Software Transition Will Reduce Costs But May Cause Revenue Decline In FY '25

Key Takeaways

• Software-based implementations and new cloud-based products drive potential for improved margins and stable revenue growth.
  
• Expanding the Dante ecosystem and OEM design wins indicate long-term revenue growth and market share increase.
  
• A shift towards software solutions and increased costs may compress margins, while supply issues and competitive threats challenge future revenue and earnings visibility.

Catalysts

Engages in develops and sells digital audio visual (AV) networking solutions Australia and internationally.

• The shift towards software-based implementations is expected to drive gross margins up towards 80%, as these have cost-saving benefits for manufacturers, thereby potentially improving net margins despite a reduction in per-unit revenue.
  
• The recent launch of Dante Director, a cloud-based SaaS product, opens up a new revenue stream by enabling remote management and monitoring of AV installations, which could enhance revenue stability and growth.
  
• The increase in the number of OEM design wins, along with a healthy pipeline of new products under development, suggests future revenue growth potential as these products reach the market and generate repeat sales.
  
• Plans to enhance sales and marketing activities, despite revenue headwinds, aim to drive revenue growth in FY '25 and beyond, indicating a strategic focus on expanding the customer base and increasing sales conversions.
  
• The continued growth and diversification of the Dante product ecosystem, highlighted by the expansion in both audio and video offerings, suggests a long-term strategy for sustainable revenue growth and capturing a larger share of the AV market.

Audinate Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Audinate Group's revenue will grow by 4.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 11.2% today to 4.5% in 3 years time.
• Analysts expect earnings to reach A$4.7 million (and earnings per share of A$0.09) by about February 2028, down from A$10.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$10.8 million in earnings, and the most bearish expecting A$-3.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 234.4x on those 2028 earnings, up from 59.8x today. This future PE is greater than the current PE for the AU Electronic industry at 28.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.05%, as per the Simply Wall St company report.

Audinate Group Future Earnings Per Share Growth

Risks

• Audinate expects a revenue decline in FY '25 due to manufacturers' increased preference for software-based implementations, which result in lower per unit revenue for the company. This situation could adversely affect both revenue and net margins.
  
• Manufacturers have over-ordered chips due to prior supply shortages, which means they currently hold increased inventory levels, leading to reduced orders and soft revenue for FY '25. This impacts revenue and earnings visibility.
  
• The transition from hardware to software solutions, such as the phase-out of the Viper product line, will lead to decreased per unit revenue, affecting gross profit dollars and potentially net margins in the short term.
  
• Increased operating expenses, including employee costs and sales and marketing expenses, stand in contrast to the softer revenue outlook, potentially compressing net margins if cost increases are not adequately offset by revenue growth.
  
• The challenge of transitioning OEMs to software solutions and dependency on the larger customer base may increase the competitive landscape risk. Larger, vertically integrated competitors with proprietary solutions threaten market share, affecting future revenue streams and overall company earnings.

Valuation

• The analysts have a consensus price target of A$10.781 for Audinate Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$18.5, and the most bearish reporting a price target of just A$9.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$104.4 million, earnings will come to A$4.7 million, and it would be trading on a PE ratio of 234.4x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of A$7.34, the analyst price target of A$10.78 is 31.9% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.