).
• Gross margins surged (+10pp to 82%), reflecting a higher software revenue mix.
• EBITDA collapsed (-91%), impacted by lower revenue and higher amortization costs.
• Cash reserves remain strong ($111M), allowing continued investment in R&D.

Product Segment Breakdown: Software Shines, CCM Struggles

• CCM revenue declined sharply (-55%) as customers worked through excess inventory. Brooklyn modules and Ultimo chips were the hardest hit.
• Software revenue grew (+13%), showing resilience and reduced cyclicality.
• Shift toward software helped boost gross margins. Software now accounts for 44% of total revenue, up from 24% in 1H24.

Comparing 1H25 to the October Q1 Update: Signs of Stabilization

• Gross profit improved from Q1 to Q2, showing signs of stabilization.
• OEM inventory issues remain but are expected to ease in H2 FY25.
• Software growth is accelerating, reinforcing the company’s long-term shift away from hardware dependency.
• New product launches in H2 FY25 (Dante AVIO Install and Dante Virtual Soundcard Pro) should support revenue recovery.

Strategic Takeaways & Outlook

1. 1. Short-Term Headwinds Persist

      • Inventory rebalancing by OEMs continues to limit demand for hardware products.
      • H2 FY25 expected to be stronger, but full revenue recovery likely in FY26.

   2. Software Transformation is Working

      • Gross margins are improving due to a higher share of software sales.
      • The transition reduces dependence on supply chain volatility.

   3. Strong Market Position in Digital AV Networking

      • Dante remains the industry standard, with 12x adoption vs. competitors.
      • New product pipeline (Dante AVIO, Dante Director) is expanding.

   4. Financially Stable, Positioned for Growth

      • $111M in cash ensures flexibility for continued investment.
      • Design wins (+15%) indicate future revenue rebound.

Trade Recommendation

We are issuing a Sell recommendation for Audinate as we believe there may be better risk-adjusted opportunities in the market at this time. While we recognize Audinate’s strong long-term positioning in the AV networking space, near-term headwinds in demand, margin compression, and an ongoing inventory overhang create an uncertain outlook. We will reassess AD8’s investment case going into FY26, where signs of recovery could present a more attractive entry point.

Sell AD8 – Entry: $15.7 | Exit$9.1 | Loss: -42%