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Mar 21, 2020 (Thomson StreetEvents) — Edited Transcript of Audinate Group Ltd earnings conference call or presentation Sunday, February 23, 2020 at 10:30:00pm GMT

Shaw and Partners Limited, Research Division – Senior Analyst of Technology, Developers & Contractors and Retailers

Thank you for standing by, and welcome to the Audinate Group Limited 1H ’20 results announcement conference call. (Operator Instructions) I would now like to hand the conference over to Mr. Aidan Williams, Chief Executive Officer and Cofounder.

Good morning, everyone. So my name is Aidan Williams, and I’m CEO and Cofounder at Audinate. Thank you for joining us on our results call today. As many of you would be aware, Audinate is a technology company that provides networking hardware and software solutions to manufacturers of professional audio and video equipment. Our technology called Dante distributes audio and video signals across standard computer networks, replacing the expensive and inflexible point-to-point cabling that has historically been used to connect AV equipment.

Thousands of commercial audio/video systems around the world in shopping centers, railway stations, lecture theatres, hotels, houses of worship, TV and radio stations, convention centers and many more other places use Dante networking to deliver high-quality AV experiences using IT infrastructure.

If you turn to Slide 3 of the presentation that we published on the ASX site, you will find the financial and operational summary for the first half of FY ’20. Overall, Audinate continued to grow with revenue in Australian dollars increasing by 14% to AUD 16.1 million, which is a solid result but below historical U.S. dollar growth rates, largely due to the impact of U.S. tariffs and the general economic slowdown in China. Compared to the prior period, gross margin dollars increased 20% to AUD 12.5 million due to revenue growth and a favorable shift in product mix towards high-margin software products.

Gross margin percentage improved to 77.1% from 73.3% due to an increasing proportion of high-margin software sales. We expect that software sales will continue to become a larger proportion of our product mix over time. Operating cash flow increased to $2.9 million from $0.6 million due to revenue growth, and that’s a pleasing result as we have also begun investing in additional R&D headcount during the half.

Operationally, the business continues to track well with key metrics improving during the half. The total number of products on the market containing Dante technology grew by over 35% to 2,371 as at the 31st of December. This figure represents the size of the Dante-enabled product catalog available to designers of AV systems. In addition, the recent European trade show, Integrated Systems Europe that took place in mid-February, saw a record number of 147 new Dante products launched, taking the total current number of Dante products in the market to over 2,500. This half also saw an increase in the number of software-based Dante unit shipped, up 11.7% to 98,000. We expect this to further improve on the back of strong manufacturer interest in our new software-based Dante products. The number of manufacturers adopting Dante also continues to grow with the number of manufacturers shipping at least 1 Dante product, increasing 28% to 292 as at the 31st of December.

The business experienced headwinds during the half, primarily due to a combination of U.S. import tariffs and an economic slowdown in China. Our China sales team is reporting a general slowdown in the wider professional AV industry in China, and this has been reflected in a 33% decline in sales of Dante components in Asia, largely seen as reductions in orders for our lower-priced Ultimo chips. Please note that these effects took place before the current outbreak of the novel coronavirus. Revenue expected in the first half from new software products, Dante Embedded Platform and Dante Application Library, has also been delayed due to manufacturers delaying the launch of their products using these new Dante software products. We expect to see revenue from these software products in the second half since those products are near complete and being publicly demonstrated by those manufacturers.

The new Dante AV Product Design Suite is also delayed by a quarter due to manufacturer requests for changes. This delays design win revenue associated with the Dante AV Product Design Suite. However, we expect the changes that we have made to facilitate and accelerate future design wins. Additionally, the U.S. tariff situation remains dynamic. Historically, Audinate has used contract manufacturing based in Mainland China, and therefore, the Adaptor and Brooklyn products have been subject to U.S. import tariffs. During this half, U.S. tariffs were threatened, introduced and then reduced, and this has likely affected growth in the sales of products based on Brooklyn and Adaptors. Going forward, we expect to eliminate the effect of U.S. tariffs by manufacturing goods bound for the U.S.A. in Malaysia. I’ll have more to say on these topics later in the presentation when we get to the outlook statement.

Slide 4 summarizes several key metrics for the business indicating continued interest and adoption of Dante by manufacturers and end users. As previously mentioned, the total number of Dante products on the market now exceeds 2,500 with a record number of 147 new products announced at the large mid-February trade show in Europe. Major equipment manufacturers who are existing customers of Dante continue to deepen their usage of Dante in their product portfolios. With new Dante products in major brands like Yamaha, Sony, Shure, Sennheiser, Extron and Kramer being announced. Metrics associated with marketing activity continues to track strongly with an in excess of 80,000 AV industry professionals having completed at least 1 Dante certification course. Website traffic, new accounts and marketing contracts continue to grow, and sales and download of end-user software products like Dante Virtual Soundcard and Dante Controller continue to grow strongly.

On the competitive front, the chart on Slide 5 shows the network effects associated with the interoperable ecosystem of Dante products continuing to grow. This is the last update that will count Cobranet products with RH Consulting not considering it to be a…

Airo AV

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