Strictly embargoed until 07:00, 26 April 2022 

 

 

Focusrite plc ("Focusrite" or "the Group")

Half year results for the period ended 28 February 2022

 

Focusrite plc, the global music and audio products company supplying hardware and software used by professional and amateur musicians and the entertainment industry, today announces its half year results for the six months ended 28 February 2022.

 

Commenting on the results, Tim Carroll CEO said:

 

"Demand for the Group's portfolio of products has remained strong, and the Group's overall performance in the half year was in line with our expectations and remains on track for the full year.  As anticipated, demand and sales volumes for home creation solutions has tapered off from the unprecedented high levels during the peak of lockdown but remain materially ahead of pre pandemic levels. This is further supported by many trade sources citing continued growth in streaming services and content creation. In addition, the Group has seen the installed sound market continue to grow with positive signs towards a full recovery of live events. The Group's continued diversification of its portfolio, routes to market, and logistics served us well during the first half, enabling us to perform well despite many challenging global macro-economic issues at play."

 

Key financial metrics

 

	HY22	HY21	HY20
Group Revenue (£ million)	92.9	95.3	49.9
Gross Margin	46.6%	48.0%	46.1%
Adjusted1 EBITDA2 (£ million)	22.2	29.3	9.1
Adjusted1 EBITDA2 as a % of sales	23.9%	30.7%	18.3%
Operating profit (£ million)	16.3	24.2	3.0
Adjusted1 operating profit (£ million)	19.1	26.3	6.4
Net cash3 (debt) (£ million)	18.0	19.1	(19.9)
Basic earnings per share (p)	23.1	33.2	3.6
Adjusted1 diluted earnings per share (p)	27.1	36.3	9.3
Interim dividend per share (p)	1.85	1.5	1.3

 

Highlights

·  Group revenue remains significantly ahead of HY20 pre-pandemic levels and is also higher than the second half of FY21 (£78.6 million), despite ongoing COVID and component supply issues

o  Focusrite brands revenue down by 11.7% to £65.4 million (HY21: £74.0 million)

o  ADAM Audio revenue down by 33.1% to £8.4 million (HY21: £12.6 million) with component shortages delaying a   product range transition and reducing supply

o  Martin Audio revenue up by 44.0% to £12.5 million (HY21: £8.7 million) benefiting from both strong installed           sound sales and the start of the return of live events

o  Sequential revenue of £6.6 million (acquired in April 2021) in line with the Board's expectations

·  Gross margin at 46.6% is higher than pre pandemic (HY20: 46.1%). Compared to HY21 pricing actions have more than offset material cost increases but short-term freight cost impacts resulted in a reduction of 1.4% points

·  Adjusted¹ EBITDA² at £22.2 million was 23.9% of sales, significantly ahead of pre pandemic levels of 18.3% (HY20) of sales, although lower than HY21 of 30.7%, which was boosted by COVID savings, and now reflecting a cost infrastructure supporting a larger international Group

·  Launch of seven new products, including Clarett Plus ranges, Circuit Tracks groovebox, Optimal Audio speakers, Prophet 5 expansion card and Ampify new features all expected to contribute in H2

·  Strong production levels of Scarlett interfaces enabling inventory levels to begin to rebuild

·  Interim dividend of 1.85 pence, 23.3% growth compared to HY21 dividend of 1.5 pence announced in May 2021

·  Acquisition of Linea Research on 10 March 2022 for £12.6 million, which had approximately £1million of cash within net assets

 

 

Trading since the half year has continued in line with the Board's expectations. The outlook for our industry remains positive, pointing towards continued growth in the content creation market, as well as a robust return to live events.  With our current portfolio, planned product introductions and continued focus on our growth strategy, including acquisitions, such as Linea Research acquired in March, we believe the Group is well positioned for a successful second half and remains on track to meet our expectations for the full year against an easier year on year comparator.  As always, we remain vigilant in view of the ongoing uncertain global situation, but continue to remain optimistic about the future prospects for the Group.

 

¹ Adjusted for items which relate to costs of recent acquisitions, sale of trademarks and amortisation of acquired intangibles, see note 4 for more details.

² Comprising profit before tax adjusted for interest, taxation, depreciation, amortisation and adjusting items. This is shown on the face of the income statement.

³ Net cash/(debt) - comprised of cash and cash equivalents, overdrafts and amount drawn against the RCF including the costs of arranging the RCF.

 

 

Enquiries:

 

Focusrite plc:
Tim Carroll (CEO)	+44 1494 462246
Sally McKone (CFO)	+44 1494 462246
Nominated Adviser and Joint Broker
Investec Bank plc David Flin William Brinkley Charlotte Young   Peel Hunt LLP (Joint broker) Edward Knight Michael Burke James Smith
Belvedere Communications
John West	+44 20 3687 2753
Llew Angus	+44 20 3687 2754

 

 

Notes to Editors

 

Focusrite plc is a global audio products group that develops and markets proprietary hardware and software products. Used by audio professionals and musicians, its solutions facilitate the high-quality production of recorded and live sound. The Focusrite Group trades under nine established brands: Focusrite, Focusrite Pro, Novation, Ampify, ADAM Audio, Martin Audio, Optimal Audio, Sequential and Linea acquired on 10^th March 2022.

With a high-quality reputation and a rich heritage spanning decades, its brands are category leaders in the music-making and audio recording industries. Focusrite and Focusrite Pro offer audio interfaces and other products for recording musicians, producers and professional audio facilities. Novation and Ampify products are used in the creation of electronic music, from synthesisers and grooveboxes to industry-shaping controllers and inspirational music-making apps. ADAM Audio studio monitors have earned a worldwide reputation based on technological innovation in the field of studio loudspeaker technology.  Martin Audio designs and manufactures performance-ready systems across the spectrum of sound reinforcement applications. Sequential designs and manufactures high end analogue synthesizers.  Linea designs, develops, manufactures and sells market innovative professional audio equipment globally. 

The Focusrite Group has offices in four continents and a global customer base with a distribution network covering approximately 240 territories.

Focusrite plc is traded on the AIM market, London Stock Exchange

Business and operating review

 

Overview 

 

We are pleased to report our financial results and summary of operations for the six months ended 28 February 2022. Demand for the Group's portfolio of products has remained strong, and the Group's overall performance in the half year was in line with our expectations and remains on track for the full year.  As anticipated, demand and sales volumes for home creation solutions has tapered off from the unprecedented high levels during the peak of lockdown but remain materially ahead of pre pandemic levels. This is further supported by many trade sources citing continued growth in streaming services and content creation. In addition, the Group has seen the installed sound market continue to grow with positive signs towards a full recovery of live events. The Group's continued diversification of its portfolio, routes to market, and logistics served us well during the first half, enabling us to perform well despite many challenging global macro-economic issues at play.  

 

These industry wide global factors, referred to at the time of the 2021 Final Results and subsequently at our AGM in December 2021, include the shortage of electronic components and high freight costs. These have not abated and the result has been some short-term downward pressure on gross margin.  The Group has proactively managed these challenges including increasing prices on some elements of the portfolio, leveraging the scale of the Group for component purchases, and optimising our logistics and routes to market. Pleasingly, the result has been that we finished the first half with results as anticipated.  

 

COVID continues to be a factor, with several delays and temporary closures of contract manufacturers occurring over the reported period. The Group has navigated these issues well and with offices beginning to return to normal, we are now formulating a longer-term plan to support hybrid work arrangements that align with our employees' ongoing needs and wishes.  

 

In March 2022, the Group suspended all sales to the Russian Federation and to the Republic of Belarus, with sales to Ukraine not currently possible. Trade with these countries is transacted via distributors and makes up only around 1% of the Group's total revenue.  This is not expected to have a material impact on our performance and will likely be replaced by demand from other regions. 

 

On 10 March 2022, post the end of the half year period, the Group acquired Linea Research (Linea), a market leading specialist amplifier designer and manufacturer, already a supplier to Martin Audio.  The consideration was £12.6m in cash, including £1m of cash on Linea's balance sheet.  The acquisition is anticipated to be earnings enhancing in the current year.

 

People, Culture and Strategy

 

At the heart of our business is a talented and passionate group of employees working for industry leading brands.  They are dedicated to audio excellence and have rallied around a common mission of 'Removing Barriers to Creativity'. Our customer base continues to grow, encompassing a much wider range of customers from the beginner/enthusiast right through to professionals and enterprise facilities. At all levels, our customers depend on our solutions to provide the highest quality audio possible in an environment where technology aids the process instead of getting in the way.

 

We remain focused on our growth strategy that is centred around innovation, market expansion, lifetime value for our customers and being a great place to work. The Group has executed well on all of these, adding a number of new products to our portfolio, expanding our global reach in strategic areas, and maintaining industry leading Net Promoter Scores ('NPS').

Environmental, Social and Governance ('ESG') priorities form an important and growing pillar of the culture across the Group, centred around the objective of creating a 'Great Place to Work', not just for employees but also within society and the environment.  We have expanded our efforts on eNPS (employee net promoter score), talent acquisition, Diversity and Inclusion (D&I) initiatives, wellness programmes, community employment opportunities and charitable work to involve all of our business units across the globe.  

 

Additionally, and as mentioned in our report for the year ended FY21, we are working with Ricardo PLC ahead of our first Task Force on Climate-related Financial Disclosures ('TCFD') disclosure at the end of FY22. We already have existing governance structures and our newly formed ESG committee will manage the TCFD process. We remain committed to reducing our Scope 1, 2 and 3 GHG emissions to Net Zero in line with the UK Climate Change Act. A great step forward in this goal has been the work in this half year to manufacture part of our core Focusrite Scarlett range with recycled aluminium reducing the carbon footprint of this product by almost 50%.

 

Operating review

 

Our Group is comprised of nine leading brands across four main businesses

 

·      Focusrite Audio Engineering (FAEL): Focusrite, Focusrite Pro, Novation and Ampify  

·      Martin Audio: Martin Audio, Optimal Audio and newly acquired Linea Research 

·      ADAM Audio 

·      Sequential 

 

With the acquisition of ADAM Audio the Group ended its distribution of third party monitors.

 

	Six months to 28 February 2022	Six months to 28 February 2021	Six months to 29 February 2020	Year to 31 August 2021
	£'000	£'000	£'000	£'000
Revenue from external customers
Focusrite	52,404	58,325	25,574	97,218
Focusrite Pro	2,510	2,675	1,884	4,877
Novation (including Ampify)	10,511	13,043	9,935	22,262
Focusrite Subtotal	65,425	74,043	37,393	124,357
ADAM Audio	8,420	12,582	7,041	23,865
Martin Audio (including Optimal Audio)	12,459	8,651	4,5264	20,398
Sequential	6,589	-	-	5,2994
Distribution	-	10	966	16
Total	92,893	95,286	49,926	173,935

⁴ Revenue from date of acquisition

 

Focusrite brands 

 

The Focusrite branded Scarlett and Clarett audio interfaces are a suite of products designed to allow both beginners and professionals alike to create the best quality audio possible. These products are core to home recording and audio streaming, which experienced large increases in demand during the height of the pandemic and lockdowns. Demand for these solutions remains significantly higher than pre-pandemic periods: whilst sales are down 10% on last year's exceptionally strong first half during the lockdown they are still up 105% over the first half of HY20, prior to the pandemic.

Focusrite Pro offers a suite of solutions for professionals in both the creation and audio reproduction sectors. Revenue was down versus prior year by 6%, but up on HY20 by 33%.  This sector of our business was the hardest hit by the AKM chip manufacturer's fire that resulted in a required rework of much of the portfolio, causing product shortages during the first half. Demand for the products has continued to be strong, fuelled by the ever-increasing amount of new content being generated for consumers, wider acceptance of enhanced formats, such as Dolby ATMOS, and more and more professionals adopting networked audio.  

 

Our Novation brand is dedicated to the electronic musician and offer a range of solutions from groove boxes, grid controllers, keyboards, and synthesizers. Novation products, like Focusrite, experienced unusually high demand levels during the first half of last year. Revenue for Novation products was down 19% compared to HY21, but up 6% compared to HY20.   

 

Ampify has continued to develop, refine, and add to the features on its cross-platform music creation solution, Ampify Studio, as well with our iOS music creation apps. As well as offering in-app and subscription revenue streams, both continue to be a great funnel for new users interested in electronic music. Although still relatively small in comparison to the other brands, the number of subscribers grew 245% with a 175% increase in MRR (monthly recurring revenue). App revenue also increased year over year by 44%.  

 

 ADAM Audio

 

ADAM Audio, based in Berlin, is a globally recognised brand with a passionate team focused on delivering world-class monitors (speakers) for audio content creators. ADAM Audio's portfolio of reference monitors encompasses the T-Series, A-Series and S-Series. The T-Series speakers are award winning reference monitors designed for the home studio market. The A-Series are used in both high-end home studios and professional facilities alike, and the enterprise level S-Series are showcased in some of the most prestigious audio production facilities in the world. 

 

ADAM had a difficult first half: component and manufacturing delays caused a material reduction in available quantities of the T-Series product for the holiday period and delayed a major product transition resulting in stock outs. The net impact of these issues resulted in ADAM finishing the first half 33% down from the previous year, albeit 20% up over HY20. Coming into the second half, both issues have been resolved.  The T-series is back in stock and a major revision to the A series has been launched to positive industry reviews and with orders already ahead of forecast with shipping due to start in April 2022.  

 

Martin Audio (including Optimal Audio)

 

During the first half of the year Martin Audio has seen strong growth in installations as well as positive signs of a global return in live sound purchases. As a result, revenues are up 44% compared to the prior year with a strong sales pipeline across all sectors. The broad portfolio of installation specific product alongside the strong market acceptance of the medium throw (15m-30m) TORUS systems are fuelling this growth in installed sound. Touring sales are slowly returning as customers come out of the pandemic and here again, TORUS is proving to be popular with its versatility and performance being well received by rental companies. The latest Display 3 software is also exciting our customer base as they see the benefits of 3D visualisation of sound system design.

 

Our new commercial audio brand, Optimal Audio, now has systems shipping with distribution signed up in over 30 countries and production ramping up through the year. At the beginning of March 2022, we acquired Linea. Linea is a market leader in the specialist amplifier and processing technology required to power live sound loudspeakers and they are already a major supplier to Martin Audio with the successful IKON Series. The addition of Linea to the Group helps us to secure this supply chain alongside growing the distribution and customer base for their own products, and enhance our research and development capabilities. 

 

 

Sequential 

 

Sequential, based in San Francisco, was acquired in April of last year. The Sequential brand is synonymous with world class analogue synthesizers and has been at the forefront of electronic music innovation for over 40 years.  Sequential had a very strong first half, finishing ahead of expectations despite component shortage issues. Sequential has several new product releases scheduled for the second half that are expected to strengthen its performance further. Additionally, the Group has been expanding Sequential's distribution and demand generation activities by leveraging the scale of the FAEL and ADAM's global sales teams. We expect to continue these efforts through the second half.  

 

 

Research and development 

 

R&D remains a cornerstone of our Group's strategy.  In this period, the Group launched seven new products to market as well as a host of software and hardware upgrades. In addition, the Group has a very robust set of product introductions scheduled for the second half of this financial year with major launches planned in most brands across the portfolio.  

 

Regional review

	Six months to 28 February 2022	Six months to 28 February 2021	Six months to 29 February 2020	Year to  31 August 2021
	£'000	£'000	£'000	£'000
North America	39,763	41,845	18,094	74,633
Europe, Middle East and Africa ('EMEA')	35,424	36,945	23,115	69,292
Rest of World ('ROW')	17,706	16,496	8,717	30,010
Total	92,893	95,286	49,926	173,935

 

 

North America

  

North America remains the largest region for the Group representing 43% of total revenue in the period. FAEL, ADAM Audio and Sequential products are sold through similar sales channels, and Martin Audio's North America business is transacted through a mix of live/tour sound rental companies, system integrators and direct to end-users. In North America we have invested in sales, marketing, logistics and customer service to support the expanded business.   At the beginning of this year, the Group set up a new entity to allow our US based teams to cross-sell products in the Group's portfolio and scale our finance, logistics, and support as a shared service. This has settled in well and having the desired impact.  

 

Revenue for Focusrite brands in North America was down 12% compared to H1 FY21 but up 117% compared to the same period pre-pandemic in H1 FY20.  ADAM Audio's performance was down 42% year-on-year, largely as a result of the reasons cited above. Compared to H1 FY20, ADAM Audio was up 8%.   Sequential had a strong first half continuing the sales volumes seen in the second half of last year.   Martin Audio's North America business was up 56% on the prior year, highlighting great momentum due to the return of live events.  

 

 

 

 

 

EMEA 

 

EMEA represented 38% of the Group's revenue for the first half of FY22. Like North America, FAEL, ADAM Audio and Sequential utilise a very similar set of distributors and resellers. The Group has been undertaking initiatives in certain countries to begin selling directly to the reseller channel as opposed to selling to a distributor. To date, these actions have proven beneficial in terms of margin and connectedness to the local channel and customers.  Martin transacts through a combination of distributors, system integrators and live sound rental companies. 

 

For Focusrite brands, the region was down 17% compared to H1 FY21 but up 31% on H1 FY20. ADAM Audio's EMEA business was down 26% on the prior first half but up 27% over H1 FY20.  Sequential had a strong first half, trading ahead of our expectations. Martin also delivered a strong performance in EMEA, finishing 68% up over the prior year.  Like North America, a great signal of the return of live events as well as continued strength in installed sound. 

 

ROW 

 

ROW comprises all other regions outside of EMEA and North America, principally made up of Asia Pacific ('APAC') and Latin America ('LATAM') and constitutes 19% of total Group revenue. Targeted as key areas for growth, the Group continues to invest resources into these regions and now has over 20 people dedicated to ROW demand generation and support activities. 

   

As with North America and EMEA, APAC utilises similar channels for the Focusrite, Novation, ADAM Audio and Sequential brands and a combination of distributors, system integrators and rental companies for Martin. In the first half, the Group initiated a direct-to-reseller structure for Australia, replacing our existing distributor and setting up our own logistics. This has performed well, and we are planning to adopt this structure in other strategic markets over the next few years.  For Focusrite brands, APAC was up 9% over the prior year. ADAM Audio was down 27%, mainly due to the same issues outlined above relating to component supply. Trading for Sequential in this region was ahead of expectations and going forward will be supported through our internal distributor. Martin Audio had a satisfactory performance in APAC, finishing 22% up over the prior year. It is worth noting that for Martin, the APAC region recovered quickly from pandemic/lockdowns last year, so the comparisons over last year had minimal pandemic impact unlike EMEA and North America.   

 

LATAM finished 24% down over the prior year, although 46% ahead of HY20.  The results this year were impacted by supply issues into the region, with both ADAM and FAEL brands reporting declines.  

 

In summary, the Group has performed well and mitigated many of the problems caused by global macro-economic issues.  Going forward, several industry data points support continued growth in the content creation market and a robust return to live events. With our current portfolio, planned product introductions and continued focus on our growth strategy, we believe the Group is well positioned for a successful second half and full year.  

 

 

 

Financial Review

 

Overview

 

Against strong comparators the Group has retained much of the sales volume gained during the pandemic, delivering revenue only 2.5% lower than the six months to February 2021, with adjusted¹ EBITDA at £22.2 million (24% of sales).  This is lower than HY21 adjusted EBITDA of £29.3 million, due to a reduction in the gross margin as a result of short-term factors increasing freight costs, together with prior year COVID savings reversing and the Group investing to support growth and expansion. Reported operating profit at £16.3 million (HY21: £24.2 million) has reduced for the same reasons, together with a slightly higher depreciation charge.  Similarly, adjusted¹ diluted EPS of 27.1p is lower than the prior year's 36.3p whilst almost three times that of HY20 (9.3p).

 

Income statement

 

	HY22 £m	HY22 £m	HY22 £m		HY21 £m	HY21 £m	HY21 £m		HY20 £m	HY20 £m	HY20 £m
	Adjusted	Adjusting items	Reported		Adjusted	Adjusting items	Reported		Adjusted	Adjusting items	Reported
Revenue	92.9	-	92.9		95.3	-	95.3		49.9	-	49.9
Cost of sales	(49.6)	-	(49.6)		(49.6)	-	(49.6)		(26.9)	-	(26.9)
Gross profit	43.3	-	43.3		45.7	-	45.7		23.0	-	23.0
Administrative expenses	(24.2)	(2.8)	(27.0)		(19.4)	(2.1)	(21.5)		(16.6)	(3.4)	(20.0)
Operating profit	19.1	(2.8)	16.3		26.3	(2.1)	24.2		6.4	(3.4)	3.0
Net finance income/(expense)	0.2	-	0.2		(0.6)	-	(0.6)		(0.3)	-	(0.3)
Profit before tax	19.3	(2.8)	16.5		25.7	(2.1)	23.6		6.1	(3.4)	2.7
Income tax expense	(3.3)	0.3	(3.0)		(4.3)	-	(4.3)		(0.7)	-	(0.7)
Profit for the period	16.0	(2.5)	13.5		21.4	(2.1)	19.3		5.4	(3.4)	2.0
	HY22 £m	HY22 £m	HY22 £m		HY21 £m	HY21 £m	HY21 £m		HY20 £m	HY20 £m	HY20 £m
	Adjusted	Adjusting items	Reported		Adjusted	Adjusting items	Reported		Adjusted	Adjusting items	Reported
Operating profit	19.1	(2.8)1	16.3		26.3	(2.1) 1	24.2		6.4	(3.4) 1	3.0
Add - amortisation of intangible assets	1.9	2.21	4.1		2.0	1.81	3.8		2.0	1.21	3.2
Add - depreciation of tangible assets	1.2	-	1.2		1.0	-	1.0		0.7	-	0.7
EBITDA	22.2	(0.6)	21.6		29.3	(0.3)	29.0		9.1	(2.2)	6.9

 

¹ Adjusting items comprise costs relating to the recent acquisitions, sale of trademarks and amortisation of acquired intangibles. They are further detailed in note 4 of the interim statements.

 

Revenue

 

Revenue for the Group declined by 2.5% to £92.9 million (HY21: £95.3 million) which, adjusting for acquisitions and constant currency, represents an organic decline of 8.7%. Sequential was purchased in April 2021 and contributed £6.6 million, ahead of our expectations, in the first half year (HY21: nil). This first half year the Group faced very strong comparators, together with the ongoing challenges of managing through COVID and component supply issues. Despite this, demand has remained at levels significantly higher than pre pandemic, and although down on the prior year, the first half of this year is 18% higher than the second half of FY21, where component availability restricted supply.  These ongoing issues particularly impacted ADAM in the first half of this year, contributing to the decline of 33%.  Conversely, Martin grew by 44% with the successful focus on installed sound and the return of live markets delivering strong growth.

 

	HY20 Revenue Reported	HY21   Revenue Reported	Exchange	As adjusted	HY22 Revenue Reported	HY22 Reported Growth (%)	HY22 OCC growth (%)4
Focusrite	38.4	74.0	(0.4)	73.6	65.4	(11.7) %	(11.1) %
ADAM Audio	7.0	12.6	(0.3)	12.3	8.4	(33.1) %	(31.7) %
Martin Audio 3	4.5	8.7	(0.1)	8.6	12.5	44.0 %	45.3 %
Total organic	49.9	95.3	(0.8)	94.5	86.3	(8.6) %	(8.7) %
Sequential 3	-	-	-	-	6.6	N/A	N/A
Total	49.9	95.3	(0.8)	94.5	92.9	(2.5) %	(8.7) %

³ Martin Audio acquired December 2019 Sequential acquired in April 2021.

⁴ Organic constant currency (OCC) growth rate is calculated by comparing FY22 revenue to FY21 revenue adjusted for FY22 exchange rates and the impact of acquisitions.

 

Exchange rates were mixed in the period.  The Euro average rate strengthened to €1.18 (HY21: €1.14) and the USD average rate weakened slightly from $1.36 in HY21 to $1.35 in HY22.  The effect of the Dollar movement is to decrease the revenue for HY22 relative to HY21.  However, at the profit level the USD effect is mitigated by the purchases of stock in USD from the manufacturers in China and Malaysia and the Euro effect is largely mitigated by the Group's hedging policy (approximately 75% of Euro exposure is hedged in the current financial year and approximately 50% is hedged in the following financial year).

 

Segment profit

 

Segment profit is disclosed in more detail in note 3 to the accounts named, 'Operating Segments'.  These segments compare the revenue of the products of the relevant brands with the directly attributable costs to create segment profit.

 

Gross profit

 

In HY22, the gross margin was 46.6%, down from 48.0% in HY21.  Although all brands implemented price increases which more than offset underlying cost increases, short term freight and component supply issues added to downward pressures. Freight costs have increased by approximately 2% of sales in this half year, exacerbated by a greater mix of air freight to ensure supply during the busy holiday period.  In addition, the operations teams have secured components for production through several spot buys at higher prices, which is not expected to continue once supply normalises. 

 

HY22 and HY21 both include benefits from US duty refunds, £0.4 million this year and £0.6 million in HY21. All brands across the Group monitor the impact of component price increases on our margin and have taken action to increase sales prices to mitigate this in the second half, whilst ensuring that product remains competitive and value for money in the market.

 

 

 

Administrative expenses

 

Administrative expenses consist of sales, marketing, operations, the uncapitalised element of research and development (partially offset by the Research and Development Expenditure Credit regime ('RDEC') tax credit) and central functions such as legal, finance and the Group Board.  These expenses were £27.0 million, up from £21.5 million last year. Excluding adjusting costs of £2.8 million (HY21: £2.1 million) (see Adjusting items section), the operating costs were £24.2 million (HY21: £19.4 million). Sequential contributed a full six months of costs of £1.6 million. 

 

The underlying increase in administrative expenses, excluding the impact of Sequential, of 16% has been a result of several factors.  HY21 at the height of the lockdowns included significant savings relating to lower travel, marketing and office running costs.  During FY21 the Group invested to support the higher volumes, with extra employees in service and product teams resulting in a step up in costs in H2 FY21 which has continued at a similar level in this half year as sales volumes have continued at the same levels.  In addition, the Group has strengthened central infrastructure and security, including IT, to support an expanded international group with increased requirements for remote working. Much of this one off investment was made in the second half of FY21, which had administrative expenses totalling £19.9 million.  Inflation has further impacted this half year, with cost increases being mitigated by cost savings and efficiencies where possible.

 

Adjusted EBITDA

 

Adjusted EBITDA is an alternative performance measure, and is widely used by securities analysts, investors and other interested parties to evaluate the profitability of companies.  It is also used within the Group as the basis for some of the incentivisation of senior management at both the operating company level and the Group level.  Adjusted EBITDA decreased from £29.3 million in HY21 to £22.2 million in HY22, a decrease of 24%. The decrease of £7.1 million was due to the lower gross margin and the increase in costs to support the ongoing strong demand for our products and the Group's expansion.  Adjusted EBITDA as a percentage of sales is 24%, lower than HY21 but ahead of the pre pandemic level in HY20 of 18.3%. A reconciliation to operating profit can be found in note 4.

 

Depreciation and amortisation

 

Depreciation is charged on tangible fixed assets on a straight-line basis over the assets' estimated useful lives, normally ranging between two and five years. Amortisation is mainly charged on capitalised development costs, writing-off the development cost over the life of the resultant product.  The life spans of the products vary across our brands, from three years for Focusrite and Novation and up to eleven years for Martin Audio and fifteen for Sequential, reflecting the different lifespans of the products. 

 

The amortisation of the acquired intangible assets totalled £2.2 million during the period (HY21: £1.8 million) and has been disclosed within adjusting items.

 

Across the Group, £3.2 million of development costs were capitalised (HY21: £2.6 million) and the amortisation of capitalised development costs was £1.5 million (HY21: £1.6 million).

 

Adjusting items

 

In HY22 adjusting items totalled £2.8 million (HY21 £2.1 million), £0.3 million relating to the diligence costs for the acquisition of Linea that was completed on 10 March 2022, £1.1 million for the earn out relating to the Sequential acquisition, and £2.2 million relating to amortisation of acquired intangible assets, offset by £0.8 million of income from the sale of a trademark. In HY21, the adjusting items included £0.3 million relating to the diligence costs for the acquisition of Sequential that was completed 26 April 2021 and £1.8 million relating to amortisation of acquired intangible assets.

 

Foreign exchange and hedging

The exchange rates were as follows: 

 

Exchange rates	HY22	HY21	HY20	FY21
Average
USD:GBP	1.35	1.36	1.28	1.36
EUR:GBP	1.18	1.14	1.16	1.14
Period end
USD:GBP	1.34	1.39	1.28	1.38
EUR:GBP	1.20	1.15	1.16	1.17

 

The average USD rate has weakened slightly at $1.35:£1.00 for HY22 (HY21: $1.36).  The USD accounts for over half of Group revenue but nearly all of the cost of sales so there is a useful natural hedge.

 

The Group enters into forward contracts to convert Euro to GBP.  The policy adopted by the Group is to hedge approximately 75% of the Euro flows for the current financial year (year ending August 2022) and approximately 50% of the Euro flows for the following financial year (FY23). 

 

In HY22, approximately three-quarters of Euro flows were hedged at €1.13, and the average transaction rate was €1.18, thereby creating a blended exchange rate of approximately €1.15.  In HY21, the equivalent hedging contracts were at €1.12, versus the transactional rate of €1.14 and so creating a blended exchange rate of €1.13.

 

Hedge accounting is used, meaning that the hedging contracts have been matched to income flows and, providing the hedging contracts remain effective, movements in fair value are shown in a hedging reserve in the balance sheet, until the hedge transaction occurs.

 

Corporation tax

 

The effective tax rate for the period is 18.6% (HY21: 18.2%), increasing slightly as brought forward losses are now utilised. In both years the rate has been impacted by the disallowance of certain adjusting item costs for corporation tax, including depreciation of acquired intangibles and costs relating to diligence on acquisitions. Adjusting for these, the underlying effective rate is 16.4% (HY21: 16.7%). Since September 2020 the Group has been part of the RDEC tax scheme for R&D credits, and as a result a credit of £0.2 million has been recognised against uncapitalised R&D costs within Administrative expenses, which is taxable.  The effective tax rate is expected to move to be broadly in line with the UK headline rate, which is due to increase on 1 April 2023 to 25% as outlined by the Chancellor.

 

Earnings per share ('EPS')

 

The basic EPS for the half year was 23.1 pence, down 30% from 33.2 pence in HY21.  This decrease has largely followed the change in reported profit after tax.  The weighted average number of shares used for the calculation has increased marginally compared to the prior year at 58,215,504 shares (HY21: 58,077,283 shares). The more comparable measure, excluding adjusting items and including the dilutive effect of share options, is the adjusted diluted EPS.  This decreased to 27.1 pence, from 36.3 pence in HY21, a decrease of 25%.

 

 

 

 

	HY22	HY21	HY20	FY21
	Pence	Pence	Pence	Pence
Basic	23.1	33.2	3.6	48.8
Diluted	22.8	32.7	3.5	48.2
Adjusted basic	27.4	36.9	9.4	58.2
Adjusted diluted	27.1	36.3	9.3	57.5

 

Balance sheet

	HY22	HY21	HY20	FY21
	£m	£m	£m	£m
Non-current assets	66.2	51.2	63.3	62.8
Current assets
Inventories	25.7	15.9	18.6	20.7
Trade and other receivables	23.7	18.2	19.3	16.3
Cash	17.8	18.8	12.8	17.3
Current liabilities
Trade, other payables and provisions	(29.9)	(20.5)	(15.7)	(25.5)
Non-current liabilities
Bank loan or overdraft	0.2	0.3	(32.7)	0.3
Other non-current liabilities	(9.6)	(8.6)	(10.6)	(7.6)
Net assets	94.1	75.3	55.0	84.3

 

 

Non-current assets

 

The non-current assets comprise: goodwill, brands, patents and capitalised development costs; property, plant and equipment; and software.

 

Goodwill totals £9.7 million (HY21: £7.9 million).  This comprises Martin Audio's £2.3 million, ADAM Audio's £4.8 million, Novation's £0.4 million and Sequential's £2.2 million. 

 

The brands were initially valued at £20.4 million.  This comprises Martin Audio's £6.8 million, which is being amortised over twenty years, ADAM Audio's £7.5 million, which is being amortised over ten years and Sequential at £6.1 million similarly between ten and fifteen years. At 28 February 2022 the brands had carrying value, net of amortisation, of £16.8 million (HY21: £12.7 million).

 

The capitalised development costs comprise acquired developments in relation to both completed products and products currently in development, and internally generated development costs for products currently on sale and currently in development.  The amortisation periods range from three years to eleven years depending on the expected life of the products.  The shorter amortisation periods are more usual for Focusrite and Novation products and the longer periods for the ADAM Audio monitors and the Martin Audio live speakers. The capitalised development costs have a carrying value, net of amortisation, of £31.0 million (HY21: £25.6 million). 

 

Based on current trading and management forecasts, no impairments to the carrying value of the intangible assets have been deemed necessary. This will be reassessed at the year-end for evidence of any permanent diminution in value.

 

Overall, the amortisation of the intangible assets totals £4.1 million (HY21: £3.8 million).  This is split between amortisation of intangible assets acquired as part of the acquisitions of £2.2 million (HY21: £1.8 million), and other amortisation of £1.9 million (HY21: £2.0 million).  The amortisation of acquired intangible assets has been treated as an adjusting item.  The ongoing amortisation relates to the capitalised development costs for new products.  The difference in the period between ongoing amortisation and capitalised development costs is £1.7 million (HY21: £1.2 million).

 

The remaining £8.7 million (HY21: £5.0 million) of non-current assets consist mainly of right of use assets relating to the Group's leased offices and warehouses, tooling equipment for the manufacture of products and other intangible assets such as software and trademarks. The lease for the Martin premises was renewed in this half year adding an asset of £3.5 million and a liability of £3.5 million to the balance sheet.

 

Working capital

 

Working capital was 11.4% of revenue (HY21: 7.7%).  Inventory has increased, as supply for Focusrite products has improved, allowing us to rebuild from very low stock positions, a trend which is expected to continue in the second half of the year enabling the Group to return to historic and more resilient levels of working capital at around 20% of revenue.  As is our practice, creditors continue to be paid on time. 

 

Cash flow

	HY22	HY21	HY20	FY21
	£m	£m	£m	£m
Free cash flow4	2.7	5.5	(0.6)	4.9
Adjusted for the following items
Acquisition of subsidiary (net of cash acquired)	-	-	4.3	13.9
Bank loan (net of arrangement fee)	-	12.0	-	11.9
Adjusting items (cash outflow) 5	0.2	-	0.7	0.8
Underlying free cash flow	2.9	17.5	4.4	31.5

 

⁴Defined as net cash from operating activities less net cash used in investing and financing activities, excluding dividends paid.

⁵Defined as net cash payments for Adjusting costs and income.

 

The underlying free cash flow in HY22 was £2.9 million, which was 3.1% of revenue.  In the comparative period, the underlying free cash flow was £17.5 million which was 18.4% of revenue. Underlying free cash flow as a percentage of revenue is a key performance measure within the Group and forms an element of the incentivisation metrics for senior management across the Group. As referenced in the FY21 year end results, we expect underlying free cashflow this year to be lower than our historic average of approximately 12% of revenue as we rebuild stock levels which were depleted due to high demand and component shortages and other supply constraints in FY21.

 

Free cash flow is 2.9% of revenue and is impacted by similar issues as underlying free cashflow. In the prior year adjusting items related to the acquisition of Sequential and the repayment of loans relating to both this and the Martin acquisition.  In the current first half year they relate to the payment of the first part of the Sequential earn out and the income received from the sale of a trademark. 

 

The net cash balance at the period end was £18.0 million (HY21: net cash of 19.1 million and FY21: net cash of £17.6 million).  This includes the arrangement fee for the RCF of £0.2m which is being amortised across the period of the facility.  The Group has a £40 million revolving credit loan facility split evenly between HSBC and NatWest due for renewal in December 2024.  As at the balance sheet date there were no amounts drawn down from the facility (HY21: nil, FY21 nil).

 

Dividend

The Board has approved an interim dividend of 1.85 pence (HY21: 1.5 pence) a growth of 23%, in line with the Group's progressive dividend policy, and reflecting the Board's confidence in the Group's prospects.  

 

Summary and outlook

 

Demand for the Group's portfolio of products has remained strong, and the Group's overall performance in the half year was in line with our expectations and remains on track for the full year.  As anticipated, demand and sales volumes for home creation solutions has tapered off from the unprecedented high levels during the peak of lockdown but remain materially ahead of pre pandemic levels. This is further supported by many trade sources citing continued growth in streaming services and content creation. In addition, the Group has seen the installed sound market continue to grow with positive signs towards a full recovery of live events. The Group's continued diversification of its portfolio, routes to market, and logistics served us well during the first half, enabling us to perform well despite many challenging global macro-economic issues at play.

 

Trading since the half year has continued in line with the Board's expectations. The outlook for our industry remains positive, pointing towards continued growth in the content creation market, as well as a robust return to live events.  With our current portfolio, planned product introductions and continued focus on our growth strategy, including acquisitions, such as Linea research acquired in March, we believe the Group is well positioned for a successful second half and remains on track to meet our expectations for the full year against an easier year on year comparator.  As always, we remain vigilant in view of the ongoing uncertain global situation, but continue to remain optimistic about the future prospects for the Group.

 

 

 

 

Tim Carroll	Sally McKone
Chief Executive Officer	Chief Financial Officer
25 April 2022	25 April 2022

 

 

 

Risks and Uncertainties

 

The Board has considered the principal risks and uncertainties for the remaining half of the financial year and determined that a number of the risks presented in the 2021 Annual Report, described as follows, also remain relevant to the rest of this financial year and could have a material impact on the Group's performance although they are not expected to cause the Group's actual results to differ materially from the expected results:

·    Business strategy development and implementation;

·    Product supply;

·    Information security, data privacy and business continuity and cyber risk; and

·    Climate Change.

Conflict in Ukraine

 

The tragic war in Ukraine makes for extraordinary uncertainty and potentially serious economic consequences. The Group trades through distributors in Russia, Ukraine and Belarus, and has ceased trading within all these markets.  Annual revenue in these markets was approximately £2 million last year and the Group has no employees or significant suppliers based in these countries. 

 

COVID

 

The threat of general disruption to operations, including from government restrictions, the impact on the supply chain and on people availability as a result of COVID has continued to be felt although to a lesser extent than in the first year of the pandemic.  Whilst demand has stayed strong, it is less than in the prior year and the volatility, uncertainty and disruption arising in connection with COVID remains. In particular, sporadic shut-downs of our contract manufacturers in order to halt the spread of the disease, particularly in China, and shipping and container delays present a threat to the Group's ability to deliver products across the world and make for an unknown trading outlook.

 

People

 

We understand the effect the COVID pandemic has had on our people's mental health. As stories of longer hours, the inability to switch off and feelings of insecurity in relation to the return - albeit on a hybrid basis - to office working abound in the press we have continued with our efforts to support the good health and wellbeing of our people. Earlier this year we introduced our first wellbeing forum and partnered with Music Support - a mental health charity for people in the music industry, run by people in the music industry. Working with them we have been training a number of mental health first aiders and offering all our people mental health awareness training all with the aim of remaining a great place to work. 

 

The job market has changed during the pandemic with candidates having more choice and we are responding to this. We are taking steps to accelerate our recruitment process so that offers can quickly be made to candidates and continually monitor the packages we offer to ensure we can attract, retain and motivate our people.

 

ESG and our sustainability strategy

 

As a responsible and trusted business, we are proactively addressing environmental, social and governance risks and our pace of change in this area has only intensified. Our overarching ambition is for the Group to be an industry leader on sustainability issues and to that end we have conducted an extensive materiality assessment to develop our detailed sustainability objectives and targets. This is outlined in our 2021 Annual Report on pages 38 to 52.

 

Cost inflation

 

The rate of cost inflation has been widely reported and is prevalent in most of our major markets.  Our operations teams constantly work to build our products as efficiently and cost effectively as possible and our brand strength helps us to mitigate cost increases with price increases, whilst still striving to remain competitive in the market.

 

Ongoing severe cost inflation may also impact the discretionary income available to our customers.  By remaining competitive in the market and offering premium desirable products we aim to mitigate this by being the first choice for customers.

 

Forward looking statements

 

Forward-looking statements in this first half year report must not be relied upon as guarantees or predictions of future performance. The business continues to face known and unknown risks, uncertainties and other factors, many of which are beyond our control, which may mean our actual results differ from those expressed in this first half year report.

 

 

Condensed Consolidated Income Statement

For the six months ended 28 February 2022

	Note		Six months to  28 February 2022		Six months to 28 February 2021		Year to 31 August 2021
			£'000		£'000		£'000
Revenue	2		92,893		95,286		173,935
Cost of sales			(49,630)		(49,594)		(89,805)
Gross profit			43,263		45,692		84,130
Administrative expenses			(27,809)		(21,541)		(48,356)
Other income			829		-		-
Adjusted EBITDA (non-GAAP measure)			22,222		29,236		47,548
Depreciation and amortisation			(3,146)		(2,946)		(6,133)
Adjusting items for Adjusted EBITDA:
Amortisation of acquired intangible assets			(2,236)		(1,869)		(4,013)
Adjusting items	4		(557)		(270)		(1,628)
Operating profit			16,283		24,151		35,774
Finance income			351		-		48
Finance costs			(106)		(589)		(784)
Profit before tax			16,528		23,562		35,038
Income tax expense	5		(3,075)		(4,296)		(6,759)
Profit for the period from continuing operations			13,453		19,266		28,279
Earnings per share
From continuing operations
Basic (pence per share)	7		23.1		33.2		48.8
Diluted (pence per share)	7		22.8		32.7		48.2

 

 

 

Condensed Consolidated Statement of Other Comprehensive Income

For the six months ended 28 February 2022

		Six months to  28 February 2022		Six months to 28 February 2021		Year to 31 August 2021
		£'000		£'000		£'000
Profit for the period		13,453		19,266		28,279
Items that may be reclassified subsequently to the income statement
Exchange differences on translation of foreign operations		(1,375)		(265)		(726)
(Loss)/gain on forward foreign exchange contracts designated and effective as a hedging instrument		(144)		626		445
Tax on hedging instrument		27		(151)		(85)
Total comprehensive income for the period		11,961		19,476		27,913
Profit attributable to:
Equity holders of the Company		11,961		19,476		27,913