Strictly embargoed until 07:00: 25 April 2023

 

 

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

Half year results for the six months ended 28 February 2023

 

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 2023.

 

Commenting on the results, Tim Carroll CEO said:

 

"Focusrite plc is a much bigger business since pre-COVID with eleven brands operating globally across different, but complementary markets. This past half year has showcased just how well the Group's diversification strategy has paid off, giving us increased resilience in the face of global and industry wide headwinds.

 

"Revenue in our Content Creation division has been impacted by industry-wide surplus channel inventory and softening in demand along with a planned channel inventory reduction ahead of a large product release programme coming in the second half.  Pleasingly, our Audio Reproduction division, as anticipated, has experienced strong growth and is now ahead of pre pandemic levels.  Despite challenging markets, the Group is still showing material growth over pre pandemic levels and has retained our strong market share, underscored by rock solid brand positions."

 

 

Key financial metrics

 

	HY23	HY22
Revenue (£ million)	86.2	92.9
Gross Margin	47.1%	46.6%
Adjusted1 EBITDA2 (£ million)	18.1	22.2
Operating profit (£ million)	11.5	16.3
Adjusted1 operating profit (£ million)	14.2	19.1
Basic earnings per share (p)	14.4	23.1
Adjusted1 diluted earnings per share (p) 4 (HY22: restated)	18.0	26.2
Interim dividend per share (p)	2.1	1.85
Net (debt)3 cash (£ million)	(13.2)	18.0

 

Highlights

·  Revenue decreased by 7.2% reflecting an organic constant currency⁵ decrease of 19.0%, with market and channel weakness impacting the Focusrite and Novation brands, partially offset by strong double digit growth in the remaining brands

o  Content Creation brands revenue was down by 16.1% to £67.4 million (HY22: £80.4 million) with Focusrite and Novation impacted by surplus channel inventory levels and a some softening in the market due to global macroeconomic issues, together with a planned reduction of inventory in advance of upcoming product releases.  ADAM and Sequential showing strong growth with prize winning product launches and are helped by weaker prior year comparators

o  Audio Reproduction brands revenue is up by 50.7% to £18.8 million (HY22: £12.5 million) benefitting from a resurgence in live events and a strong performance from Linea Research, acquired in March 2022.

·  Growth in EMEA region of 3.4% following ongoing changes to strengthen our routes to market.  North America was impacted by high levels of inventory in the channel and ROW by market weakness in APAC

·  Acquisition of Sonnox on 19 December 2022 for cash consideration of £7.2 million (net of cash acquired of £1.9 million) has performed to plan and is contributing positively to the Group

·  Gross margin at 47.1% (HY22: 46.6%) is 0.5% points higher than HY22 and 3.0% points higher than H2 FY22. Freight costs have reduced significantly, with some of that benefit reinvested in promotions to support sales

·  Adjusted¹ EBITDA² at £18.1 million, down from HY22 at £22.2 million, reflecting lower sales, notwithstanding stronger gross margins and strong cost control

·  Operating profit of £11.5 million (HY22: £16.3 million) impacted by increased amortisation from acquisitions and new product launches

·  Launch of 21 new products, including a new Sequential synthesiser and a range of Martin speakers all expected to contribute in the second half of this year

·  Net debt³ of £13.2 million (HY22: net cash £18.0 million) has increased to fund acquisitions and to support higher inventory levels during a period of key product transitions

·  Interim dividend of 2.1 pence, 13.5% growth compared to HY22 dividend of 1.85 pence

 

Trading since the half year has remained solid.  The outlook for the Group is positive with inventory in the channel beginning to improve and continued strength in the buoyant live sound market.  We anticipate revenue growth in the second half to be in line with expectations, driven by a number of planned key product introductions alongside elevated costs due to promotions for existing products.  We continue to execute on our established and proven growth strategy combining organic growth with focussed M&A activity. 

 

1 Adjusted for amortisation of acquired intangible assets, sale of trademark and other adjusting items detailed in note 4 to the Interim Statement

2 Comprising earnings adjusted for interest, taxation, depreciation and amortisation.

3 Net debt/cash defined as cash and cash equivalents, overdrafts and amounts drawn against the RCF including the costs of arranging the RCF

4 Restated to include the deferred tax credit arising on the amortisation of acquired intangibles, which was not previously included.  See note 1.8 to the interim financial statements

5 Organic constant currency growth. This is calculated by comparing HY22 revenue to HY23 revenue adjusted for HY23 exchange rates and the impact of acquisitions.

 

 

 

Enquiries:

 

Focusrite plc:
Tim Carroll (CEO)	+44 1494 462246
Sally McKone (CFO)	+44 1494 462246
Investec Bank plc (Nominated Adviser and Joint Broker) David Flin Ed Knight William Brinkley   Peel Hunt LLP (Joint broker) Paul Gillam Michael Burke James Smith	+44 20 7597 5970         +44 20 7418 8900
Belvedere Communications	+44 20 3008 6864
John West
Llew Angus

 

 

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 Group trades under eleven established brands: Focusrite, Focusrite Pro, Novation, Ampify, ADAM Audio, Martin Audio, Optimal Audio, Linea Research, Sequential, Oberheim and Sonnox.

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 design and manufacture 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. Linea Research designs, develops, manufactures and sells market innovative professional audio equipment globally. Sequential designs and manufactures high-end analogue synthesizers under the Sequential and Oberheim brands.  Sonnox is a leading designer of innovative, high quality, award-winning audio processing software plug-ins for professional audio engineers.

The 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 of the 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 2023.

Overall demand for the Group's products across our Content Creation and Audio Reproduction divisions has remained resilient notwithstanding the challenging macroeconomic backdrop and our diversification across these two divisions has proven to be an effective strategy over the past four years. When the pandemic hit during FY20 and live events were effectively shut down, our Content Creation division experienced unprecedented growth, offsetting the large decline in the Audio Reproduction division revenue. This past half year, demand for Content Creation solutions has softened albeit it remains at a higher level than pre-pandemic. However, we have seen demand for our Audio Reproduction product portfolio exceeding pre-pandemic levels, supported by new products developed during the pandemic and a strengthened supply chain, especially since the acquisition of Linea Research in March 2022. With revenue for our Audio Reproduction brands up 50.7% and our Content Creation brands down 16.1%, overall Group revenue for HY23 is down 7.2% when compared to HY22.  On an organic constant currency basis, the Audio Reproduction division was up 25.3% with the Content Creation division down 25.2%, resulting in Group revenue down 19.0%.

The Group's stronger gross margins at 47.1% (HY22: 46.6%) have been the result of proactively managing our logistics and routes to market, as well as increasing prices on some elements of our product portfolio.  These efforts, along with a continued easing in freight costs, normalising of component prices, and a reduction in supply chain issues have resulted in an improvement in gross margin compared with both H1 and H2 of the prior year. 

In December 2022, the Group announced that it had acquired Sonnox, a leading software developer of audio plug-ins and tools used in every aspect of the audio industry, including music production, television, film, and live broadcasting.  Sonnox is based near Oxford, United Kingdom.  Beyond the additional revenue of Sonnox's portfolio, many opportunities for collaboration between Sonnox and the Group's other industry leading brands are being pursued.  This was one of the key reasons for making the acquisition and we are extremely pleased with the integration and co-collaboration achieved to date.

 

People, Culture and Strategy

 

One of our greatest assets is our enormously talented and passionate group of employees who work tirelessly to develop and improve our industry leading brands.  They are committed to audio excellence and have rallied around a common mission of 'Removing Barriers to Creativity' with great enthusiasm.

 

Our customer base continues to grow, encompassing a much wider range of users from the beginner or enthusiast level right through to professionals and corporate, educational or other enterprise facilities. At all levels, our customers depend on our products and solutions to provide the highest quality audio possible in an environment where our technology aids their experiences, instead of getting in the way.

 

Our growth strategy is centred around innovation, market expansion and lifetime value for our customers, as well as creating a great place to work.  The Group has executed well on all of these, adding 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.  

 

Our ESG work relating to the environment continues to develop and since our last Annual Report, we have made solid progress towards having our first standalone TCFD report, which we expect to complete this year. Alongside this, the Group is also working with McGrady Clarke and utilising the Ecoinvent Database to help us plan out our Science Based Targets trajectory.  In parallel, new products across the Group will incorporate recycled materials and plastic free boxes wherever feasible. 

 

Operating review

 

Our Group's portfolio consists of eleven leading brands across five main businesses, which are categorised into two divisions, Content Creation and Audio Reproduction.

 

Content Creation includes: 

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

o  ADAM Audio 

o  Sequential and Oberheim

o  Sonnox

 

Audio Reproduction consists of:

o  Martin Audio: Martin Audio, Optimal Audio and Linea Research 

 

Segmental analysis can be found in the table below:

 

	Six months to 28 February 2023	Six months to 28 February 2022	Year to 31 August 2022
	£'000	£'000	£'000
Revenue from external customers
Focusrite	40,084	54,914	97,186
Novation	8,241	10,511	20,583
ADAM Audio	10,161	8,420	17,797
Sequential	8,679	6,589	16,249
Sonnox1	306	-	-
Content Creation	67,471	80,434	151,815
Martin Audio (including Optimal Audio and Linea Research1)	18,772	12,459	31,918
Audio Reproduction	18,772	12,459	31,918
Total	86,243	92,893	183,733

¹ Revenue from date of acquisition

Content Creation

Our Content Creation brands bring best in class audio recording technology, electronic music instruments and controllers, and studio reference monitors to content creators at all levels.

 

Our products are showcased in the finest recording and postproduction studios in the world, as well as in the homes of millions of hobbyists and aspiring professionals.  Over the pandemic, across our 2020 and 2021 financial years, we saw accelerated growth as more customers sought solutions for creating and streaming content. This half year has seen a slight softening in the market due to global macroeconomic issues, as well as a phasing of inventory into the channel in late FY22 to ensure that adequate supply for the November and December holiday season was available.  Overall, revenue in HY23 is down 16.1% compared to HY22, but demand compared with pre pandemic levels is still materially higher, with external customer registrations over the November and December 2022 holiday season up 22.1% compared to the same period in 2019.

 

Focusrite audio interfaces, comprised of our Scarlett, Clarett and Vocaster ranges, are a suite of audio interfaces 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.

 

During this half year inventory in our sales channels reduced by approximately one month compared to a slight build in the first half of last year, resulting in lower sales into the channel compared to the first half of FY22, in part due to preparations for a programme of product releases in the second half of this year.  Global macroeconomic issues have impacted all regions, with market data indicating that North America was down at least 8%, and other regions declining further. However the sell-through to customers is still significantly ahead of pre-pandemic levels, and we have retained market share, consistently appearing as top sellers on leading external e-Commerce sites in the US and Europe.  Vocaster sales have been below expectations due to a decrease in new podcasts since the end of the high growth experienced during the pandemic.  We have reset our expectations for this product set, but still believe it is a viable segment.  Overall, these factors resulted in a 27.1% decline in revenue, when compared with HY22.  The Group is expecting a stronger second half driven by new product introductions.

 

Focusrite Pro offers a suite of solutions for professionals that employ audio over "audio over internet protocol" (AOIP) technology for scale in enterprise solutions. This sector of our business was the hardest hit by the AKM chip manufacturer's fire in Japan in October 2020 that required in a re-engineering of much of the portfolio, with many products in the portfolio only coming back into the market very late in the first half, after over 24 months' disruption.  On a like for like basis, revenue decreased by 16.0% compared to HY22.  Despite supply issues, underlying 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.  The re-engineering of these products will complete in the second half with a return to normal shipping levels expected later in the year.

 

Our Novation brand is dedicated to the art of the electronic musician, and offers a range of solutions including groove boxes, controllers, synthesizers and desktop and iOS creation apps. This past year saw the introduction of several new keyboard controllers, including the Launchkey 88, Sound on Sound's winner for "Best Performance Controller". Revenue for Novation products was down 21.9% during the first half, due mainly to tough comparatives with the same period last year that saw a number of new product introductions as well as a period of component rework on most of the brand's synthesizers, due to component issues. We are expecting Novation to perform better in the second half due to availability of the reworked synthesizers, and a number of new product introductions.

 

ADAM Audio, based in Berlin, is a globally recognised brand with a passionate team focused on delivering world-class monitor 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 solid recovery coming off a weak first half last year when component shortages impacted T-Series products as well as the launch of the new A-Series. Both product lines are in full production with good line of sight on components as well as finished inventory. The new A-Series won the prestigious Sound on Sound "Best Studio Monitor" award for 2022.  Revenue for ADAM was up 21.9% in HY23 compared to HY22.

 

Sequential, based in San Francisco, was acquired in April 2021. The Sequential brand is legendary in the industry and is synonymous with world class analogue synthesizers. It has been at the forefront of electronic music innovation for over 40 years.  Additionally, last May, the Group acquired the exclusive rights to another prestigious synthesizer brand, Oberheim, which now operates under the Sequential entity as a separate brand.  Since acquiring Oberheim, we have launched the OBX8, a modern day faithful recreation of three classic Oberheim synthesizers.  The OBX8 has won numerous industry awards during this first half and is considered the most coveted high-end synthesizer on the market.  Sequential also released the Trigon6, a Sequential branded synthesizer with unique filtering that has very recently been introduced into the market.  The Group continues to expand Sequential's distribution and demand generation activities by leveraging the scale of the Content Creation division's highly effective global sales teams.  Overall, Sequential had a strong first half, with revenues increasing by 33.5% when compared to the same period in the previous year.

 

Audio Reproduction

 

Our Audio Reproduction brands provide high quality, professional solutions for both permanent installations and live sound events. During the first half of the year the division has seen continued growth in installations as well as a global bounce back in live sound purchases.  In addition to strong organic growth, the Group acquired Linea Research in March 2022.  Linea Research has integrated well into the wider Group, providing a consistent supply of power amplification technology for Martin Audio's solutions as well as continuing to offer its own product line to a range of OEM customers.  Optimal Audio, our commercial audio brand, also saw growth year over year as we began shipping complete systems after a period of unavailability due to component shortages late last year.  As a result, overall revenues for the Audio Reproduction division are up 50.7% compared to the prior year with a strong sales pipeline across all sectors giving us cause for optimism for the second half.

 

Research and development 

 

R&D remains a cornerstone of our Group's strategy.  In this period, the Group launched 21 new products to market as well as a host of software and hardware upgrades. As reported above, the Group has a very important 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 2023	Six months to 28 February 2022	Year to  31 August 2022
	£'000	£'000	£'000
North America	36,309	39,763	74,509
Europe, Middle East and Africa ('EMEA')	36,644	35,424	70,110
Rest of World ('ROW')	13,290	17,706	39,114
Total	86,243	92,893	183,733

 

North America

  

North America represented 42% of total revenue during the half year.  Focusrite, Novation, ADAM Audio, and Sequential/Oberheim products are sold through similar sales channels, whilst 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 continue to invest in sales, marketing, logistics and customer service to support both divisions.  Revenue for the Group's brands in North America was down 8.7% compared to HY22, reflecting the issues discussed in the divisional analysis above.

 

The Group's Content Creation portfolio was down 15.3% year over year in North America.  This was partially due to some softness in the market as well as reduced shipments on a number of key products that are undergoing product transitions in the second half.

 

Our Audio Reproduction portfolio was up 70.9%, highlighting the return to growth in this market as the impact of the easing of lockdowns restrictions has paved the way for a return to live music.

 

EMEA 

 

EMEA was our largest region during the half, representing 43% of total revenue for the Group. Revenue for the Group's brands in EMEA was up 3.4% when compared to HY22.  Like North America, our Content Creation portfolio, Focusrite, Novation, ADAM Audio and Sequential/Oberheim, utilise a very similar set of distributors and resellers. At the beginning of this fiscal year, the Group initiated a consolidated "go to market" strategy for our Content Creation brands across EMEA. This has proven to be very successful, giving us more leverage within our channel, and providing a scalable structure for future growth and expansion. Overall, our EMEA's Content Creation division was down 9.0% compared to HY22, driven by softer demand, a planned reduction of inventory in advance of product releases in the second half and a phasing of inventory late last fiscal year to ensure adequate inventory levels for the holiday season.  

 

Our Audio Reproduction division, Martin, Optimal and Linea Research, transact through a combination of distributors, system integrators and live sound rental companies. This division saw strong growth of 91.5%, when compared to HY22 with revenues now above pre-pandemic levels, albeit from a relatively low base last year.

 

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 15% of total Group revenue. Both regions had a challenging first half, primarily driven by macroeconomic issues that have impacted these areas more significantly than others.

 

APAC, like North America and EMEA, utilises similar distribution and reseller channels for the Content Creation division. Our Audio Reproduction division utilises a combination of distributors, system integrators and rental companies. APAC has been a very challenging region during the first half, due to a combination of high inflation, currency swings, and continuing COVID lockdowns.  For our Content Creation division, APAC was down 33.8% compared to HY22, with the majority of the decline in China, South Korea, and Japan.  For the Audio Reproduction business, APAC was down 4.3%, illustrating just how impactful the above mentioned factors have been in these regions when compared to the very high growth rates elsewhere across the globe.

 

LATAM was similarly impacted in the Content Creation division, down 39.6% Compared to HY22. This was partially offset with Audio Reproduction being up 370%, albeit from a very low base in the prior year.

 

For both regions in ROW, we are seeing positive signs of both divisions re-stabilising and demand starting to increase again. We continue to view both these regions as potential high growth areas and will continue to invest in people, localisation efforts, and refined routes to market.

 

We are confident that both regions will revert to positive growth in the near future.

 

Financial Review

Overview

 

Against a difficult and often volatile economic backdrop, the Group delivered revenue of £86.2 million, 7.2% lower than during the six months to 28 February 2022 and adjusted¹ EBITDA ² of £18.1million, 18.8% lower than the comparable period, with the lower sales volumes resulting in lower profits despite stronger gross margins and actions taken to manage costs. 

 

Reported operating profit was £ 11.5 million (HY22: £16.3 million) and reduced for the same reasons.  Similarly, adjusted¹ diluted EPS³. of 18.0 pence is lower than the prior year's of 26.2 pence (restated - see note 1.8).

 

Income statement

	HY23 £m	HY23 £m	HY23 £m		HY22 £m	HY22 £m	HY22 £m
					Restated3	Restated3	Restated3
	Adjusted	Adjusting items1	Reported		Adjusted	Adjusting items1	Reported
Revenue	86.2	-	86.2		92.9	-	92.9
Cost of sales	(45.6)	-	(45.6)		(49.6)	-	(49.6)
Gross profit	40.6	-	40.6		43.3	-	43.3
Administrative expenses	(26.4)	(2.7)	(29.1)		(24.2)	(2.8)	(27.0)
Operating profit	14.2	(2.7)	11.5		19.1	(2.8)	16.3
Net finance (expense)/income	(0.6)	-	(0.6)		0.2	-	0.2
Profit before tax	13.6	(2.7)	10.9		19.3	(2.8)	16.5
Income tax expense	(3.0)	0.6	(2.4)		(3.8)	0.8	(3.0)
Profit for the period	10.6	(2.1)	8.5		15.5	(2.0)	13.5
	HY23 £m	HY23 £m	HY23 £m		HY22 £m	HY22 £m	HY22 £m
	Adjusted	Adjusting items1	Reported		Adjusted	Adjusting items1	Reported
Operating profit	14.2	(2.7)	11.5		19.1	(2.8)	16.3
Add - amortisation of intangible assets	2.8	1.5	4.3		1.9	2.2	4.1
Add - depreciation of tangible assets	1.1	-	1.1		1.2	-	1.2
EBITDA 2	18.1	(1.2)	16.9		22.2	(0.6)	21.6

 

1 Adjusted for amortisation of acquired intangible assets, sale of trademark and other adjusting items detailed in note 4 to the Interim Financial Statements

2 Earnings Before Interest, Tax, Depreciation and Amortisation

3  Restated to include the deferred tax credit arising on the amortisation of acquired intangibles, which was not previously included.  See note 1.8 to the interim financial statements.

Revenue

Revenue for the Group declined by 7.2% to £86.2 million (HY22: £92.9 million) which, adjusting for acquisitions and constant currency, represents an organic constant currency decline of 19.0%. Linea Research was purchased in March 2022 and contributed revenue of £2.4 million, ahead of our expectations, in the first half of FY23.  Sonnox was acquired in December 2022 and contributed £0.3 million, in line with our expectations. 

 

As previously reported the Group's divisions have faced macroeconomic and industry challenges during this first half.

 

Within the Content Creation division, the easing of component supply issues resulted in industry-wide restocking across sales channels in FY22, at a time when demand was being impacted by cost-of-living issues, resulting in significant surplus inventory across the channels by the beginning of HY23.  As a result, HY23 experienced channel de-stocking and a consequent slowing of orders which, together with a planned reduction ahead of a programme of product releases in the second half which resulted in a 27.1% decline for Focusrite (35% on an organic constant currency basis).  However, ADAM Audio and Sequential both delivered significant double-digit growth, although both are reporting against comparators impacted by the lack of availability of components in the first half of FY22.  The Audio Reproduction division has seen a resurgence in demand in the live music sector, across most geographies, with the exception of Asia.  Overall this division experienced strong growth despite some ongoing component supply issues. 

 

Pleasingly, underlying demand has continued to remain at levels significantly higher than pre pandemic, with the current half year still 52% ahead of HY20 on a reported basis for our Content Creation division.  During the second half of the year we expect inventory to begin to reduce across our distribution channels, and together with the introduction of new products later in the year, we expect a greater weighting of sales in the second half of the year and into H1 2024.

	HY23 Reported	HY23 Acquisitions2	HY23 As adjusted	HY22 Reported	HY22 Exchange1	HY22 As adjusted	Reported Growth	OCC Growth1
Focusrite	40.1	-	40.1	54.9	6.6	61.5	-27.1%	-35.0%
Novation	8.2	-	8.2	10.5	1.0	11.5	-21.9%	-28.7%
ADAM	10.1	-	10.1	8.4	0.7	9.1	21.9%	12.2%
Sequential	8.7	-	8.7	6.6	1.0	7.6	33.5%	15.6%
Sonnox	0.3	(0.3)	-	-	-	-	N/A	N/A
Content Creation	67.4	(0.3)	67.1	80.4	9.3	89.7	-16.1%	-25.2%
Martin	18.8	(2.4)	16.4	12.5	0.7	13.2	50.7%	25.3%
Total	86.2	(2.7)	83.5	92.9	10.0	102.9	-7.2%	-19.0%

 

[1] Organic constant currency (OCC) growth rate is calculated by comparing FY23 revenue to FY22 revenue adjusted for FY23 exchange rates and the impact of acquisitions

2 Linea Research acquired in March 2022, Sonnox acquired in December 2022

 

Currency impact

 

Both the Euro and the US Dollar strengthened during the period (with detail of rate movements provided on the following pages).  This has resulted in a £10.0 million positive translation impact on revenue for the Group for HY23 relative to HY22. However, at the profit level the USD effect is mitigated by the purchases of inventory in USD from the manufacturers in China and Malaysia and the Euro effect on profit is largely mitigated by the Group's hedging policy, such that the translation impact between periods is not material.

 

Segment profit

Segment profit is disclosed in more detail in note 3 to the Interim Financial Statements 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 HY23, the gross margin was 47.1%, up from 46.6% in HY22 and 3.0% points higher than the second half margin in FY22 of 44.1%.  As expected freight costs eased during the half year, returning to pre pandemic levels, benefitting margin by 4.1% points.  This was largely offset by a reduction in product margins as cost increases in the second half of FY22 began to impact, together with the promotional campaigns, highlighted during the year end results, which were in place to ensure we remained competitive in the current very price sensitive market environment.

 

We expect promotional activity on existing products to continue into the second half of the year for the Content Creation brands at a higher level than previously anticipated, with Audio Reproduction beginning to benefit from a price increase put into effect from March 2023.  As a result, we expect gross margins to reduce slightly for the remainder of the year.

 

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 of £0.4 million) and central functions such as legal, finance and the Group Board.  These expenses were £29.2 million, up from £27.0 million last year. Excluding adjusting costs of £2.7 million (HY22: £2.8 million) (see Adjusting items section), the operating costs were £26.5 million (HY22: £24.2 million).

 

The increase in administrative expenses of £2.3 million is due mainly to both an increase in amortisation of intangible assets of £0.9 million, reflecting the recent launches of new products and the impact of companies acquired since the first half of FY22 which contributed an additional £0.8 million of this increase.   During the half year, the Group restructured to realign teams to our new regional and brand organisational structure, resulting in a reduction of 14 roles across the Group at a one-off cost of £0.4 million and annualised savings of £0.6 million.

 

Adjusted EBITDA

 

Adjusted EBITDA is an alternative performance measure which 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 £22.2 million in HY22 to £18.1 million in HY23, a decrease of 18.8%. The decrease of £4.1 million was due to lower sales volume, not fully offset by increased gross margins and relatively stable underlying operating costs.  A reconciliation of adjusted EBITDA 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, 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 £1.5 million during the period (HY22: £2.2 million) and has been disclosed within adjusting items.  This year we have amended our accounting policy relating to the amortisation of acquired intangibles under development, such that it now commences from the date of first usage of the underlying product rather than from the date of acquisition of the business, and this has resulted in a £1.0 million reversal of amortisation charged in previous periods.  This has offset the underlying increase of amortisation of acquired intangibles due to the Sonnox acquisition this year and the full period impact of Linea Research, acquired in FY22.

 

Across the Group, £4.3 million of development costs were capitalised (HY22: £3.2 million) and the amortisation of capitalised development costs was £2.3 million (HY22: £1.5 million).  Further details are shown in note 8, with added disclosure to highlight the movement from technology, products and patents in development to those now in use.

 

Adjusting items

 

In HY23 adjusting items totalled £2.7 million (HY22 £2.8 million), comprising £0.3 million which related mainly to the due diligence costs for the acquisition of Sonnox that was completed on 19 December 2022, £0.5 million related to the earn-outs put in place after the acquisitions of Sequential and Linea Research in prior years, £0.4 million related to restructuring activities in the half year and £1.5 million related to amortisation of acquired intangible assets.

 

In HY22, the adjusting items included £0.3 million which related to the due diligence costs for the acquisition of Linea Research that was completed on 10 March 2022, £1.1 million related to the Sequential earn out, and £2.2 million related to amortisation of acquired intangible assets offset by £0.8 million of income from the sale of a trademark.

 

Foreign exchange and hedging

The exchange rates were as follows: 

 

Exchange rates	HY23	HY22	FY22
Average
USD:GBP	1.19	1.35	1.31
EUR:GBP	1.15	1.18	1.18
Period end
USD:GBP	1.21	1.34	1.16
EUR:GBP	1.14	1.20	1.16

 

The average USD rate has strengthened to $1.19 for HY23 (HY22: $1.35).  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 2023) and approximately 50% of the Euro flows for the following financial year (year ending August 2024). 

 

In HY23, approximately three-quarters of Euro flows were hedged at €1.17, and the average transaction rate was €1.15, thereby creating a blended exchange rate of approximately €1.16.  In HY22, the equivalent hedging contracts were at €1.13, versus the transactional rate of €1.18 and so creating a blended exchange rate of €1.15.

 

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 has increased to 22.4% (HY22: 18.6%), as a result of brought forward losses are now being fully utilised, a greater proportion of the Group's profits arising outside the UK and the increase in the UK headline corporation tax rate from 1 April 2023. In both years the rate has been impacted by the disallowance for corporation tax of certain adjusting item costs for corporation tax, including depreciation of acquired intangibles and costs relating to due diligence on acquisitions.  Since September 2020 the Group has been part of the RDEC tax scheme for R&D credits, and as a result a credit of £0.4 million has been recognised against uncapitalised R&D costs within Administrative expenses, which is taxable.  

 

Earnings per share ('EPS')

 

The basic EPS for the half year was 14.4 pence, down 37.7% from 23.1 pence in HY22.  This decrease has largely resulted from 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 58,494,265 shares (HY22: 58,215,504 shares). The more comparable measure, excluding adjusting items and including the dilutive effect of share options, is the adjusted diluted EPS.  This decreased to 18.0 pence, from 26.2 pence in HY22 (restated), a decrease of 31.3%. This measure has been restated to include the deferred tax credit arising on the amortisation of acquired intangibles, which was not previously included.  See note 1.8 to the financial statements.

 

	HY23	HY22	FY22
	Pence	Pence1	Pence1
Basic	14.4	23.1	42.5
Diluted	14.3	22.8	42.1
Adjusted basic	18.2	26.5	50.5
Adjusted diluted	18.0	26.2	49.9

¹ Restated to include the deferred tax credit arising on the amortisation of acquired intangibles, which was not previously included.  See note 1.8 to the interim financial statements.

 

Balance sheet

	HY23	HY22	FY22
	£m	£m	£m
Non-current assets	95.2	66.2	87.5
Current assets
Inventories	50.7	25.7	48.3
Trade and other receivables	27.5	23.7	28.9
Cash	13.5	17.8	12.8
Current liabilities
Trade, other payables and provisions	(30.3)	(29.9)	(41.2)
Bank loan or overdraft	(26.8)	0.2	(13.1)
Non-current liabilities
Deferred tax	(10.6)	(6.2)	(9.1)
Other non-current liabilities	(8.6)	(3.4)	(8.8)
Net assets	110.6	94.1	105.3
Working capital1	47.9	19.5	36.0

 

¹ Working capital is defined as Inventories plus trade and other receivables less trade and other payables and provisions

 

Non-current assets

 

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

 

The goodwill totals £16.4 million (HY22: £9.7 million).  The increase is due to the addition of Linea Research at £3.4 million and Sonnox at £2.7 million, together with foreign exchange movements on the existing items. 

 

The total cost of the brands is £26.4 million (HY22: £19.8 million).  This has increased due to the addition of the Linea Research brand (£0.9 million), Oberheim brand (£4.7 million) and Sonnox brand (£0.4 million). The majority of brands are being amortised over 10 and 15 years with Martin over 20 years.  At 28 February 2023 the brands had carrying value, net of amortisation, of £21.6 million compared to £16.8 million as at 28 February 2022.

 

The capitalised technology and patent costs comprise acquired and internally generated technology and patent costs for products currently in use.  The amortisation periods range from three years to fifteen 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, Martin Audio live speakers and Sequential synthesisers. The capitalised technology and patent costs as at 28 February 2023 had a carrying value, net of amortisation, of £34.9 million (HY22: £30.9 million). 

 

Capitalised technology and patent costs still under development comprise acquired and internally generated technology and patent costs for products currently still in development.  The cost of these items has increased from £8.3 million at 1 September 2022 to £8.5 million at the 28 February 2023, as a result of our ongoing investment in new products, net of the transfer of £3.4 million of costs to products now in use.  These costs are not amortised and, following a review of our calculations this year, we have reversed £1.0 million of amortisation on acquired intangibles in development which had been incorrectly amortised from the date of acquisition and not the date of use. 

 

Based on current trading and management forecasts, we have conducted impairment reviews for those subsidiaries impacted by difficult markets with no impairments to the carrying value of the intangible assets being deemed necessary. This will be reassessed at the year-end for any evidence of any permanent diminution in value.

 

Overall, amortisation of the intangible assets totals £4.4 million (HY22: £4.1 million).  This is split between amortisation of intangible assets acquired as part of the acquisitions of £1.5 million (HY22: £2.2 million), and other amortisation of £2.9 million (HY22: £1.9 million).  The amortisation of acquired intangible assets has been treated as an adjusting item.  The difference in the period between ongoing amortisation of development costs and capitalised development costs is £2.0 million (HY22: £1.7 million).

 

The remaining £13.8 million (HY22: £8.6 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. This has increased since the last year due to the acquisition of the Linea offices and the inception of a new lease as Focusrite moves to a new headquarters in High Wycombe.

 

Working capital

Working capital at 28 February 2023 was 27.0% of the last 12 months revenue (HY22: 11.4%).  Working capital has increased at the half year, as we build inventory to support product transitions and launches in the second half of the year and due to a low level of trade creditors at the half year, due to the phasing of production levels, which we expect to increase by the year end.  We anticipate that the inventory position will remain stable across the second half of the year, but creditors will have normalised by the end 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 in a timely manner.

 

Cash flow

	HY23	HY22	FY22
	£m	£m	£m
Cash and cash equivalents at the beginning of the year	12.8	17.3	17.3
Foreign exchange movements	0.1	-	0.7
Cash and cash equivalents at the end of the year	13.5	17.8	12.8
Net increase/(decrease) in cash and cash equivalents (per Cash Flow Statement)	0.6	0.5	(5.2)
Change in bank loan	(13.7)	-	(13.2)
(Increase)/decrease in net debt	(13.1)	0.5	(18.4)
Add back equity dividend paid	2.4	2.2	3.2
Add back acquisition of subsidiary (net of cash acquired)	7.2	-	10.9
Free cash (outflow)/inflow	(3.5)	2.7	(4.3)
Add back non underlying items (cash outflow)	1.2	0.6	0.9
Underlying free cash (outflow)/inflow 1	(2.3)	3.3	(3.4)

 

¹Defined as cashflow before equity dividends, acquisition of subsidiary (net of cash acquired) and adjusting items.

 

The underlying free cash outflow in HY23 was £2.3 million, which was -2.7% of revenue.  In the comparative period, the underlying free cash inflow was £3.3 million which was 3.5% 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. We expect underlying free cashflow this year to be lower than our historic norm of approximately 10- 12% of revenue due to the impacts on inventory outlined above.

 

Reported free cash outflow is -4.0% of revenue and is impacted by similar issues as underlying free cashflow. In the current first half year adjusting items relate to the payment of the final payment of the Sequential earn out and the acquisition costs and restructuring costs as outlined in note 4 to the Interim Financial Statements.  In the prior year they related to payment of the first part of the Sequential earn out and the income received from the sale of a trademark. 

 

The net debt balance at the period end was £13.2 million (HY22: net cash of £18.0 million and FY22: net debt of £0.3 million).  The net debt includes the arrangement fee for the RCF of £0.1 million which is being amortised across the period of the facility.  The increase in net debt since the beginning of HY22 principally reflects the increase in working capital noted above, the acquisition of Sonnox for £7.2 million in December 2022 and the acquisition of Linea Research for £12.3 million in March 2022.  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 £26.9 million was drawn down from the facility (HY22: nil, FY22 £13.2 million).

 

Dividend

The Board has approved an interim dividend of 2.1p (HY22: 1.85p) an increase of 13.5%, in line with the Group's progressive dividend policy, and reflecting the Board's confidence in the Group's prospects and future cash generating prospects.  

 

Summary and Outlook

 

Focusrite plc is a much bigger business since pre-COVID with eleven brands operating globally across different, but complementary markets. This past half year has showcased just how well the Group's diversification strategy has paid off, giving us increased resilience in the face of global and industry wide headwinds.

 

Revenue in our Content Creation division has been impacted by some industry-wide surplus channel inventory and softening in demand along with a planned channel inventory reduction ahead of a large product release programme coming in the second half.  Pleasingly, our Audio Reproduction division, as anticipated, has experienced strong growth and is now ahead of pre pandemic levels.  Despite challenging markets, we are still showing material growth over pre pandemic levels and have retained our strong market share, underscored by rock solid brand positions.

 

Trading since the half year has remained solid.  The outlook for the Group is positive with inventory in the channel beginning to improve and continued strength in the buoyant live sound market.  We anticipate revenue growth in the second half to be in line with expectations, driven by a number of planned key product introductions alongside slightly elevated costs due to promotions for existing products.  We continue to execute on our established and proven growth strategy combining organic growth with focussed M&A activity. 

 

 

 

Tim Carroll	Sally McKone
Chief Executive Officer	Chief Financial Officer
24 April 2023	24 April 2023

 

 

Risks and Uncertainties

 

The Board has considered the principal risks and uncertainties as presented in the 2022 Annual Report and has determined that they broadly remain relevant to the rest of this financial year, with the updates as set out below. Such risks and uncertainties 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.

 

People

The job market changed post-pandemic with candidates now having more choice. We continue to experience skill shortages in some areas, namely in technical and in lower skilled production/warehouse roles. Our recruitment process has been successfully accelerated and we now promote all vacancies internally which has helped us to fill some vacancies more quickly. In addition, and in conjunction with our commitment to being "a great place to work", we have taken steps to increase training and upskill our people.

ESG and our sustainability strategy

 

Our aim is to become industry leaders in environmental sustainability. We shared our Strategy and Targets on page 53 of the 2022 Annual Report, which includes having a target to reduce and neutralise product Green House Gas emissions by 2030. Additionally, we have started to incorporate the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations into our processes ahead of the mandatory compliance deadline at the end of this financial year. More information about our identified Climate Risks and Opportunities can be seen across pages 43 to 57 of the FY22 Annual Report.

 

In the first half of this year, we have continued with our programme of linking tree planting to wood consumption in our products across the group - ensuring there is a minimum of 10x more wood growing in the world than we consumed. Through these efforts, we have already planted over 70,000 new trees. Our dedication to sustainability remains a top priority, and we look forward to sharing progress on our initiatives and commitment to the Science Based Targets Initiative.

 

Doing Business in China

 

Whilst we have a long-established relationship with our business partners in China political discourse is becoming more strained with governments around the world implementing measures to protect their domestic interests.  Geo-political tensions have been heightened by Russia's invasion of Ukraine and increased concerns with regard to China's policy towards Taiwan.  We recognise that we are highly dependent on China both for its supply of electronic components and the provision of contract manufacturing and, like many companies who sell electronic hardware, have limited alternative options. We monitor the stances governments take and consider how they may affect our business. We recognise that we will need to create effective policies to identify applicable prohibitions and implement responsive procedures such as running restricted party screenings in order to know exactly with whom we are doing business and whether those parties are restricted.

 

Export control laws creating restrictions on exporting goods are extensive and continue to expand. We monitor legislation and have established relationships with Chinese legal advisers who advise us on compliance with the law and evaluate our long-term goals and business plans. In addition import tariffs on Chinese products affect our profit margins. We continually assess supply chains to identify where vulnerabilities lie and, where possible, we restructure those supply chains to reduce the risk of violations or excessive costs.  We continue to explore contract manufacturing opportunities in countries outside of China.

 

 

Cost inflation

 

Cost inflation continues to be widely reported and remains prevalent in most of our major markets.  Indications of how cost inflation is impacting the discretionary income available to customers has been felt across all industries and revenue growth has been impacted by macro-economic uncertainty. By remaining competitive in the market and offering premium and desirable products we aim to mitigate this by continuing to be the first choice for customers.

 

The Group's customers continue to operate in a range of different sectors which reduces the risk of a downturn in a particular sector. As a global Group we operate in different countries and therefore are less exposed if particular countries are impacted. The Group continues to have no operations or customers in Russia, Belarus or Ukraine, a market previously providing an annual revenue of approximately £2million.

 

Forward looking statements

 

The risks and uncertainties facing the Group were reported in detail in the 2022 Annual Report and are monitored closely by the Group. The forward-looking statements in this 2023 Half Year Report cannot be relied upon as a guarantee or prediction of future performance. We, like all businesses, continue 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 2023

	Note		Six months to  28 February 2023	Six months to 28 February 2022	Year to 31 August 2022
			£'000	£'000	£'000
Revenue	2		86,243	92,893	183,733
Cost of sales			(45,619)	(49,630)	(100,453)
Gross profit			40,624	43,263	83,280
Administrative expenses			(29,163)	(27,810)	(55,449)
Other income			-	830	830
Adjusted EBITDA (non-GAAP measure)			18,053	22,222	41,663
Depreciation and amortisation			(3,858)	(3,146)	(6,991)
Adjusting items for Adjusted EBITDA:
Amortisation of acquired intangible assets			(1,504)	(2,236)	(5,116)
Adjusting items	4		(1,230)	(557)	(895)
Operating profit			11,461	16,283	28,661
Finance income			712	351	2,286
Finance costs			(1,290)	(106)	(398)
Profit before tax			10,883	16,528	30,549
Income tax expense	5		(2,434)	(3,075)	(5,773)
Profit for the period from continuing operations			8,449	13,453	24,776
Earnings per share
From continuing operations
Basic (pence per share)	7		14.4	23.1	42.5
Diluted (pence per share)	7		14.3	22.8	42.1

 

 

Condensed Consolidated Statement of Other Comprehensive Income

For the six months ended 28 February 2023

		Six months to  28 February 2023		Six months to 28 February 2022		Year to 31 August 2022
		£'000		£'000		£'000
Profit for the period		8,449		13,453		24,776
Items that may be reclassified subsequently to the income statement
Exchange differences on translation of foreign operations		(999)		(1,375)		(486)
Gain/(loss) on forward foreign exchange contracts designated and effective as a hedging instrument		194		(144)		(1,009)
Tax on hedging instrument		(38)		27		199
Total comprehensive income for the period		7,606		11,961		23,480
Profit attributable to:
Equity holders of the Company		7,606		11,961		23,480