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Edited Transcript of AD8.AX earnings conference call or presentation 23-Feb-20 10:30pm GMT

Half Year 2020 Audinate Group Ltd Earnings Call

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

TEXT version of Transcript

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Corporate Participants

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* Aidan Williams

Audinate Group Limited - Co-Founder, CEO & Director

* Robert Goss

Audinate Group Limited - CFO & Company Secretary

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Conference Call Participants

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* Chenny Wang

Morgan Stanley, Research Division - Equity Analyst

* Claude Walker

* Danny Younis

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

* Justin Pezzano

Blue Ocean Equities Pty Ltd, Research Division - Investment Analyst

* Owen Humphries

Canaccord Genuity Corp., Research Division - Senior Industrials Analyst

* Quinn McComas Pierson

Crédit Suisse AG, Research Division - Co-head of the Small Cap Research

* Tim Plumbe

UBS Investment Bank, Research Division - Research Analyst

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Presentation

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Operator [1]

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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.

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Aidan Williams, Audinate Group Limited - Co-Founder, CEO & Director [2]

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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 relevant technology in the industry going forward. The takeaway from this slide is that Dante continues to extend its lead with 7x more products than the next -- nearest competitor or even more if Cobranet is disregarded.

To support long-term growth in the business, Audinate has several medium-term strategies and goals, as shown on Slide 6. In this half, notable activities shown on the right, against our medium-term goals and strategies shown on the left, include: beginning the growth of our engineering and R&D functions, we've added 13 new positions in engineering, product management and technology development; bringing Malaysian contract manufacturing online to avoid U.S. tariffs; rolling out new product development processes, the scale of their job framework to manage engineering and product development; a new HR information system and travel management platforms; new audio and video feature developments, notably tweak to the Dante AV Product Design Suite in response to earlier customer feedback; and importantly, closing 7 design wins for new products in the form of Dante AV and the new software-based Dante product.

In the near term, the revenue and operational priority for the business are summarized on Slide 7. On the operational side, we will continue to deliver our existing mature hardware products taking advantage of Malaysian manufacturing to avoid U.S. tariffs. On the execution side, completing delivery of new products will unlock new design wins and repeat orders. On the sales side, growing the pipeline of customers for new Dante video and software products is a priority. We aim to close a total of at least 20 design wins for new Dante software and video products in this financial year. On marketing side, we have added training resources in Europe, China and Latin America, which will drive further interest in Dante amongst AV professionals around the world.

And with that, I'll turn over to Rob Goss, Audinate's CFO, to present the financial results and business metrics in more detail.

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Robert Goss, Audinate Group Limited - CFO & Company Secretary [3]

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Thanks, Aidan. Good morning, everyone. Over the next few minutes, I will be explaining the first half 2020 financial results that we launched with the ASX earlier today and are summarized in the accompanying investor presentation. In particular, the information I'm going to talk to is set out in the investor deck on Slides 9 to 13, and all amounts quoted will be in Aussie dollars.

Aidan previously talked to some high-level factors impacting revenue during the first half. From a product perspective, the increase in revenue from chips, cards and modules is attributable to continued growth in our Brooklyn and Broadway products, whilst growth in software revenue is attributable to royalty, Dante Domain Manager, and sales of Dante Virtual Soundcard and Dante video. Overall, operating expenses have increased from $8.7 million in the prior period to $10.6 million for the first half 2020. As we outlined at the time of capital raise last year and at the time of our FY '19 results, we see enormous opportunities in the near-term and aim to double the size of engineering team over the next 2 years and ensure we have the business infrastructure in place to support our growth agenda.

Overall, headcount has grown to 105 from 81 at the same time last year. Since 31 December 2019, we've added a further 9 people, so the total headcount is now 114. In terms of the engineering team, we've ramped from 40 people at 30 June 2019 to 53 now and consider ourselves well placed to meet this goal.

Employee expenses have been impacted by some one-off impacts from the departure of our former CEO, Lee Ellison, who finished at Audinate at the end of last year. At the AGM, the shareholders approved the acceleration of vesting conditions for these performance rights, which resulted in an additional noncash charge of approximately $300,000 during the period. There were a further $300,000 worth of U.S. employer taxes paid on equity grants to Lee during the period.

We have also reclassified director's fees into employee expenses from other operating expenses and the detail of this is set out on Page 12 of the financial statements. Marketing expenses are seasonally lower in the first half, given that the main trade shows take place in the second half of the financial year. Accordingly, marketing expenses are expected to increase in the second half of the year again in 2020. We applied the new lease accounting standard with effect from 1st of July 2019 and comparatives were not required to be restated. The impacts can be seen on the balance sheet as the right-of-use asset with a corresponding lease liability.

In terms of P&L, this means that premises costs are now expensed through depreciation and amortization, which amounted to approximately $300,000 in the current period. If the prior period was adjusted to be on a like-for-like basis, then the EBITDA for both periods would have been approximately $1.9 million. At an NPAT level, the increased depreciation and amortization in the current period flows through and drives the movement between first half '19 and first half '20.

Operating cash flows increased from $600,000 in first half '19 to $2.9 million in first half '20 as the benefit of additional gross margin dollars can be seen. In terms of free cash flow, there are a couple of one-off items to call out in investing activities. Firstly, there are about $500,000 of payments for the assets of new Sydney office and a further $400,000 for the rental bond for the same asset.

Within financing activities, the $4 million of proceeds from the completion of share purchase plan came in at the beginning of July. There is also an anomalous outcome within financing activities, which should be called out. In the U.S., Audinate is required to withhold employee taxes upon the exercise of equity grants. As a result, employees selling shares from the exercise of options or performance rights authorize our share registry to sell them on their behalf. The proceeds have been remitted to our (inaudible) company in the U.S. to withhold the applicable employee taxes and remit the remaining amounts to the employee. At 31 December 2019, we received approximately $3 million from the sale of shares of our former CEO, which were remitted to him in early January. Whilst we do not consider this to be almost cash in a practical sense, it does meet the definition of cash under the accounting standards and is reflected in the cash flow statement and balance sheet accordingly. Further details are contained in the financial statements in Note 10.

The balance sheet remains strong, and the company continues to have no debt.

I will now hand back to Aidan to discuss new products and outlook.

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Aidan Williams, Audinate Group Limited - Co-Founder, CEO & Director [4]

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Thanks, Rob. In the next few slides, I want to provide a brief update on the new software and video products we launched during the last year. A major milestone last year was the addition of video support to the Dante networking solution.

Slide 15 shows a couple of articles, reflecting industry reaction to the launch of Dante AV. We have at this point 4 design wins for Dante AV, and even though there are no shipping of Dante video products from manufacturers, the bar chart shown on this slide come from a survey carried out by Commercial Integrator magazine, indicating that AV integrators have a higher degree of confidence that Dante AV will meet their needs. We believe that this confidence comes from the positive experience Dante -- from the positive experience integrators have with Dante audio products and that all goes well for the adoption of Dante AV products when they become available. The article linked at the top right points towards the potential for Dante AV to create an interoperable ecosystem for networked video products like the one already available for Dante audio products. If we succeed, the article suggests that this will be a game changer for the industry.

Dante AV has generated strong interest with a pipeline of design win opportunities. To date, we have closed 4 design wins using the products shown on the left-hand side of Slide 16. These include Yamaha and Bolin, a manufacturer of pan-tilt zoom video cameras. Our prototype Dante AV camera was demonstrated in conjunction with Bolin at the recent ISE trade show in Amsterdam.

The delivery of the Dante AV Product Design Suite has been delayed by a quarter due to customer-requested modifications. With these modifications in place, we expect that the Dante AV Product Design Suite will meet the needs of a wider variety of manufacturers who wish to get to market quickly with the networks video products based on this reference design.

On the software side, Slide 17 highlights progress with new Dante software products. QSC, the initial customer for the Dante Embedded Platform software products, has delayed their rollout of software Dante with launch now expected in March this year. We anticipate pent-up demand from this half to be delivered during the next half as that product comes online.

Zoom has incorporated the Dante Application Library into their Zoom Rooms software application and it has been quietly rolled out in beta program. The screen capture on the bottom right shows an iPad configuring the Zoom Room software to connect to a Dante microphone.

Finally, in a significant announcement at ISE, Shure launched a pure software, digital signal processor for conference room applications. In the past, Shure has delivered signal processing functionality in a hardware form as shown by the black box in the center of the slide. With Dante Application Library, that same functionality can now be delivered as a window software application without the need to install any additional hardware. This product launch from a major brand has done a lot to validate their thesis that the AV industry is undergoing a hardware to software transition enabled by Dante networking technology.

In the near term, U.S. tariffs and associated changes in the Chinese economy due to supply chain restructuring are expected to continue along with the uncertain impact associated with the recent outbreak of the novel coronavirus.

I'm on Slide 19 now looking at the outlook. Despite these temporary headwinds, the company expects to deliver further revenue growth in the second half of FY '20, although it is likely that the full year result will be below the historical range of growth for our business. As described earlier in the presentation, delivering operationally on the manufacturing of existing products and achieving design wins for new software and Dante video products will continue to drive repeat revenue for the business. Beyond FY '20, business metrics and leading indicators such as the continued interest in Dante-enabled products, continued strong interest in Dante training amongst AV professionals and the healthy sales pipeline for new products like Dante AV and software with Dante implementation, provide confidence that the company is well positioned to deliver attractive, long-term growth for shareholders.

In order to capitalize on the digital transformation of the AV industry, Audinate will continue to execute on its medium-term priorities, to grow our product development capacity, to put in place the necessary business infrastructure and systems to scale, to deliver the next-generation of Dante audio and video software products, all with the aim of substantially addressing the addressable market for the business, which we estimate to exceed AUD 1 billion.

And with that, I think we can move to time of question and answer.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Danny Younis from Shaw and Partners.

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Danny Younis, Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Developers & Contractors and Retailers [2]

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My first question is around the second half outlook. Given your first half revenue growth was 14%, and you've guided the second half below historical averages, let's say, 26%, so that's incurring 15% to 25% growth, which is a pretty large range, and I understand the uncertainty out there. But could you maybe give us a little bit more detail in terms of, has there been a pronounced downtrend, say, from January to February from coronavirus on top of the tariffs last year? And what that means for the demand and forward orders?

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Aidan Williams, Audinate Group Limited - Co-Founder, CEO & Director [3]

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Yes. So I think that where we are at this point in time is, reduction in demand is really related to the domestic Chinese economy, as we've indicated in the presentation. So we have, at this stage, not seen any effect from the coronavirus, but I think it's certainly out there as a potential impact. So January has been strong for us. In the conversations we've had with our top 20 customers, there seems to be no sort of general indication globally that we're seeing an additional downturn, at least at the point in which we had those conversations, which was around December last year. But there is just some uncertainty associated with the impact of the coronavirus and its effect on things like supply chain, which is at this point an unknown. So I think we have no reason to suspect that outside the domestic China market, there are any sort of major headwinds at this point. But there is just some substantial uncertainty associated with the impact of the coronavirus. And like many companies, I guess, that's beyond our control.

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Danny Younis, Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Developers & Contractors and Retailers [4]

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Okay. And then my second question is around your gross margins. 77% is the strongest, I think, since 2015 for you guys, so well done on that front. And I understand it's the mix shift from CCM into software. So my understanding is, over the last 3 to 4 years, this is the first time you've called out Via and DVS as being particularly strong. What's really driving that? And can you hold those gross margins at around 7%, given software is further increasing going forward?

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Robert Goss, Audinate Group Limited - CFO & Company Secretary [5]

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Yes. Danny, it's Rob. I'll take this one. So what we'd call sort of retail sales or sort of consumer software in the form of Dante Virtual Soundcard and Dante video, it's been pretty steady over quite a period of time. So in terms of that growth in software, it was really attributable to 3 products in relatively similar dollar amount. So we've called it out for that reason. That is about 20% revenue growth and these are products which have been around for 3 or 4 years. So we see that as being a really good sort of bellwether for the continued interest in Dante technology and the proliferation of the technology.

In terms of the second part of your question around -- is the gross margin percentage going forward. We do see in the medium-term that there will be a continued shift to software, and then therefore an increased gross margin over time. In the near term, it will move around a little bit depending upon proportion of chips, card and modules revenue. To the extent that that picks up in the second half, there might be a slight decrease in the near term.

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Operator [6]

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Your next question comes from Dan Coughlan from Crédit Suisse.

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Quinn McComas Pierson, Crédit Suisse AG, Research Division - Co-head of the Small Cap Research [7]

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Quinn here actually. So maybe first question on the cost investment that's occurring in the business and how to think about that investment going forward. Given some of the, I guess, macro headwinds on the business and slowing top line from that kind of historic range, is there any thinking to maybe moderate some of the cost investment expectations over the next year or 2? I mean, you've called out R&D doubling. I'm understanding the sales and marketing expenses will also go up quite a bit. I mean, is there -- would you potentially slow that down to kind of protect the profit base? Or is there a scenario here where profit could be kind of flat to maybe down for the next year or 2?

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Aidan Williams, Audinate Group Limited - Co-Founder, CEO & Director [8]

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Yes. I think the -- generally speaking, Audinate is -- we see ourselves as a technology business that's really establishing a platform in the AV industry, which is our Dante technology inside lots of amplifiers, microphones, speakers, that sort of stuff throughout the industry. And as we establish that platform, that gives us the capability to drive the transformation of the industry towards software-based delivery of AV industry -- of AV solutions as opposed to hardware-based solutions that they have at the moment. So the key upside for Audinate is not so much in the existing chips and modules business that we have now, although it's a good business. We see the chips and modules business we have now as a land grab to establish the Dante networking solution as the foundation of a software platform for the industry. So for us, a key is to be able to continue to invest in the next phases of our strategy so that we can take advantage of the potential upside in that transformation in the medium term. Rob, do you want to add anything?

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Robert Goss, Audinate Group Limited - CFO & Company Secretary [9]

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No. I think we've sort of previously flagged headcount numbers of around about 130 or 130-plus as the target for 30 June this year. I'll just reiterate what Aidan said, we're running this business for the medium term. We set out a list of medium-term priority, and we intend to continue to execute them albeit there's a little bit of near term uncertainty.

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Quinn McComas Pierson, Crédit Suisse AG, Research Division - Co-head of the Small Cap Research [10]

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That's helpful. And then just secondly, so you did call out that Asia, mostly China is down by 1/3 in revenue. Can you just remind us how much of group revenue is from Asia? That -- if memory serves, in August annual report that was about 1/3 of the group.

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Aidan Williams, Audinate Group Limited - Co-Founder, CEO & Director [11]

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Yes. So the specific sort of issue in China, we're probably seeing an effect of around about $0.5 million with respect to China. That's a combination of lots of expected growth and downturn from the previous comparable period. So the combination of those 2 is probably worth about AUD 0.5 million to Audinate.

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Robert Goss, Audinate Group Limited - CFO & Company Secretary [12]

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And as a point of detail, Quinn, the call out in the ASX release was sort of ex-Japan, which accounts for the delta for those who are (inaudible).

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Operator [13]

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Your next question comes from Tim Plumbe from UBS.

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Tim Plumbe, UBS Investment Bank, Research Division - Research Analyst [14]

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Just 2 questions from me, if possible, please. Just firstly, in terms of the COVID impact or coronavirus impact. You mentioned potential supply issues. Can you just give us a sense, I mean, how much inventory do you have on board and what's the kind of duration before it becomes an issue of not being able to get chips out? And second to that, kind of how are your OEMs impacted by those same sort of issues?

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Aidan Williams, Audinate Group Limited - Co-Founder, CEO & Director [15]

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Yes. So our OEMs had similar sorts of issues to us, to the extent that they manufacture hardware in China. Typically, we target, say, 4 turns per year. So generally speaking, we would love to have 3 months' worth of inventory in the form of components and the ability to manufacture in that kind of time frame. The coronavirus impact at the moment has coincided with Chinese New Year. So as a matter of sort of normal planning for the business, we expect manufacturing in China to basically go offline during Chinese New Year. And what has happened is that has been extended out as a result of the actions that have been taken by the government in China. So we have been monitoring this very closely. Our understanding for our own products is that we expect manufacturing to be coming back online. Workers are coming back to the factories, development factory parts. At this point, we believe parts to be available. And so we're expecting to see manufacturing come back online over the next weeks, although there is still some uncertainty associated with that. So at this stage, we have no reason to believe that we're going to have trouble. However, there's still some uncertainty. It also the case that shipment freight is still being transported out of Hong Kong, so we have the ability to deliver orders, and we're not -- where at this stage, we're delivering all of the orders that we have for our customers.

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Tim Plumbe, UBS Investment Bank, Research Division - Research Analyst [16]

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Got it. And just second question around the penetration of products from the existing OEMs. Can you talk a little bit in terms of -- there was a pretty big uplift in terms of new products that came on board. Are you seeing new products that are working their way down through the value range? So you're seeing more products come on at cheaper rates? How are you looking at the quality of the new products coming on and how that assists your business in terms of growing across the whole of the spectrum?

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Aidan Williams, Audinate Group Limited - Co-Founder, CEO & Director [17]

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Yes. I think there is a large number of products. So I haven't personally wanted evaluating. We have 147 [inches] of those particular products. At the trade show, one of the things that was very notable was that there were several manufacturers that when we turn up with their boots and said, ask them if I had any new Dante products, they kind of looked at us in a sort of mildly surprised fashion and then turned around and pointed to an entire wall of products. So the interesting thing, I think, is that there have been several manufacturers that are launching whole portfolios of products. And that, for us, I think was the new thing at ISE.

In terms of the quality or driving the penetration lower, I think we are seeing increased growth in Ultimo, but in particular, in the Brooklyn product, so that is really starting to grow strongly now. So there are more -- sorry, Broadway. I meant Broadway not Brooklyn. So this is the 8- to 16-channel chip product. So these are sort of medium-scale Dante products. Driving that penetration into lower cost, more broadly available products, that is the purpose of Dante Embedded Platform, for which we've seen very strong interest, and there's a good pipeline of interested manufacturers for that.

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Operator [18]

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Your next question comes from Chenny Wang from Morgan Stanley.

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Chenny Wang, Morgan Stanley, Research Division - Equity Analyst [19]

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Maybe I'll just start on the first one, which is diving a little bit deeper into the Asia revenues from China being down, I guess, 33%. Can you give us a sense of what really drove that between, I guess, the tariffs and economic slowdown? And if you are able to give us a sense of, I guess, which one has the greater impact?

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Aidan Williams, Audinate Group Limited - Co-Founder, CEO & Director [20]

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The tariffs and the economic slowdown, I find them quite difficult to separate because I think we were affected by the tariffs in the sense that we do anticipate that there was some reduction in demand because of the tariff on our products that we manufactured in China. But I think it's all tangled up because what has happened with the tariffs is there has been supply chain restructuring in China. So we've talked about the fact that we've moved -- we've established contract manufacturing in Malaysia. So that has moved probably about 1/3 of our manufacturing from Mainland China to another country. So the effect of that generally in the Chinese economy is probably that there's a general downturn in the Chinese economy. So tariffs and the downturn in China I think are inextricably connected or at least -- I'm not in a position to really able to unpick those particular differences.

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Operator [21]

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Your next question comes from Owen Humphries from Canaccord Genuity.

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Owen Humphries, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [22]

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Just touching on the major trade shows. So what percentage of products from your OEM partners are launched at trade shows? Is it a very high percentage?

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Aidan Williams, Audinate Group Limited - Co-Founder, CEO & Director [23]

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Yes. Typically, it would be. There are 2 major trade shows, one in the middle of the year in June and one in February, so the European one and an American one. They're in the commercial installed AV space, so they're the largest trade show for us. And likewise, there's a European and an American broadcast related trade show. But majority of products generally would be launched coinciding with the trade show.

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Robert Goss, Audinate Group Limited - CFO & Company Secretary [24]

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And would be weighted to the second half of the financial year, so whether we're at 1 of the 2 major trade shows that Aidan just mentioned, or alternatively, there are those couple of extra shows in this part of the year. So generally speaking, if history is a guide, we would expect a stronger increase in products in this half of the year.

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Operator [25]

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Your next question comes from Justin Pezzano from Blue Ocean Equities.

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Justin Pezzano, Blue Ocean Equities Pty Ltd, Research Division - Investment Analyst [26]

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Two questions from me. The first one is just around the Malaysian contract manufacturing side. Can you give us an idea of the impact on the supply cost, whether it's different to what you get in China?

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Aidan Williams, Audinate Group Limited - Co-Founder, CEO & Director [27]

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Yes. So the Malaysian contract manufacturing is a factory that's been purchased by VTech, which is the same contract manufacturer who runs the factory in Mainland China that we use. In transferring our -- some of our manufacturing to Malaysia, the increase in costs has been negligible. So there's essentially no difference to us with respect to cost, process or at this point, the operational side of it is that we can work through VTech and use both locations fairly transparently.

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Operator [28]

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Your next question comes from Claude Walker from Ethical Equities.

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Claude Walker, [29]

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I don't know if you can answer this question, but I was wondering if you're able to sort of split up your technical staff numbers into, I guess, those working on hardware-based solution and those already working on, I guess, the next stage of the company's development, which is the software-based solution. Are you able to give a feel?

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Aidan Williams, Audinate Group Limited - Co-Founder, CEO & Director [30]

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Yes. I think I can. So of the 93 (sic) [53] staff members that we have at this point in time, probably somewhere between sort of 5 to 7 of those are in the hardware kind of area. The -- so the majority of our engineers these days are software people, and they're working on products that are primarily software products where we deliver software to equipment manufacturers by putting the software inside a printed circuit board module like effectively a network card for a piece of AV equipment or a chip where the software is preprogrammed into the chip, so that the manufacturer can then put that on the board. So we do anticipate most of the additional headcount that's coming online will be software-oriented staff, but that probably just reflects the general mix of our business anyway, where the technology itself is primarily in software form. By the way, that 53 is the total headcount in our engineering team not 93, as I said.

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Operator [31]

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Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.