REG - Focusrite PLC - Final Results
28/11/2023 07:00
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RNS Number : 8403U Focusrite PLC 28 November 2023
Strictly Embargoed until 07.00, 28th November 2023
Focusrite plc
("Focusrite" "the Company" or "the Group")
Final Results for the Year Ended 31 August 2023
Focusrite plc (AIM: TUNE), the global music and audio products company,
announces its Final Results for the year ended 31 August 2023.
Financial and operational highlights
FY23 FY22 Change
Revenue (£ million) 178.5 183.7 -2.9%
Gross margin % 47.5% 45.3% +2.2ppts
Adjusted(1) EBITDA(2) (£ million) 38.6 41.7 -7.4%
Operating profit (£ million) 24.3 28.7 -15.3%
Adjusted(1) operating profit (£ million) 30.4 34.7 -12.4%
Basic earnings per share (p) 30.4 42.5 -28.5%
Adjusted(1) diluted earnings per share (p) 38.4 49.9(3) -23.0%
Total dividend per share (p) 6.6 6.0 +10.0%
Net debt(4) (£ million) (1.3) (0.3) -£1.0m
Revenue decrease of 2.9% reflects organic constant currency(5) (OCC) decrease
of 9.5% partially offset by acquisitions and foreign exchange translation
benefits against a challenging market backdrop.
· Content Creation revenue down by 9.7% (15.3% OCC decrease) to £137.0
million (FY22: £151.8 million), an improvement on first half decline of 16.1%
with Focusrite brands returning to growth in H2.
· Audio Reproduction revenue growing by 30.1% (19.6% OCC growth) to
£41.5 million (FY22: £31.9 million), benefitting from a strong supply chain
and a resurgence in demand for live experiences.
· Gross margin increased by 2.2% points, with freight costs
normalising, partially offset by investment in promotions to counteract cost
of living challenges.
· Adjusted EBITDA of £38.6 million down 7.4% from FY22, impacted by
lower sales and investment in Group infrastructure.
· Operating profit of £24.3 million down 15.3% impacted by increased
amortisation from product launches and amortisation of acquired intangibles.
· Launch of 32 new products across all brands throughout the year,
including 4th generation of flagship Scarlett audio interface.
· Acquisition of Sonnox, an established provider of market leading
software, completed in December 2022 for £7.2 million net of cash acquired
(£1.9 million).
· Final dividend of 4.5p recommended, resulting in 6.6p for the
year, up 10% on prior year.
1 Adjusted for amortisation of acquired intangible assets, acquisition and
restructuring costs and other adjusting items
2 Comprising earnings adjusted for interest, taxation, depreciation and
amortisation.
3 Restated to include the deferred tax impact of amortisation on acquired
intangible assets
4 Net debt defined as cash and cash equivalents, overdrafts and amounts drawn
against the RCF including the costs of arranging the RCF
5 Organic constant currency growth. This is calculated by comparing FY23
revenue to FY22 revenue adjusted for FY23 exchange rates and the impact of
acquisitions.
Commenting on the final year results and current trading Tim Carroll CEO,
said:
"Despite challenging macroeconomic conditions, our Group has delivered a
resilient performance, achieving revenue and profit figures in line with
market expectations. With our existing portfolio, planned product launches
throughout the coming year, streamlined go-to-market strategies, and shared
back-office support structures, we are well-positioned to embrace the
opportunities and challenges the new year presents.
Current market conditions for our Content Creation division remain difficult
and our revenue year to date has been impacted by a degree of sales channel
de-stocking. However, underlying demand for our products, as evidenced by
customer registrations, remains satisfactory. Performance in our Audio
Reproduction division remains strong.
Overall, at this early stage and as we head into our key holiday season, our
expectations for the year remain unchanged.
Whilst we remain mindful of the significant global economic and political
challenges, as well as ongoing cost pressure in the supply chain, we have
successfully built our inventory positions back to more normalised levels and
have robust plans for future component supplies as well. With key new products
launched towards the end of FY23 and more introductions planned for the year
ahead, we remain confident in the organic growth potential of existing brands.
Additionally, with the benefit of our cash generation, the Group has
demonstrated its ability to execute on our proactive M&A strategy,
carefully considering acquisitions that not only enhance earnings but also
expand our market potential, increase our R&D capabilities, and contribute
both scale and dynamism to our business.
We remain optimistic about our future prospects."
Availability of Annual Report and Notice of AGM
The Annual Report and Accounts for the financial year ended 31 August 2023 and
notice of the Annual General Meeting ("AGM") of Focusrite will be posted to
shareholders by 20 December 2023 and will be available on Focusrite's website
at www.focusriteplc.com.
Dividend timetable
The final dividend is subject to shareholder approval, which will be sought at
Focusrite's AGM on 19 January 2024.
The timetable for the final dividend is as follows:
19 January 2024 AGM to approve the recommended final dividend
28 December 2023 Ex-dividend Date
29 December 2023 Record Date
31 January 2024 Dividend payment date
- ends -
Enquiries:
Focusrite plc:
Tim Carroll (CEO) +44 1494 462246
Sally McKone (CFO) +44 1494 462246
Investec Bank plc (Nominated Adviser and Joint Broker) +44 20 7597 5970
David Flin
Edward Knight
William Brinkley
Peel Hunt LLP (Joint Broker) +44 20 7418 8900
Paul Gillam
Michael Burke
James Smith
Belvedere Communications +44 20 7653 8702
John West
Llew Angus
This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 (MAR)
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 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 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 synthesizers 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 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 Company 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.
Chairman's Report
Focusrite plc has undergone substantial growth since the pre-COVID era,
expanding our presence globally with 11 distinct brands operating in diverse
yet complementary markets. Over the past year, we have seen tangible results
stemming from our strategic diversification efforts, which have enhanced our
resilience in the face of global and industry-wide challenges.
We take immense pride in the business we have become, accompanied by
impressive financial achievements since our initial public offering in
December 2014. Although facing a challenging time this year, our track record
speaks for itself, with revenue growth, strong cash generation, robust gross
margins, a progressive dividend policy, and a successful acquisition strategy
that has delivered attractive total returns to our valued shareholders.
At the core of our operations lies a global market with underlying growth
factors, which we estimate at £5.5 billion across all our divisions. The
ongoing technological advancements have democratised content creation and
catalysed growth across the world. In this landscape, we find ourselves at the
forefront of innovation.
Throughout the past year, the Group has undergone substantial changes while
maintaining a strong presence in various markets, both vertically and
geographically. We continue to drive innovation, foster strong relationships
with our established customer base, and maintain an expansive distribution
network spanning approximately 240 territories worldwide.
Whilst we celebrate our growth achievements, we remain vigilant in
acknowledging factors that have impacted our revenue performance. Notably, our
Focusrite-branded Scarlett audio interface range experienced a decline in
volume in a market that had previously surged in demand during the pandemic.
However, we proudly retained our global market leadership in this category. In
July, we unveiled the 4(th) generation of Scarlett interfaces, which has
already garnered widespread acclaim, bolstering our confidence in this range's
market share for the years ahead.
To enhance marketing and representation efficiency, the Group has restructured
its distribution networks in Europe and the US, aligning the acquired brands
with our original Focusrite and Novation brands.
In the wake of the COVID-19 pandemic, the Audio Reproduction market is
witnessing a surge in demand for experiences, including live and installed
sound. The businesses within our Audio Reproduction division, including Martin
Audio, Linea Research, and Optimal Audio, are all experiencing healthy growth,
compensating for anticipated short-term contractions in our Content Creation
brands from the past year. ADAM Audio is also making good progress following
operational challenges in FY22 predominantly as a result of market wide
shortages.
In May 2023, the Group Headquarters and home of Focusrite and Novation brands
relocated to a new, more modern location in High Wycombe, providing us with
vastly improved working conditions and stability for the foreseeable future.
Concurrently, we have refreshed our investor-facing materials, and I encourage
investors to explore our new plc website at https://focusriteplc.com/
(https://focusriteplc.com/) .
The Group is well positioned in all major markets, with enduring demand for
high-quality audio products in music and sound production, recording, and
entertainment industries across the globe. The catalysts for our business
opportunities lie in music education and the global thirst for content and
live entertainment, and we are always ready to embrace the challenges and
prospects presented.
I extend my sincere gratitude to our investors for their continued confidence
and support, to our dedicated employees for their hard work and innovation,
and our distribution partners for their invaluable role in delivering our
products to the masses.
We have successfully cultivated a diverse portfolio of world-leading brands,
each holding strong positions within their respective segments. This
diversification bolsters our resilience against global and industry-specific
headwinds. There is much to look forward to and, with a proven track record
of growing both organically and via selected M&A, we approach the future
with much to be optimistic about.
Phil Dudderidge
Non-Executive Chairman and Founder
CEO Statement
CEO's Statement
I'm pleased to present our final results for 2023, highlighting the Group's
journey over the past year. It was a year of challenges and opportunities, and
the Group tackled both with a focus on our growth strategy, resulting in
strong performance in a challenging market. As part of our strategic
expansion, we welcomed Sonnox, a renowned software company specialising in
professional audio effects and tools, into our Group.
Some of the challenges we faced in 2023 carried over from the previous year,
notably the impact of rising living costs on home recording solutions and
ongoing high component costs. As discussed in the half year report, this
resulted in softer sell through on many Content Creation products focused on
the home recordist, and a build-up of inventory in the channel. The Group
effectively addressed both issues with our product inventory unwinding in the
channel to targeted levels and pricing actions taken to protect margin without
impacting our sell through volumes to end users. Our products continue to be
top sellers in their various categories. In parallel, the Group witnessed a
surge of demand for live and installed sound solutions, reinforcing the view
that live events are back in a big way.
With 11 brands spanning Content Creation and Audio Reproduction, the Group's
R&D efforts resulted in the successful launch of 32 new products and
updates to 23 existing ones during the fiscal year. Additionally, we have
continued to refine our go-to-market approach; most notably this past year
with a combined EMEA sales and marketing team for our Content Creation brands,
which has resulted in greater leverage and scale.
Our primary locations are in the UK (High Wycombe, Letchworth, Oxford and
London), Germany (Berlin), Hong Kong, Australia (Melbourne), and the US (Los
Angeles, Nashville and San Francisco). Our employee base, which now totals
557, consists of a remarkable group of passionate professionals, including
accomplished musicians, DJs, audio engineers, live sound experts, and
podcasters/streamers. We are fortunate to have employees who actively use our
solutions in real-world scenarios, contributing their experiences, feedback,
and technical expertise. We continue to invest in our people and look
wherever possible to promote from within, whilst seeking out top talent from
around the world across all divisions and brands.
Our Group Structure
The Group's portfolio of solutions can be categorised into two broad
categories:
· Content Creation: Solutions that enable the creation of audio
content for distribution or personal enjoyment- approx. 77% of total FY23
revenue comprised of four unique business units and eight industry leading
brands.
· Audio Reproduction: Solutions that enable the reproduction of
sound-approx. 23% of total FY23 revenue comprised of two unique business units
and three brands.
Our two divisions cater to distinct customer bases; employ different routes to
market; and involve product-specific technical requirements for our
products. Each individual business unit continues to focus on innovation,
ensuring a robust roadmap of refreshes for current products whilst also
introducing completely new solutions. Content Creation and live sound
reproduction workflows are constantly evolving, and the Group aims to lead the
industry by spending considerable effort and resources in our various R&D
efforts.
To support these brands we have implemented a unified go-to-market strategy,
managed by cohesive regional teams for each division. Additionally, all
business units benefit from Group-led services across Finance, IT, and HR.
The Group is dedicated to gaining valuable insights from our customers,
actively collecting data during their on-boarding and user journey as they use
our solutions. We closely monitor customer Net Promoter Scores (NPS), which
serves as a key performance indicator (KPI) across all our businesses.
Additionally, we collate our own proprietary data with industry market sources
to ensure we consistently stay attuned to our customers' evolving needs and
purchasing behaviours. More detail on our markets and customer types is
provided elsewhere in this report.
Additionally, the Group maintains a very proactive stance towards M&A,
carefully considering potential acquisitions that are not only earnings
enhancing, but which can also expand our reach into existing and new markets
and add to our R&D capabilities.
Operating review
Despite the challenging environment and the gradual return to normality
following the pandemic, the diversity of the Group's portfolio has mitigated
these impact and maintained our position as market leaders. In the past
year, our Content Creation division was down 9.8% compared with the prior
year, whilst our Audio Reproduction brands, witnessing a strong return of live
events globally, were up 30.1%. The Group's diversification across these two
divisions has served us well across the past three years: when the pandemic
hit and live events were shut, our Content Creation brands witnessed an
unprecedented increase in demand, offsetting the decline in Audio
Reproduction. As a result, while consumer-focussed brands in the content
creation space grapple with rising living costs, inflated channel inventories,
and artists returning to a more balanced recording and live performance
schedule, the Group's Audio Reproduction brands have experienced a significant
surge in demand during this live events revival.
Content Creation
Content Creation encompasses the creation of audio content using various
technologies. It spans from personal enjoyment to professional content
production across diverse mediums, such as music, podcasting, and audio for
film. The global demand for content creation continues to increase, with
industry reports such as IFPI Global Music Report 2023 indicating not only
sustained growth but also an expanding global reach, driven by emerging
markets, enabling individuals worldwide to reach a global audience.
The pandemic and subsequent lockdowns accelerated this growth, as many people
turned to music and podcast creation as a creative outlet. Musicians and
streamers used technology to stay in touch with their audiences and increase
their productivity. However, challenges relating to component availability and
shipping logistics began to plague all industries around mid-2022 which, for
our industry, resulted in exceptionally low stock levels across our Global
channel. At the beginning of this past fiscal year, both component supply and
freight costs began to ease up, resulting in a massive inflow of inventory to
the channel. This coincided with concerns about rising living costs.
The net result was a very bloated channel, not just in our sectors, but across
all sectors such as guitars, wind instruments, pianos and other instruments.
Industry trade publications have reported this phenomenon, with recent data
from Music Trades indicating a 65% decrease compared to the prior year in
guitar exports to the US for the quarter from April to June 2023. As outlined
in our half year presentation, the Group realised this early into the year and
worked very collaboratively with our global channel partners on promotions and
incremental marketing campaigns to drive down inventory. These efforts proved
effective and from all data points, we believe the Group performed materially
better than our competitors and was able to maintain our market share and, in
some instances, grow share as well.
Regionally, both North America and EMEA witnessed low single digit declines in
revenue year over year. APAC saw a larger decline, most notably due to China,
where the extended lockdowns ending, and the larger scale of inflation had
greater impact. To help mitigate this the Group has continued to refine our
route to market strategy across our Content Creation brands. We now have
unified regional teams in the US, Latin America, Canada, EMEA and APAC,
representing all our brands. This approach leverages our scale to optimise
channel performance.
Focusrite/Focusrite Pro branded solutions include the Scarlett, Clarett,
Vocaster, Red and Rednet range of audio interfaces. Scarlett, focused
primarily on the home studio customer, continued to dominate the market,
holding on to its leading market share even with a number of new competitors
entering the space. As one of the Group's larger revenue-generating
portfolio of products, Scarlett also had the additional challenge of a major
product transition happening late in the second half. This required the Group
to drive down inventory levels at an accelerated rate over the second half to
insure a smooth product transition to the next generation. The 4(th)
Generation Scarlett Solo, 2i2, 4i4 and related bundles launch was announced at
the end of August 2023 to industry wide accolades on the products new features
and specs. The Group successfully reduced inventory levels of the 3(rd)
generation products, whilst working strategically with several key continental
partners to place much of the remaining inventory of the 3(rd) gen product to
be sold through the holiday season, in the first half of FY24. This was made
possible due to the price difference between the 3(rd) and 4(th) generation
products, allowing us to effectively market a premium product to customers who
would potentially opt for a lower-priced, lower specification product.
Focusrite's Red and Rednet solutions continue to set industry standards for
professionals and facilities with complex workflows requiring reliability and
quality. These products were deeply impacted by the AKM factory fire in
Japan, which was the sole source for many professional grade audio products.
The re-work required to source and implement alternative silicon for these
products was a substantial undertaking, requiring nearly two years of
development resources. We are finishing the rework on the last remaining items
and production is beginning to ramp up again.
Novation/Ampify branded products are a collection of hardware and software
solutions dedicated to the art of electronic music. These products also cater
to a wide range of customers, from the beginner to the professional electronic
music maker. This category, like others in the industry, experienced reduced
demand, primarily among younger artists affected by cost-of-living issues.
Inside the different product categories, the Group saw the most softness in
the groovebox and launchpad products, very much aligned to a younger, more
price sensitive market. This was partially offset by an increase in our
keyboard controller category, which the group has expanded to support several
different computer-based recording platforms and workflows. Ampify, our
freemium software offering, saw a slight decline in both perpetual and
subscription sales, aligning with industry trends, and influenced by global
cost of living factors. These offerings remain a great vehicle for attracting
new customers.
ADAM Audio's revenue increased slightly compared to FY22, defying the
industry-wide trend, reported in many market studies, of approximately 20%
year over year declines. This performance was partially due to a low
comparator in FY22, as ADAM Audio had numerous components issues the previous
year that resulted in extended stock outs on key products, and a delay in
introducing the new A series line. All products have now been in stock and
available for the full year and, based on the various industry reports we
receive and our own channel sales data, we believe ADAM Audio increased their
market share year-on-year in a very challenging environment. While a larger
portion of the revenue came from the lower-priced T Series this past year, we
are seeing the new A Series solutions generating good traction in the
professional market, with many choosing these solutions for upgrading their
rooms to new immersive mixing formats, such as Dolby ATMOS.
Sequential and Oberheim also faced a challenging year: global industry reports
highlighted a 25% decline in the synthesizer category compared to the previous
year. Higher-priced products, such as those from Sequential and Oberheim,
experienced even more declines. Sequential / Oberheim revenue for the year was
down 10.9% on FY22, which, while a better result than industry data for the
entire category, was partially driven by strong new product introductions in
the previous year that were not repeated in FY23. This decline was partially
offset by the introduction of the Oberheim OBX and Sequential Trigon 6 desktop
modules. Both brands remain incredibly strong in this category.
Sonnox was acquired by the Group in December of this past year. Sonnox is a
pure software business, with itsportfolio sold by a select group of global
resellers as well as direct to end user. Sonnox had a solid year, with sales
meeting expectations. This performance was a combination of consistent sales
of legacy products, successful planned seasonal promotions, and the launch of
Voca toward the end of the fiscal year. Going forward, the Sonnox development
team will continue to execute on its internal roadmap as well as working with
several of the Group's other brands for future products.
Summary: After a challenging FY23, we anticipate the market stabilising in
FY24, but with limited growth given the ongoing macro economic climate. For
our established Focusrite brands, where we have achieved significant market
penetration of up to 30% in some segments, we expect growth to align with the
market, supported by new product introductions. For our newer brands, there is
room to capture market share, increase penetration, and achieve above-market
growth, driven by market expansion and new product offerings.
Audio Reproduction
The Group's Audio Reproduction brands, Martin Audio, Optimal Audio and Linea
Research, are focused on delivering state of the art audio to audiences across
a wide spectrum. From the largest music festivals to renowned theatres, music
halls, night clubs, houses of worship, universities and more, our solutions
ensure rich and memorable auditory experiences. As discussed in last year's
annual report, the global Audio Reproduction industry faced a significant
hiatus during most of the pandemic. Towards the end of 2022, live events
gradually returned, and we forecasted an accelerating return to normal for the
industry across this past year. This acceleration materialised, resulting in a
significant increase year over year for our brands in this space as well as
the entire industry. Revenue for Audio Reproduction brands for the Group
finished the year 30.1% up year over year and have carried over into the new
year with a healthy order book.
Our Martin Audio brand of products is seen and heard in some of the largest
music festivals and tours, as well as many of the most prestigious music halls
and theatres across the globe. Most notable this past year, Martin Audio
solutions dominated the Glastonbury and Hyde Park music festivals, utilising a
patented design that allows maximum coverage in the audience space whilst
minimising the noise exterior to the event. Martin Audio introduced a range of
new products across the year, including a new addition to the award-winning
Torus family and the new Flexpoint series, providing advanced solutions for
shorter throw needs across live sound and installations. In total, Martin
Audio had 15 new product introductions in the past year, a testament to the
Group's decision to keep Martin Audio operational throughout the pandemic when
many competitors temporarily closed their doors.
Linea Research, one of the Group's FY22 acquisitions, makes professional grade
amplification for use in a multitude of live sound settings. Linea Research
had an outstanding year, exceeding budget expectations and ramping up
production to double the number of amplifiers previously produced. This result
played heavily into Martin Audio's success as well, with most of its powered
offerings utilising Linea Research amplification. Linea Research has also
benefitted from the Group's scale and leverage, both for purchasing raw
components and for logistics and operational support.
Optimal Audio, the Group's new commercial audio brand, is dedicated to
bringing high-quality sound to a host of commercial installations. Launched in
April of 2022, Optimal Audio has gained popularity among system integrators as
an easy to use, high quality sound solution for installations such as
restaurants, gyms, smaller clubs, and universities. After a slow start with
availability due to the 2022 component crisis and a prioritisation call to
focus on Martin Audio branded solutions, production has ramped up and the
pipeline is growing as system integrators globally have begun specifying
Optimal audio into their bids.
Summary: As mentioned earlier, the audio reproduction market is currently
thriving, with customers valuing audio experiences following the COVID-19
lockdowns. We anticipate this market will gradually normalise over the next
year, returning to lower levels of growth. Martin's robust product pipeline
and opportunities to take market share are expected to deliver growth levels
surpassing the overall market trend.
Routes to Market
The Group's two divisions are now supported by dedicated regional sales teams.
Given the distinct nature of both end customers and channels, each division
benefits from professional regional sales and marketing teams across EMEA,
Americas and APAC. As part of our growth strategy, the Group continues to
refine its routes to market, looking for ways to optimise reach and return in
every global region.
Audio Reproduction worked diligently to expand the global distribution network
for Optimal Audio. The focus was on forging partnerships with entities that
are closely aligned with system integrators well known for specialising in the
targeted customer groups. Additionally, new partners in the equipment rental
market, such as 22Live in the UK, emerged to meet the challenges of the
resurgence of live events, making significant investments in Martin Audio's
Wavefront Precision range.
Within Content Creation, the Group was able to make some key changes to its
go-to-market strategy. Historically, each business unit in Content Creation
had its own individual sales personnel managing relationships with their
global channels. In many instances, each business unit engaged with the same
resellers or distributors. The Group had already consolidated our Content
Creation efforts in Australia the previous year, with the new structure
proving highly beneficial in terms of extending leverage and focus within the
reseller community.
Consequently, the Group initiated the same strategy in EMEA, bringing together
several disparate teams into one unified Content Creation sales and marketing
team for all associated brands. The result has again proven to be very
effective. As a result, in the last quarter of this past year, we began to
restructure the US team into a similar unified regional team supporting all
Content Creation brands. We anticipate that these newly formed unified teams
will allow us to forge closer connections with our channel partners and end
users while providing scalability and improved organisational structure as the
Group pursues organic growth and acquisitions.
Our eCommerce platform has also been completely rebuilt during the year,
initially for the Focusrite brands, but now giving us a platform for all our
Content Creation brands and to provide a more robust route for our direct to
consumer channel.
Summary and Outlook
Despite challenging macroeconomic conditions, our Group has delivered a
resilient performance, achieving revenue and profit figures in line with
market expectations. With our existing portfolio, planned product launches
throughout the coming year, streamlined go-to-market strategies, and shared
back-office support structures, we are well-positioned to embrace the
opportunities and challenges the new year presents.
Current market conditions for our Content Creation division remain difficult
and our revenue year to date has been impacted by a degree of sales channel
de-stocking. However, underlying demand for our products, as evidenced by
customer registrations, remains satisfactory. Performance in our Audio
Reproduction division remains strong.
Overall, at this early stage and as we head into our key holiday season, our
expectations for the year remain unchanged.
Whilst we remain mindful of the significant global economic and political
challenges, as well as ongoing cost pressure in the supply chain, we have
successfully built our inventory positions back to more normalised levels and
have robust plans for future component supplies as well. With key new products
launched towards the end of FY23 and more introductions planned for the year
ahead, we remain confident in the organic growth potential of existing brands.
Additionally, with the benefit of our cash generation, the Group has
demonstrated its ability to execute on our proactive M&A strategy,
carefully considering acquisitions that not only enhance earnings but also
expand our market potential, increase our R&D capabilities, and contribute
both scale and dynamism to our business.
We remain optimistic about our future prospects.
Tim Carroll
Chief Executive Officer
Financial Review
Overview
Against a challenging market, the Group has seen revenues decline by 2.9% and,
despite a stronger gross margin, adjusted EBITDA has reduced by 7.4%, with a
decline of 23% in adjusted diluted earnings per share ('EPS').
Income statement
2023 2023 2023 2022 2022 2022
£m £m £m £m £m £m
Adjusted Non-underlying(1) Reported Adjusted Non-underlying(1) Reported
Revenue 178.5 - 178.5 183.7 - 183.7
Cost of sales (93.7) - (93.7) (100.4) - (100.4)
Gross profit 84.8 - 84.8 83.3 - 83.3
Administrative expenses (54.4) (6.1) (60.5) (48.6) (6.0) (54.6)
Operating profit 30.4 (6.1) 24.3 34.7 (6.0) 28.7
Net finance income (expense) (1.6) - (1.6) 1.9 - 1.9
Profit before tax 28.8 (6.1) 22.7 36.6 (6.0) 30.6
Income tax expense (6.2) 1.3 (4.9) (6.0) 0.2 (5.8)
Profit for the period 22.6 (4.8) 17.8 30.6 (5.8) 24.8
(1) Non underlying costs and income as defined in note 2 and note 7 to the
financial statements.
Revenue
Revenue for the Group decreased by 2.9% to £178.5 million from £183.7
million; adjusting for acquisitions and constant currency, this is an organic
decline of 9.5%. Sonnox was acquired in December 2022 and FY23 included eight
months of revenue. Linea Research was acquired in March 2022 and FY22 includes
six months of revenue.
The Euro average exchange rate was €1.15 (FY22: €1.18). Sterling has
weakened against the US dollar from an average of $1.31 in FY22 to $1.21 in
FY23. This has had the impact of increasing reported revenue but the currency
impact is broadly neutral at a gross profit level as the majority of costs
of sale are also incurred in US dollars.
FY23 Revenue FY23 Acquisition FY23 Organic FY22 FY22 Exchange FY22 Constant Currency FY23 FY23
Revenue Reported Growth OCC Growth(1)
Focusrite 86.3 - 86.3 97.2 5.8 103.0 -11.2% -16.2%
Novation 16.6 - 16.6 20.6 1.1 21.7 -19.5% -23.5%
ADAM Audio 18.5 - 18.5 17.8 0.9 18.7 3.9% -1.1%
Sequential 14.5 - 14.5 16.2 0.9 17.1 -10.5% -15.2%
Sonnox 1.1 (1.1) - - - - n/a n/a
Content Creation 137.0 (1.1) 135.9 151.8 8.7 160.5 -9.7% -15.3%
Audio Reproduction 41.5 (2.3) 39.2 31.9 0.9 32.8 30.1% 19.6%
Total 178.5 (3.4) 175.1 183.7 9.6 193.3 -2.9% -9.5%
(1) OCC (organic constant currency growth). This is calculated by comparing
FY23 revenue to FY22 revenue adjusted for FY23 exchange rates and the impact
of acquisitions.
The reported full-year revenue declined by 2.9%, but there was an improvement
compared to the half-year (HY23: -7.2% reported). Revenue in the second half
of the year grew by 1.5% compared to the same period in FY22. In the first
half of the year, high inventory levels in our sales channel, resulting from
industry-wide restocking in FY22, and the impact of cost of living issues on
demand led to destocking. However, as stock levels began to normalise in the
second half, revenue returned to growth, supported by the launch of new
products, including the 4th generation Scarlett Audio Interface,
which although released in August was sold into resellers in the preceding
quarter.
The overall revenue figures mask a more complex result across our divisions,
but pleasingly highlight the benefits of an increasingly diverse portfolio
across the Group. Our Content Creation brands were faced by difficult markets,
down by approximately 20% on the prior year according to many trusted market
sources. This compares with Audio Reproduction, which is still benefiting from
the increased demand for live experiences following the end of COVID-19,
particularly at the premium end of the market in which our brands
predominantly operate.
Within Content Creation, our biggest business unit, Focusrite, returned to
growth in the second half following destocking in the first half and supported
by the successful launch of our 4th generation range of Scarlett interfaces.
This brand finished the year 16.2% lower on an organic constant currency basis
and 11.2% lower on a reported basis at £86.3 million (FY22: £97.2 million).
Our Novation synthesizer brand, which had fewer new products compared to other
brands to offset, reported a decline in line with the overall market. Both
ADAM Audio and Sequential were adversely impacted in FY22 by component
shortages, limiting supply and, as a result, had weak comparators in the first
half. This resulted in stronger growth in the first half, and a reported
decline in the second half. For the full year, ADAM Audio's revenue benefited
from improved supply of the new A Series and the ongoing popularity of the
entry level T Series monitor range. This resulted in revenue growth of 3.9%
for the year (-1.1% on an organic constant currency basis) to £18.5 million
(FY22: £17.8 million).
Sequential operates at the premium end of the synthesizer market, with
products selling for approximately $3,000 to $5,000; as a result, they
were particularly hard hit by the cost of living crisis and experienced a
decline of reported revenue of 10.5% (-15.2% on an organic constant
currency basis) for the year. This appears to be ahead of the overall market
decline according to market sources, due to the launch of its new products,
such as the Trigon 6 and OBX modules, with Sequential retaining their premium
rating.
Sonnox was acquired by the Group in December 2022, and contributed £1.1
million in revenue during FY23. This result was in line with expectations.
Towards the end of the year Sonnox launched as planned its new Voca plug-in
contributing to the revenue result.
Audio Reproduction began the first half of the year with strong growth of
50.7%, finishing the year with reported revenue growth of 30.1% (19.6% on an
organic constant currency basis). This translates into revenue of £41.5
million for the year, compared with £31.9 million in FY22. The resurgence in
live sound following COVID-19 lockdowns helped drive this growth, as did the
extension of the Optimal Audio range, which contributed £1 million to Audio
Reproduction's overall sales. The standout result for the year has been the
strength of Linea Research, which has doubled output since joining the Group
in March 2022, following investment from Martin Audio in delivering a new ERP
system and supply chain support.
FY23 Revenue FY23 Acquisition FY23 Organic FY22 FY22 Exchange FY22 Constant Currency FY23 FY23
Revenue Reported Growth OCC Growth(1)
North America 77.7 (1.5) 76.2 74.5 4.6 79.1 4.3% -3.8%
EMEA 69.5 (1.4) 68.1 70.1 1.5 71.6 -0.8% -4.9%
Rest of the World 31.3 (0.5) 30.8 39.1 3.5 42.6 -19.9% -27.7%
Total 178.5 (3.4) 175.1 183.7 9.6 193.3 -2.9% -9.5%
(1) OCC (organic constant currency growth). This is calculated by comparing
FY23 revenue to FY22 revenue adjusted for FY23 exchange rates and the impact
of acquisitions.
North America represents 44% of the Group's revenue and saw a 3.8% organic
constant currency revenue decline, impacted by destocking and a weaker market
hit by cost of living issues. Due to the strength of the dollar during the
year, reported revenue increased by 4.3%. Content Creation brands declined
year on year by 2.2% reported (-8.2% organic constant currency). However,
Audio Reproduction experienced strong growth of 56.9% (reported) and 31.9%
organic constant currency. The combination of new products, a strong supply
chain and investment in the market have all served to deliver a firm
foundation for growth in the US for Audio Reproduction.
EMEA, which represents 39% of Group revenue, declined by 0.8% (-4.9% on an
organic constant currency basis) to £69.5 million. As within the US market,
Audio Reproduction was strong, delivering 17.1% growth (9.6% on an organic
constant currency basis), with production from Linea Research helping to
deliver improved levels of product availability compared with the competition.
Content Creation brands declined by 5.4% (-8.6% on an organic constant
currency basis), with ADAM Audio delivering a return to growth and Focusrite
remaining stable, but with Sequential and Novation contributing to the
overall decline.
ROW comprises mainly APAC and LATAM and represents the remaining 17% of Group
revenue. The APAC region experienced a particularly challenging year, with
prolonged lockdowns in China, and high levels of stock at distributors as a
result of the lower demand. Overall, the region was down 19.9% compared with
FY22 (27.7% on an organic constant currency basis). Pleasingly, our Audio
Reproduction division saw growth, with all brands reporting double digit
increases as demand for experiences increased. This resulted in growth of
26.6% in the region (23.1% organic constant currency), however, this was not
enough to offset the 35.3% decline across Content Creation (42.7% organic
constant currency).
Segment profit
Segment profit is disclosed in more detail in note 8 to the Group's financial
statements, 'Business Segments'. The revenue is compared with the directly
attributable costs to create a segment profit. The only major change is the
inclusion of Sonnox as a separate segment following its acquisition in
December 2022.
Gross profit
Gross margin improved during FY23 increasing to 47.5%, up from 45.3% in FY22,
which had been impacted by high freight rates and the increased costs from
component spot buys. During the reported year freight rates returned to
pre-COVID-19 levels, benefiting margin by 3.9% points, and component cost spot
buys reduced significantly with a further 0.8% point benefit. This was
partially offset by increased promotions across the year, with heavier
discounts for longer promotional periods offered than historically had been
the case. These were implemented as a response to the increased pressures
caused by the cost of living crisis and high levels of stock in the channel.
Altogether with cost increases this resulted in a 3.2% point decline in our
core product margin, which partially offset the freight benefits.
Promotional levels in FY24 are expected to return to more normal levels for
current ranges, with some ongoing activity to support the 3rd generation of
Scarlett, with a planned transition to be marketed as a lower-cost alternative
at a different price point, similar to Apple's approach to iPhone transitions.
In addition, the new 4th generation Scarlett will be mildly dilutive to
margin, as new products do not yet attract the production efficiencies at
scale that well-established products typically achieve. As a result, we expect
overall gross margin to be broadly flat in the next year.
Administrative expenses
Administrative expenses consist of sales, marketing, operations, the
uncapitalised element of research and development and central functions such
as legal, finance and the Group Board. These expenses were £60.5 million, up
from £54.6 million last year. These costs also include depreciation and
amortisation of £8.1 million (FY22: £7.0 million), amortisation of acquired
intangible assets of £4.5 million (FY22: £5.1 million) and non-underlying
items of £1.7 million (FY22: £0.9 million), which are discussed in more
detail below. Excluding non-underlying items and depreciation and
amortisation, administrative costs were £46.3 million (FY22: £41.6 million),
an increase of £4.7 million over the prior year.
Acquisitions partially contributed to this increase, with the addition of
Sonnox contributing £0.8 million and the annualisation of Linea Research a
further £0.4 million. Audio Reproduction has invested in additional staff to
support the increase in production and to drive sales and marketing efforts
globally, including increased trade show activity during the year.
During a time of heightened inflation, we have sought to retain staff and
structured pay increases with the aim of directing resources to those most
impacted by cost pressures. With approximately 60% of our cost base relating
to labour costs, this has resulted in an inflationary increase of around £1.4
million across the year. Changing assumptions about the vesting of share-based
payments has resulted in a £0.3 million credit this year (FY22: £1.3m
charge), which is not expected to repeat next year, but was offset this year
by the increase in bonuses from a lower level in FY22.
We are now a much larger and more complex international Group and so have
invested during this year in strengthening our infrastructure. Thes
investments include cyber security and a new eCommerce platform for the
Focusrite brands, capable of being scaled across all of Content Creation. As
part of our return to work programme, we have also invested in the Group's
office space, with a new office for the Focusrite brands and refurbished
offices for both Martin Audio and ADAM Audio. This has resulted in one-off
costs of £0.4 million due to the disruption which are not expected to repeat
in FY24.
Adjusted EBITDA
EBITDA is a non-GAAP measure, but it is widely recognised in the financial
markets and it is used (as adjusted for non-underlying items) as a key
performance measure and as the basis for some of the incentivisation of senior
management within the Group. Adjusted EBITDA decreased from £41.7 million in
FY22 to £38.6 million in FY23. This was primarily as a result of the lower
sales and overhead cost factors described above.
2023 2023 2023 2022 2022 2022
£m £m £m £m £m £m
Adjusted Non-underlying Reported Adjusted Non-underlying Reported
Operating profit 30.4 (6.1) 24.3 34.7 (6.0) 28.7
Add - amortisation of intangible assets 5.5 4.4 9.9 4.8 5.1 9.9
Add - depreciation of tangible assets 2.7 - 2.7 2.2 - 2.2
EBITDA 1 (#_ftn1) 38.6 (1.7) 36.9 41.7 (0.9) 40.8
1 EBITDA is defined as earnings before tax, interest, depreciation, and
amortisation. Adjusted EBITDA includes items treated as non-underlying which
are explained in note 5 to the Consolidated Financial Statements.
Depreciation and amortisation
Depreciation of £2.7 million (FY22: £2.2 million) was charged on tangible
fixed assets on a straight-line basis over the assets' estimated useful lives.
This increased in the year due to the investment in the office refurbishments
and resultant increases in fixtures and fittings, which are written off over
three to five years. Amortisation on non-acquired intangibles is mainly
charged on capitalised development costs, writing off the development cost
over the life of the resultant product. Development costs related to an
individual product are written off over a periods of between two and ten
years, reflecting the different lifespans of the products across our brands.
Normally, the capitalised development costs are greater than the
amortisation, reflecting the continued investment in product development in a
growing group of companies.
During FY23, capitalised development costs were £8.6 million (FY22: £7.9
million), compared with amortisation of £4.8 million (FY22: £3.9 million).
Development cost spend is slightly higher than the prior year, mainly due to
inflation, as the implementation of our product roadmap continues across all
brands. In addition, this year we acquired further licences to utilise certain
technologies, which have added £1.7 million to intangible assets, with
further investment expected in FY24.
The amortisation of the acquired intangible assets totalled £4.4 million
during the period (FY22: £5.1 million) and has been disclosed within adjusted
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, excluding this
gross amortisation was £5.4 million.
Non-underlying items
In FY23, the Group acquired Sonnox, with associated acquisition costs relating
to the transaction of £0.4 million (FY22: £0.6 million relating to the Linea
Research acquisition). During the year earnouts relating to the Linea Research
and Sequential acquisitions were completed and paid out resulting in a cost of
£0.8 million (FY22: £1.2 million relating to the Sequential earn out).
During the year, the Group also undertook a restructuring exercise to create
regional sales and marketing teams across the Content Creation division. This
has resulted in costs of £0.5 million paid in the year. In FY22,
non-underlying costs were offset by £0.8 million of income relating to
the sale of a trademark. Non-underlying items also include amortisation of
the intangible assets from acquisitions of £4.4 million (FY22: £5.1
million). This has increased due to the inclusion of Sonnox and the
annualisation of Linea Research on amortisation of brands and technology, but
has been offset by the one off adjustment of amortisation of £1.0 million
incorrectly charged in prior years on assets not yet brought into use. See
notes 5 and 15 to the Group's financial statements for more information.
Foreign exchange and hedging
Sterling has remained relatively stable compared to the euro between years,
but has the average rate has weakened against the US dollar.
Exchange rates 2022 2022
Average
USD:GBP 1.21 1.31
EUR:GBP 1.15 1.18
Year end
USD:GBP 1.27 1.16
EUR:GBP 1.17 1.16
During the year, Sterling has weakened against the average US dollar rate from
$1.31 to $1.21. The US dollar accounts for 40% of Group revenue but over 80%
of the cost of sales, so this has resulted in increased revenue but has a
neutral impact in terms of gross profit. The Euro comprises approximately a
quarter of revenue but little cost. The Group has continued entering into
forward contracts to convert Euro to Sterling. The policy adopted by the Group
is to hedge approximately 75% of the Euro flows for the current financial year
(year ended August 2023) and approximately 50% of the Euro flows for the
following financial year (FY24). In FY23, approximately three-quarters of Euro
flows were hedged at €1.16, and the average transaction rate was €1.15,
thereby creating a blended exchange rate of approximately €1.16. In FY22,
the equivalent hedging contracts were at €1.13, compared to a transactional
rate of €1.18 and so creating a blended exchange rate of €1.14.
Finance costs of £1.6 million (FY22: £2.3 income) are made up of the
interest on the Group's revolving credit facility ('RCF') draw downs.
FY22 included a large gain from retranslation of US dollar balances within
the Group.
Corporation tax
In FY23, the corporation tax charge totalled £4.9 million on reported profit
before tax of £22.7 million, an effective tax rate of 21.8% (FY22: 18.9%).
Adjusting for non-underlying items, the effective tax rate is 21.7% (FY22:
19.6%) on adjusted profit before tax of £28.9 million. Going forward, we
expect the effective tax rate to remain broadly in line with the UK corporate
tax rate.
Earnings per share
The basic EPS for the year was 30.4 pence, down 28.5% from 42.5 pence in FY22.
This decrease is due to a combination of factors: the reduction in operating
profits, the non-repeat of a significant foreign exchange gain in finance
income in FY22 due to an exceptionally strong dollar at the year end, and the
increase in the UK corporate tax rate from 19% to 25% from April 2023. The
alternative measure, including the dilutive effect of share options, is the
adjusted diluted EPS. This decreased by 23.0% from 49.9 pence in FY22 to
38.4 pence in FY23.
2023 2022 Change
pence pence %
Basic 30.4 42.5 (28.5)%
Diluted 30.2 42.1 (28.3)%
Adjusted(1) basic 38.7 50.5 (23.4)%
Adjusted(1) diluted 38.4 49.9 (23.0)%
1 Adjusted for amortisation of acquired intangible assets, and other adjusting
items. See reconciliation note 2 to the financial statements
Balance sheet
2023 2022
£m £m
Non-current assets 95.9 87.5
Current assets
Inventories 55.3 48.3
Trade and other receivables 32.9 28.9
Cash 26.8 12.8
Bank loan (28.1) (13.1)
Current liabilities (including bank loans) (45.4) (41.1)
Non-current liabilities (18.9) (18.0)
Net assets 118.5 105.3
Non-current assets
The non-current assets comprise: goodwill of £16.1 million, other intangible
assets of £66.7 million, and property, plant and equipment of £12.5 million.
The goodwill of £16.1 million (FY22: £13.7 million) has increased due to the
acquisition of Sonnox this year for a total consideration of £7.2 million
including goodwill of £2.7 million.
The other intangible assets of £66.7 million (FY22: £62.0 million) consist
mainly of capitalised research and development costs and acquired intangible
assets relating to product development and brand. The capitalised development
costs in use have a carrying value of £10.0 million (FY22: £7.1 million),
which has increased with the launch of 32 products this year. Products and
technology under development comprising £8.5 million (FY22: £7.3 million),
of which £2.0 million relates to acquired assets under development (FY22:
£1.5 million). In the year £8.6 million of costs were capitalised (FY22:
£8.3 million) and underlying amortisation was £4.8 million (FY22: £3.9
million). Approximately 65% of development costs are capitalised and they are
amortised over the life of the relevant products. Acquired capitalised
development costs had a carrying value of £24.2 million (FY22: £22.8
million) at year end. These have increased due to the inclusion of Sonnox's
development costs of £4.7 million less the annual amortisation charge of
£3.5 million.
The remaining intangible assets, totalling £23.9 million (FY22: £24.6
million), include brands acquired as part of the acquisitions, to be amortised
over ten years for ADAM Audio, 20 years for Martin Audio, 15 years for
Sequential and Linea Research and 10 years for Sonnox.
Tangible assets have increased this year from £10.9 million at the end of
FY22 to £12.5 million at the end of FY23, due to the refurbishment costs this
year across three of our businesses. Focusrite has moved to a new office in
High Wycombe, providing space for growth and an engaging working environment
designed specifically with hybrid working in mind. Martin Audio and ADAM Audio
offices have both been refurbished as part of their return to work programme.
The work at Martin Audio has also built improved34 demonstration spaces and
facilities for research and development.
Working capital
At the end of the year, working capital was 24.0% of revenue (FY22: 19.9%).
This increase can be attributed in part to planned phasing of stock levels for
both generations of Scarlett. The older generation will be marketed as a
lower-cost alternative through selected partners and our own eCommerce channel
and, as a result, we expect inventory levels to reduce during FY24. Debtor
balances are also high due to strong sales in the final quarter of the year,
but with effective credit management there have been minimal issues with
collections or bad debts during the year. Creditors continue to be paid on
time.
Cash flow
( )
2023 2022
£m £m
Cash and cash equivalents at beginning of year 12.8 17.3
Foreign exchange movements (1.0) 0.7
Cash and cash equivalents at end of year 26.8 12.8
Net increase/(decrease) in cash and cash equivalents (per Cash Flow Statement) 15.0 (5.2)
Change in bank loan (15.2) (13.2)
Decrease in Net Cash (0.2) (18.4)
Add back: equity dividend paid 3.6 3.2
Add back: acquisition of business (net of cash acquired) 7.2 10.9
Free cashflow 10.6 (4.3)
Add back: non-underlying items 1.7 0.9
Underlying free cashflow(1) 12.3 (3.4)
(1) Defined as cashflow before equity dividends, acquisition of subsidiary
(net of cash acquired) and adjusting items.
The net debt balance at the year end was £1.3 million (FY22: net debt £0.3
million). In September 2023, the Group signed a new £50 million RCF, with an
additional £50 million uncommitted facility with HSBC and NatWest due to
expire in September 2027. At the year end, the Group had drawn down £28.2
million of the RCF (FY22: £13.2 million) to fund the acquisitions of Sonnox
as well as support our working capital requirement.
The underlying free cash flow for the full year was a cash inflow of £12.2
million (FY22: cash outflow of £3.4 million), leading to a year end net
debt position of £1.3 million. Within this, the movement in working capital
included an outflow of £6.6 million (FY22: outflow of £26.9 million), due
largely to stock holding for product transitions and debtor phasing. Capital
investment this year totalled £14.4 million (FY22: £12.5 million); of this,
£9.2 million related to capitalised R&D, reflecting the Group's ongoing
commitment to product development. We expect this level of investment to
continue into FY24 to support the Group's product roadmap.
Dividend
The Board is proposing a final dividend of 4.5 pence per share (FY22 final
dividend: 4.15 pence), which would result in a total of 6.6 pence per share
for the year (FY22: 6.0 pence). This represents an adjusted earnings dividend
cover of 5.8 times (FY22: 8.7 times).
Summary
FY23 was marked by economic challenges including macroeconomic instability and
industry-wide inventory surpluses. Throughout this period, the Group adhered
to its strategic path. FY24 begins with the finalisation of a product
transition of our primary Scarlett range, a restructured sales and marketing
team, a new banking facility in place and a rebuilt eCommerce platform. The
portfolio is also broader by introducing a Sonnox to the Focusrite family.
These initiatives provide us with the structure and scale to deliver on our
future plans.
Sally McKone
Chief Financial Officer
Principal Risks and Uncertainties
Overview
Effective risk management is key to enabling and supporting our business
strategy and commitments to our customers, community, climate and environment.
We are committed to conducting our business responsibly, safely and legally,
while making risk-informed decisions when responding to opportunities or
threats that present themselves. The Board and General Executive Committee are
responsible for the effective management of risk across the Focusrite Group.
Principal risks are those significant risks that to pose the most potential
threat to our strategy, performance, viability, people, impact on the
environment and/or reputation now or in the near and distant future.
The table below sets out our principal risks. Please note, this list does not
include all of our risks. Risks which change or are not presently known or are
currently considered to be less material, may also have adverse effects.
Principal risk/uncertainty Mitigation
Business strategy development and implementation (No risk movement) Change vs. prior year and residual risk
The risk remains relatively stable as we monitor drivers for macroeconomic
changes and implement appropriate response strategies to manage their impact
The risk of not identifying and reacting to changing market conditions, not on the Focusrite Group's performance. This has enabled us to ensure that the
being able to implement our acquisition strategy or bring efficiencies to our risk is managed appropriately in line with any changes to external conditions.
route to market strategy can impact our growth.
Impact on the business
Ensuring that our products win customers is key to being able to keep up with
inflation and Group growth.
Risk Mitigation
The Group has a multi‑stranded resilience plan with an increasingly diverse
range of products which ensures there are various revenue streams to enable
Group growth and an increasing number of direct to market routes, which
enables us to reach more customers.
Product supply (Risk increasing) Change vs. prior year and residual risk
Exposure to risks associated with our product supply increased in FY23 due to
external changes over which we have little influence.
Risks associated with market demand, including the availability of materials
to manufacture products and our ability to sell and deliver products into new
and existing key markets.
Impact on the business
The continuing conflict in Ukraine and the Middle East and rising geopolitical
tensions as well as increased volatility and uncertainty in the international
trading environment could cause disruption of global supply chains and affect
macroeconomic conditions and our ability to sell our products.
Risk mitigation
In addition to diversifying our product portfolio we also continually monitor
and assess:
• our ability to access key markets;
• relationships with our sales partners and their expectations of market
demand;
• geopolitical and macroeconomic developments and trends; and
• weather and/or climate related vulnerabilities.
Product Innovation (Risk increasing) Change vs. prior year and residual risk
We have increased our user testing and influencer endorsements to test and
exalt our products to ensure that they meet the current market expectations.
Risks associated with our ability to
design, manufacture and position
Impact on the business
our products to generate returns
A design strategy that does not result in innovative products will lead to a
and value for stakeholders in a fast- changing industry. loss of value which in turn will impact our ability to deliver returns to
stakeholders and fund our investment and growth opportunities and expose our
product portfolio to climate-related risks, movements in commodity prices or
inflationary pressures and other macroeconomic factors.
Risk mitigation
The Group has developed resilient strategies, processes and
frameworks to grow and protect our product portfolio. Our business development
strategy focusses on enhancing our product portfolio to ensure the Group
retains its competitive advantage and identifies threats to or opportunities
for our products.
People (Risk increasing) Change vs. prior year and residual risk
The challenges arising from external conditions, in particular the spike in
cost of living, poses a threat to the wellbeing of our people and our ability
People are critical to the Group's ability to meet the needs of its customers to retain people buoyed by the favourable jobseekers' market.
and end users and achieve its goals as a business.
Impact on the business
We continue to rely on key individuals to contribute to the
Failure to attract, retain and develop senior managers and technical
personnel, and to embed our values in our culture, could impact on the success of the Group. We need our people to develop their skills in order to
delivery of our purpose and business performance. future-proof the Group's business whilst being able to attract, retain and
motive people.
Risk Mitigation
Training and development programmes are established across the Group to
develop the skills required to fulfil the Group's strategic objectives.
Succession planning for key roles and the identification of any new skillsets
are reviewed by the Board.
Information security, data privacy, business continuity and cyber risks (Risk Change v prior year and residual risk
increasing)
Investment in our cyber shields and efforts to support and drive employee
awareness of phishing attacks and how to respond appropriately have continued.
The unencumbered availability and Impact on the business
integrity of the Group's IT systems and the threat of a cyber security breach Disruption to our information systems may have a significant impact on our
or a malicious attack is an ongoing and critical threat to successful trading. sales, cash flows and profits.
A cyber security breach could lead to unauthorised access to, or loss of,
personal and/or sensitive information.
Risk MitigatioThe Group's business continuity plan has been updated.
Regular system and security patching is in place, including the use of
vulnerability scanning to identify security weaknesses.
We also run regular phishing campaigns to raise awareness and such exercises
are supported by training and guidance.
.
Climate Change (Risk increasing) Change vs. prior year and residual risk
Climate change is a concern for customers and stakeholders alike as well as
being an area of increasing scrutiny and regulation.
Climate change is a multi-faceted risk to the business at many levels. Failure
to deliver on climate change initiatives, particularly around the reduction in
the use of energy and carbon within required timescales, will have short-,
medium- and long-term climate change risks to residents, businesses and This year, we have built on our TCFD work from last year and have concluded
infrastructure. that in the short term (up until 2030), we are largely shielded from the worst
physical effects of climate change, but will continue to monitor our exposure
to climate-related risks on a regular basis.
Impact on the business
Reduced availability of raw materials could have several effects, from
fluctuating and rising prices to uncertainty in the supply chain to our having
to use lower-quality raw materials in our products.
We expect regulation and the possibility taxes on less sustainable materials
or processes to increase.
We are also aware that our customers expect us to lead the way in running a
sustainable business and it will have an impact on our reputation if we fail
to adequately address these concerns.
Risk mitigation
Managing our operations towards a low-carbon future in order to sustain the
longevity and prosperity of the business, remains one of our key mitigation
efforts.
Sustainability criteria are embedded throughout the product design process in
order to mitigate risks and identify opportunities.
We have implemented systems to monitor and reduce the environmental impact of
our operations and ensure compliance with environmental legislation.
Macroeconomic/Geopolitical conditions (Risk increasing) Change vs. prior year and residual risk
Changing geopolitical situations, in particular the effect of tensions in
various parts of the world, have resulted in greater volatility.
The effect of the difficult global macro-economic situation, rising cost
inflation and the ongoing impact of the war in Ukraine and the Middle East is
predicted to heavily impact trading. The broader global political situation is
also something that we monitor. Impact on the business
Political dynamics, which are outside of our control, are driving economics
which are likely to have a lasting effect on the global economy.
Risk mitigation
We have continued to build scale and diversification through our expanded
product offerings and geographic reach.
Regular management reviews monitor financial results, end markets, alternative
product supply arrangements and competitor behaviour.
At present, there continues to be a heightened level of macroeconomic
uncertainty relating to cost inflation leading to rising prices, which has
been exacerbated by the war in Ukraine and the Middle East. These are
impacting our customers' disposable income, thereby changing the products they
buy and increasing our operational costs. We understand the short-term risks
and impacts, and we have the right teams, governance, innovative products and
strategies in place to be able to ride out the current storm. The
longer-term impacts remain uncertain and we continue to monitor the associated
risks closely and respond accordingly.
The long-term impacts remain uncertain and we continue to monitor the
associated risks closely and respond accordingly.
Save for business strategy development and implementation all of our principal
risks have increased this year as a result of the impact of the external
macroeconomic and geopolitical situations on trading conditions. We a knock-on
effect on each of our principal risks, in particular the pressure they place
on our supply chains. A deep dive of the Product Supply risk was discussed
at the February 2023 Board meeting and a review of the implications of
manufacturing in China is provided as a case study of the Board's S172
application within the FY23 Annual Report and Accounts.
Changes to Risk Scores vs Prior Year
Information security, data privacy, business continuity and cyber risks Risk
increasing
Organisations are becoming more vulnerable to cyber threats due to the
increasing reliance on computers, networks, programs, social media and data
globally. A relatively small data breach or a common cyber attack has a
massive negative business impact. Whilst the measure we are taking to ensure
our cyber security programme increases each year we, along with many other
businesses, are finding that the frequency and sophistication of cyber
security incidents is increasing.
Product innovation, Product supply, People and Macro-economic/Geopolitical
conditions Risks increasing
There is a heightened level of macroeconomic uncertainty relating to
cost-inflation leading to rising prices which has been exacerbated by the wars
in Ukraine and the Middle East. These are impacting our customers' disposable
income, thereby changing the products they buy and increasing our operational
costs which, together, affects several of our principal risks.
The supply chain risks facing the Group have again changed shape over the last
year. The global business climate is increasingly uncertain, with
manufacturers facing a myriad of challenges, including high energy prices and
unexpected fluctuations in raw material costs as well as the continuing wars
in Ukraine and the Middle East and rising geopolitical tensions disrupting
global supply chains. Many raw materials are becoming harder to secure and
their fluctuating costs can have a significant impact on the profitability and
pricing of products. As the various factors are not expected to be alleviated
in the short term, this will remain a significant risk for the Group.
When it comes to geopolitical tensions we recognise that there is no single
solution but this does not mean that doing nothing is our response. Instead,
we will diversify our strategies to help build a safety net. For examples,
boosting our manufacturing capabilities in order to ensure we can quickly
scale up production should a location become unviable, putting ourselves at
the forefront of developments in the cyber world, not just attacks but also,
how we might harness AI to protect us.
Emerging Risk Themes
Emerging risk themes are reported to the Audit Committee alongside our
principal risks. We conduct horizon scanning to enable a medium- and
longer-term view of potential disruptors to our business. As part of our risk
assessment process, we analyse internal and external sources of emerging risk
themes through review of leading external publications including attending
industry seminars and forums, gathering insights via top-down and bottom-up
risk workshops with internal stakeholders, and seeking professional
consultation where required. We are currently tracking several emerging risk
themes such as political, economic, technological, environment and talent. An
example of an emerging theme that has the potential to impact our position and
requires a plan of action is set out below:
Identified Risk Group's view Actions we will take
AI For the Group it is seen not only as a risk, but also as an opportunity that We will look to harness AI to drive operational and cost efficiencies, as well
can offer advantages in product development, such as efficiency, consistency as strategic business transformation programmes where the opportunity arises,
Widely flagged as a strategic risk and accuracy of processing large amounts of data quickly. whilst being aware of the growing amount of harmful misinformation and
increasingly sophisticated cyber attacks.
Ultimately, we believe that collaboration with our business partners is key to
navigating these uncertain times.
Artificial Intelligence
Risks Benefits
Hacker attacks: Use of AI to create crafted Spear Phishing/impersonation Improved cyber security surveillance and response
attacks using data from public AI systems
Surveillance: External regulations/requirements/laws/knowledge internal Improved time to market
impact/ issue
Data confidentiality: possible accidental sharing/ exposure of company data Improved product information
Data integrity: Incorrect, incomplete or bias data Improved internal processes and cost saving in all areas
Availability: Possible exposure of data/employees leading to system compromise Better informed decisions (internal and external factors including
geo-political)
FORWARD-LOOKING STATEMENTS
Certain statements in this announcement are forward-looking. Although the
Directors believe that their expectations are based on reasonable assumptions,
any statements about future outlook may be influenced by factors that could
cause actual outcomes and results to be materially different.
Consolidated Income Statement
For the year ended 31 August 2023
Note 2023 2022
£000 £000
Revenue 4 178,465 183,733
Cost of Sales (93,616) (100,453)
Gross Profit 84,849 83,280
Administrative Expenses (60,506) (54,619)
Adjusted EBITDA (non-GAAP measure) 38,568 41,663
Depreciation and Amortisation (8,087) (6,991)
Adjusting items:
Amortisation of acquired intangible assets (4,451) (5,116)
Other adjusting items 7 (1,687) (895)
Operating profit 24,343 28,661
Finance income 770 2,286
Finance costs (2,365) (398)
Profit before tax 22,748 30,549
Income tax expense 8 (4,951) (5,773)
Profit for the period from continuing operations 17,797 24,776
Earnings per share
Basic (pence per share) 10 30.4 42.5
Diluted (pence per share) 10 30.2 42.1
The accompanying notes on pages 26 to 37 form part of these abbreviated
financial statements.
Consolidated Statement of Comprehensive Income
For the year ended 31 August 2023
Note 2023 2022
£000 £000
Profit for the period (attributable to equity shareholders) 17,797 24,776
Items that may be subsequently reclassified to the income statement
Exchange losses on translation of foreign operations (1,742) (486)
Gain (loss) on forward exchange contracts 784 (1,009)
Tax on hedging instrument (186) 199
Exchange loss on acquired amortisation (18) -
Total comprehensive income for the period 16,635 23,480
Consolidated Statement of Financial Position
As at 31 August 2023
Note 2023 2022
£000 £000
Assets
Non-current assets
Goodwill 16,138 13,728
Other intangible assets 11 66,709 61,964
Property, plant and equipment 12,495 10,870
Deferred tax assets 533 938
Total non-current assets 95,875 87,500
Current assets
Inventories 55,256 48,340
Trade and other receivables 32,384 28,520
Cash and cash equivalents 26,787 12,758
Current tax asset - 413
Derivative financial instruments 491 -
Total current assets 114,918 90,031
Current liabilities
Trade and other payables (39,703) (36,348)
Other liabilities (1,761) (1,641)
Current tax liabilities (2,619) (1,066)
Provisions (1,270) (1,840)
Bank loan (28,093) (13,054)
Derivative financial instruments - (293)
Total current liabilities (73,446) (54,242)
Net current assets 41,472 35,789
Total assets less current liabilities 137,347 123,289
Non-current liabilities
Deferred tax (10,824) (9,130)
Other liabilities (8,071) (8,843)
Total non-current liabilities (18,895) (17,973)
Total liabilities (92,341) (72,215)
Net assets 118,452 105,316
Capital and Reserves
Share capital 59 59
Share premium 115 115
Merger reserve 14,595 14,595
Merger difference reserve (13,147) (13,147)
Translation reserve (2,757) (1,015)
Hedging reserve 491 (293)
EBT reserve (1) (1)
Retained earnings 119,097 105,003
Equity attributable to the owners of the Company 118,452 84,347
Total Equity 118,452 105,316
The financial statements were approved by the Board of Directors and
authorised for issue on 28 November 2023. They were signed on its behalf by:
Tim
Carroll
Sally McKone
Chief Executive Officer
Chief Financial Officer
Consolidated Statement of Changes in Equity
For the year ended 31 August 2023
Share capital Share premium Merger reserve Merger difference reserve Translation reserve Hedging reserve EBT reserve Retained earnings Total
£000 £000 £000 £000 £000 £000 £000 £000 £000
Balance at 31 August 2021 59 115 14,595 (13,147) (529) 716 (1) 82,539 84,347
Profit for the period - - - - - - - 24,776 24,776
Other comprehensive income - - - - (486) (1,009) - 199 (1,296)
Total comprehensive income - - - - (486) (1,009) - 24,975 23,480
Share based payments deferred tax deduction - - - - - - - (1,131) (1,131)
Share based payments current tax deduction - - - - - - - 723 723
EBT shares issued - - - - - - - 674 674
Share-based payments - - - - - - - 1,120 1,120
Shares withheld to settle tax obligations - - - - - - - (865) (865)
Premium on shares in lieu of bonuses - - - - - - - 202 202
Dividends paid - - - - - - - (3,234) (3,234)
Balance at 31 August 2022 59 115 14,595 (13,147) (1,015) (293) (1) 105,003 105,316
Profit for the period - - - - 17,797 17,797
Other comprehensive income - - - - (1,742) 784 - (204) (1,162)
Total comprehensive income - - - - (1,765) 784 - 17,593 16,635
Share based payments deferred tax deduction - - - - - - - 5 5
Share based payments current tax deduction - - - - - - - (123) (123)
EBT shares issued - - - - - - 1 584 585
Share-based payments - - - - - - (1) (246) (247)
Shares withheld to settle tax obligations - - - - - - - (216) (216)
Premium on shares in lieu of bonuses - - - - - - - 106 106
Dividends paid - - - - - - - (3,609) (3,609)
Balance at 31 August 2023 59 115 14,595 (13,147) (2,757) 491 (1) 119,097 118,452
Consolidated Cash Flow Statement
For the year ended 31 August 2023
2023 2022
Note £000 £000
Operating activities
Profit for the financial year 17,797 24,776
Income tax expense 8 4,951 5,773
Net interest expense (income) 1,595 (1,888)
Loss on disposal of PPE 187 24
Loss on disposal of intangible assets 27 105
Gain on sale of trademark - (830)
Amortisation of intangibles 9,861 9,883
Depreciation of PPE 2,677 2,223
Other non-cash items (229) (369)
Share-based payments credit (charge) (246) 1,313
Operating cashflow before movements in working capital 36,620 41,010
Increase in trade and other receivables (3,599) (12,316)
Increase in inventories (6,916) (27,591)
Increase in trade and other payables 2,922 12,988
Operating cash flows before interest and tax 29,027 14,091
Net interest (1,699) (330)
Income tax paid (1,856) (3,380)
Cash generated by operations 25,472 10,381
Net foreign exchange movements 860 (1,918)
Net cash from operating activities 26,332 8,463
Investing activities
Purchase of property, plant and equipment (3,204) (1,045)
Purchase of intangible assets (2,024) (3,095)
Capitalised R&D costs (9,163) (8,368)
Proceeds from disposal of intangible assets 5 830
Acquisition of business, net of cash acquired (7,153) (10,923)
Net cash used in investing activities (21,539) (22,601)
Financing activities
Proceeds from loans and borrowings 15,226 13,228
Payment of lease liabilities (1,427) (1,168)
Equity dividends paid (3,609) (3,234)
Net cash used in financing activities 10,190 8,826
Net increase (decrease) in cash and cash equivalents 14,983 (5,312)
Cash and cash equivalents at the beginning of the year 12,758 17,339
Foreign exchange movements (954) 731
Cash and cash equivalents at the end of the year 26,787 12,758
Notes to the Final Results
For the year ended 31 August 2023
1. BASIS OF PREPARATION
The financial information set out above does not constitute the company's
statutory accounts for the years ended 31 August 2023 or 2022 but is derived
from those accounts. Statutory accounts for 2022 have been delivered to the
registrar of companies, and those for 2023 will be delivered in due course.
The auditor has reported on those accounts; their reports were (i)
unqualified, (ii) did not include a reference to any matters to which the
auditor drew attention by way of emphasis without qualifying their report and
(iii) did not contain a statement under section 498 (2) or (3) of the
Companies Act 2006
Going concern assumption
The Board of Directors has a reasonable expectation that the Company and the
Group have adequate resources to continue in operational existence and meet
their liabilities as they fall due for a period of at least 12 months from the
approval of these financial statements ('the going concern period').
Accordingly, the financial statements have been prepared on a going concern
basis.
The Group meets its day-to-day working capital requirements from cash balances
and a revolving credit facility of £50.0 million which was renewed in
September 2023 for a four year period with an option to extend for a further
fifth year. The availability of the revolving credit facility is subject to
continued compliance with certain covenants.
The Directors have prepared projected cash flow forecasts for the going
concern period. These forecasts include a severe but plausible downside
scenario, which includes potential impacts from risks identified from the
business including
· Loss of our largest customer, our distributor for Focusrite and
Novation in the US
· Loss of a key contract manufacturer, potentially due to increased
storm intensity, as flagged in our climate risk analysis
Whilst climate change is considered to bring both risks and opportunities to
the Group, as outlined in our ESG section on pages 42 to 58 of our Annual
Report for FY23, we consider the quantifiable risk in the short term to relate
to increased storm intensity, resulting in the potential loss of a distributor
or contract manufacturer and
this is included within our scenarios. The increased geopolitical risk which
could impact our manufacturing partners in China has also been considered, but
has not been modelled, given the considered likelihood and scale of global
sanctions would not deem this a plausible scenario.
The base case covers a period of at least 12 months from the date of signing
and includes demanding but achievable forecast growth. The forecast has been
extracted from the Group's FY24 budget and three-year plan for the remainder
of the going concern period.
Key assumptions include:
• Future growth assumptions consistent with the business plans of
each business unit and adjusted for the annualisation of recent acquisitions.
• Working capital requirements in line with historic trends and a
stablisation from the current position
• Continued investment in research and development in all areas of
the Group.
• Dividends consistent with the Group's dividend policy
• No additional investment in acquisitions in the forecast period
• Foreign exchange rates in line with those prevailing as at 31
August 2023
Throughout the period the forecast cash flow information indicates that the
Group will have sufficient cash reserves and headroom on the loan facility to
continue to meet its liabilities throughout the forecast period.
The Directors have modelled severe but plausible downside scenarios of the
risks identified above. This model assumes that purchases of stock would, in
time, reduce to reflect reduced sales, if they occurred. The Group would also
respond to a revenue shortfall by taking reasonable steps to reduce overheads
within its control. In this scenario, a draw down from the loan facility of an
average of around £30 million for a period of 8 months is expected, however
the Group would be expected to remain well within the terms of its loan
facility with the leverage covenant (net debt to adjusted EBITDA in the period
not exceeding the maximum of 2.5x.
Separately, as a reverse stress test, the Directors estimate that if the Group
were to experience a shortfall in revenue of greater than 35% permanently from
the start of the forecast period, leverage could rise to the upper limits
allowed by the banking covenants by August 2024. This scenario includes
consequential reductions in the purchases of stock and dividends However, the
Directors' view is that any scenario of a revenue shortfall of greater than
the severe yet plausible scenario above is not realistic.
In practice, the Group is still currently experiencing stable levels of
consumer registrations and customer demand, and therefore the revenue levels
have been maintained in line with historic trends since year end. The Group
has continued to invest in stock prior to the holiday season, with the Group's
net debt balance increasing from net position of £1.3 million reported at
year end to approximately net debt of £9.6 million at 16 November 2023, which
is expected to improve following the upcoming 2023 holiday season. As a
result, the Directors are confident that the Group and Company will have
sufficient funds to continue to meet their liabilities as they fall due for at
least 12 months from the date of approval of the financial statements and
therefore have prepared the financial statements on a going concern basis.
2 ALTERNATIVE PERFORMANCE MEASURES ('APMs')
The Group has applied certain alternative performance measures ('APMs') within
these financial results. A reconciliation to GAAP measures is provided in the
table below or are cross referenced to tables within the Financial review
section. The APMs presented are used in discussions with the Board, management
and investors to aid the understanding of the performance of the Group. The
Group considers that the presentation of APMs allows for improved insight to
the trading performance of the Group. The Group consider that the term
'Adjusted' together with an adjusting items category, best reflects the
trading performance of the Group.
Adjusting items are those items that are unusual because of their size, nature
or incidence, and are applied consistently year on year. The Directors
consider that these items should be separately identified within their
relevant income statement category to enable full understanding of the Group's
results. Items included are acquisition costs, earnout payable to employees of
acquired businesses, profit on sale of trademarks and restructuring costs.
The following APMs have been used in these financial results:
• Organic constant currency growth - this is calculated by
comparing current period revenue to prior period revenue adjusted for current
period exchange rates and the impact of acquisitions, shown within the
Financial Review.
• Adjusted EBITDA - comprising earnings (operating profit)
adjusted for interest, taxation, depreciation, amortisation and adjusting
items. This is shown on the face of the income statement.
• Adjusted operating profit - operating profit adjusted for
adjusting items.
• Adjusted earnings per share ('EPS') - earnings per share
excluding adjusting items.
• Free cash flow - net increase/(decrease) in cash and cash
equivalents excluding net cash used acquisitions, movements on the bank loan
and dividends paid.
• Underlying free cash flow - as free cash flow but adding back
adjusting items.
• Net debt - comprised of cash and cash equivalents, overdrafts
and amounts drawn against the RCF including the costs of arranging the RCF.
A reconciliation of all items is provided in the table below
Profit definitions FY23 FY23 FY23 FY22 FY22 FY22 Restated(1)
Adjusted Diluted Earnings Per Share
Adjusted Diluted Earnings Per Share
Adjusted Operating Profit Adjusted Operating Profit
Adjusted EBITDA Adjusted EBITDA
Reported:
Operating Profit 24,343 24,343 28,661 28,661
Profit after tax 17,797 24,776
Add back (deduct)
Underlying depreciation and amortisation 8,087 6,991
Amortisation on acquired intangibles 4,451 4,451 4,451 5,116 5,116 5,116
Acquisition costs 367 367 367 565 565 565
Gain on sale of trademark - - - (830) (830) (830)
Earnout in relation to acquisition 786 786 786 1,160 1,160 1,160
Restructuring 534 534 534 -
Tax on adjusting items (1,319) (1,376)
Adjusted 38,568 30,481 22,616 41,663 34,672 29,411
Weighted average number of total ordinary shares including dilutive impact 58,953 58,917
Adjusted diluted EPS 38.4 49.9
(1) Restated to include the deferred tax credit arising on the amortisation of
acquired intangibles, which was not previously included.
Cashflow definitions FY23 FY23 Adjusted free cash flow FY22 FY22
Adjusted free cash flow
Free cash flow Free cash flow
Net increase (decrease) in cash and cash equivalents during the year 14,983 14,983 (5,312) (5,312)
Add back dividends paid 3,609 3,609 3,234 3,234
Add back cash outflow in relation to acquisition of business 7,153 7,153 10.923 10,923
Change in bank loan (15,226) (15,226) (13,228) (13,228)
Add back; adjusting items - 1,687 - 895
Free cashflow/Adjusted free cashflow 10,519 12,206 (4,383) (3,488)
Definition of net debt FY23 FY22
Net debt Net debt
Cash and cash equivalents 26,787 12,758
Bank loan (28,192) (13,228)
RCF arrangement fee 99 174
Net debt (1,306) (296)
3 acquisition of a subsidiary
On 19 December 2022, the Group completed the acquisition of 100% of the share
capital of Sonnox Limited ("Sonnox"). The total gross cash consideration was
£9.1 million paid in full on completion. The acquisition was funded by a
drawdown of £9.2 million on the existing revolving credit facility of £40
million with HSBC and NatWest. Sonnox had £1.9 million of cash at the
acquisition date such that the net cash consideration was £7.2
million.
Sonnox is a well-established and acclaimed brand in the audio industry. Its
range of innovative and award-winning plugins are used in a wide range of
audio applications including mixing, mastering, live sound, broadcast, TV and
film, and even scientific and forensics projects.
For the period between the acquisition date and 31 August 2023, Sonnox
contributed revenue of £1.1 million and a profit before tax of £0.2 million
to the Group. If the acquisition had occurred on 1 September 2022, management
estimates that Sonnox's revenue would have been £2.4 million and profit
before tax for the period would have been £1.2 million.
In 2022 the Group purchased Linea Research for £12,227,000, including cash of
£1,354,000, resulting in acquired intangible assets additions of £6,500,000
and goodwill of £3,387,000 arising due to this business combination.
Acquisition-related costs
The Group incurred acquisition-related costs of £367,000 on legal fees and
due diligence costs relating to the acquisition of Sonnox. These have been
included in adjusting item costs to give investors a better understanding of
the costs related to the acquisition of Sonnox. Additionally, because of their
size, nature and the fact they vary from acquisition to acquisition, the Group
considers it a better reflection of the trading performance to show these
separately.
Identifiable assets acquired and liabilities assumed
The following table summarises the recognised amounts of assets acquired, and
liabilities assumed at the date of acquisition:
Recognised values on acquisition £000
Developed technology 4,700
Technology and patents in development 450
Brand 400
Software/website 3
Intangible assets 5,553
Property, plant and equipment 36
Cash 1,942
Working capital 265
Acquired deferred tax liability (11)
Deferred tax liability (1,373)
Net identifiable assets and liabilities at fair value 6,412
Goodwill recognised on acquisition 2,683
Consideration paid 9,095
The acquired deferred tax liability has been estimated by applying the uplift
in asset fair value to the average expected corporate tax rates over the life
of the assets.
Measurement of fair values
The valuation techniques used for measuring the fair value of material assets
acquired were as follows:
Assets acquired Valuation technique
Property, plant and equipment Cost approach
Developed Technology Income approach (multi-period excess earnings method "MEEM")
The key assumption used is the forecast revenues attributable to the
existing asset.
Technology and patents in development Replacement cost approach
The key assumption is the estimated completion percentage
Brand Income approach (relief from royalty method)
The key assumption used is the forecast revenues attributable to the existing
asset.
Goodwill
The goodwill recognised is attributable to:
· the skills and technical talent of the Sonnox workforce;
· income growth potential from new products, future relationships
and a proportion of synergies;
· alignment to the Group's existing customer base; and
· strong strategic fit.
As a result of the strong strategic fit, we expect revenue and cost synergies
to result for Focusrite brands as a result of this transaction. Therefore, a
proportion of the goodwill and technology and patents in development
recognised in this transaction will be attributed to Focusrite CGU rather than
the Sonnox CGU.
Intangible assets sensitivity analysis
In assessing the estimated useful life of the intangible assets, management
considered the sensitivity in the forecast sales on the valuation of the
developed technology and brand. The following table details the sensitivity to
a 10% increase and decrease in the sales forecast and related cost of sales
impact this would have on the valuation of the assets.
Valuation impact
Asset Cost 10% sales increase 10% sales decrease
Developed technology 4,700 482 (482)
Brand 400 43 (43)
Total 5,100 525 (525)
4 Revenue
An analysis of the Group's revenue by reportable segment and by location of
customer is as follows:
Year ended 31 August 2023 Year ended 31 August 2022
North America EMEA Rest of World Total North America EMEA Rest of World Total
£000 £000 £000 £000 £000 £000 £000 £000
Focusrite 45,724 29,334 11,259 86,317 47,558 30,936 18,692 97,186
Novation 6,078 6,711 3,776 16,565 8,603 8,088 3,892 20,583
ADAM Audio 5,657 10,072 2,720 18,449 3,964 9,036 4,797 17,797
Sequential 7,115 6,309 1,056 14,480 6,300 7,874 2,075 16,249
Sonnox 405 492 242 1,139 - - - -
Content Creation 64,979 52,918 19,053 136,950 66,425 55,934 29,456 151,815
Audio Reproduction 12,684 16,601 12,230 41,515 8,084 14,176 9,658 31,918
Total 77,663 69,519 31,283 178,465 74,509 70,110 39,114 183,733
The amount of revenue sold to external customers in the UK was £20,782,000
(2022: £21,830,000).
5 Business segments
Information reported to the Board of Directors for the purposes of resource
allocation and assessment of segment performance is focused on the main
product groups which the Group sells. Similarly, the results of Novation and
Ampify also meet the aggregation criteria set out in IFRS 8 Segmental
Reporting. The Group's reportable segments under IFRS 8 are therefore as
follows:
Focusrite - Sales of Focusrite and
Focusrite Pro branded products
Novation - Sales of Novation or Ampify
branded products
ADAM Audio - Sales of ADAM Audio branded products
Martin Audio - Sales of Martin Audio, Optimal Audio
and Linea Research branded products
Sequential - Sales of Sequential branded
products
Sonnox - Sales of Sonnox branded
products
Segment revenues and results
The accounting policies of the reportable segments are the same as the Group's
accounting policies described in note 3 of the full Annual Report. Segment
profit represents the profit earned by each segment without allocation of the
share of central administration costs including Directors' salaries,
investment revenue and finance costs, and income tax expense. This is the
measure reported to the Board of Directors for the purpose of resource
allocation and assessment of segment performance.
Central administration costs comprise principally the employment-related costs
and other overheads incurred by the Group. Also included within central
administration costs is the credit relating to the share option scheme of
£282,000 for the year ended 31 August 2023 (2022: charge £1,313,000).
The following is an analysis of the Group's revenue and results by reportable
segment:
Year ended 31 August
2023 2022
£'000 £'000
Revenue from external customers
Focusrite 86,317 97,186
Novation 16,565 20,583
ADAM Audio 18,449 17,797
Sequential 14,480 16,249
Sonnox 1,139 -
Martin Audio 41,515 31,918
Total 178,465 183,733
Segment profit
Focusrite 40,130 45,108
Novation 9,133 8,132
ADAM Audio 9,570 8,941
Sequential 6,705 6,819
Sonnox 1,125 -
Martin Audio 18,186 14,280
84,849 83,280
Central distribution costs and administrative expenses (58,819) (53,724)
Other income - 830
Adjusting items (note 7) (1,687) (1,725)
Operating profit 24,343 28,661
Finance income 770 2,286
Finance costs (2,365) (398)
Profit before tax 22,748 30,549
Tax (4,951) (5,773)
Profit after tax 17,797 24,776
The Group's non-current assets, analysed by geographical location, were as
follows:
2023 2022
£'000 £'000
Non-current assets
North America 8,937 21,311
Europe, Middle East and Africa 86,725 66,189
Rest of the World 213 -
Total non-current assets 95,875 87,500
UK 68,867 63,543
Information about major customers
Included in revenues shown for FY23 is £48.1 million (FY22: £51.3 million)
attributed to the Group's largest customer, which is located in North America.
Amounts owed at the year-end were £10.0 million (FY22: £7.9 million).
6 Profit for the year
Profit for the year has been arrived at after charging/(crediting):
Year Ended 31 August
2023 2022
Note £000 £000
Net foreign exchange gains 331 2,364
Loss on disposal of property, plant and equipment 187 23
Research and development costs 4,873 4,178
Depreciation and impairment of property, plant & equipment 2,677 2,223
Amortisation of intangibles 11 9,861 9,883
Cost of inventories within cost of sales 75,548 94,481
Staff costs 28,235 25,244
Gain on sale of trademark 7 - (830)
Movement in expected credit loss (292) (26)
Share based payments (282) 1,313
7 Adjusting ITEMS
The following adjusting items have been declared in the period
Year ended 31 August
2023 Restated(1)
2022
£000 £000
Adjusting income
Gain on sale of trademark - (830)
Adjusting costs
Acquisition Costs 367 565
Earnout accrual in relation to acquisition 786 1,160
Restructuring 534 -
Adjusting items 1,687 895
Amortisation of acquired intangible assets 4,451 5,116
Total adjusting items for adjusted EBITDA 6,138 6,011
Tax on adjusting items (1,319) (1,376)
Total adjusting items for adjusted profit after tax 4,819 4,635
(1) Restated to include the deferred tax credit arising on the amortisation of
acquired intangible, which was not previously included.
Acquisition costs in FY23 relate to the acquisition of Sonnox Ltd in December
2022.
The earnout cost relates to the final balances of contingent consideration in
respect of the acquisitions of Linea Research (£0.6 million) and Sequential
LLC (£0.2 million) recognised during the year.
During the year, the Group carried out restructuring of the regional sales and
marketing teams in the EMEA region resulting in costs of £0.5 million, this
is a one off strategic consolidation of multiple teams which is not expected
to repeat.
8 Tax
Year ended 31 August
2023 2022
£000 £000
Corporation tax charges
Over provision in prior year (309) (11)
Current year 4,745 6,523
4,436 6,512
Deferred taxation
Under provision in prior year 249 (438)
Current year 266 (301)
4,951 5,773
Corporation tax is calculated at 21.5% (2022: 19%) of the estimated taxable
profit for the year. Taxation for the US and Germany subsidiaries are
calculated at the rates prevailing in the respective jurisdiction.
The tax charge for each year can be reconciled to the profit per the income
statement as follows:
Year ended 31 August
2023 2022
£000 £000
Current taxation
Profit before tax on continuing operations 22,748 30,549
Tax at the UK corporation tax rate of 21.5% (2022: 19%) 4,894 5,804
Effects of:
Expenses not deductible for tax purposes 480 168
Deferred tax assets recognition - -
Other differences (26) (49)
Additional UK tax reliefs (642) (140)
Prior period adjustment (59) (449)
Effect of change in standard rate of deferred tax 12 173
Impact of foreign tax rates 292 266
Tax charge for the year 4,951 5,773
Expenses not deductible relate to the costs of acquisition and entertainment
expenses.
Tax credited directly to equity
In addition to the amount charged to the income statement and other
comprehensive income, the following amounts of tax have been recognised in
equity:
2023 2022
£'000 £'000
Share based payment deferred tax deduction 5 (1,131)
Share based payment current tax deduction (123) 723
(118) (408)
The net corporation tax creditor is £2,619,000 (2022: £653,000).
9 Dividends
The following equity dividends have been declared:
Year to Year to
31 August 2023
31 August 2022
Dividend per qualifying ordinary share 6.6p 6.0p
During the year, the Company paid an interim dividend in respect of the year
ended 31 August 2023 of 2.10 pence per share (2022: 1.85 pence per share).
On 24 November 2023, the Directors recommended a final dividend of 4.5 pence
per share (2022: 4.15 pence per share), making a total of 6.6 pence per share
for the year (2022: 6.0 pence per share).
10 Earnings per share ('EPS')
The calculation of the basic and diluted EPS is based on the following data:
Year ended 31 August
Earnings 2023 2022
£'000 Restated(1)
£'000
Profit after tax 17,797 24,776
Adjusting items (note 2) 6,138 6,011
Tax on adjusting items (note 2) (1,319) (1,376)
Total underlying profit for adjusted EPS calculation 22,616 29,411
Year ended 31 August
2023 2022
Number Number
'000 '000
Number of shares
Weighted average number of ordinary shares 58,506 58,294
Effect of dilutive potential ordinary shares:
Share option plans 447 623
Weighted average number of ordinary shares including dilutive impact 58,953 58,917
EPS Pence Pence
Basic EPS 30.4 42.5
Diluted EPS 30.2 42.1
Adjusted basic EPS 38.7 50.5
Adjusted diluted EPS 38.4 49.9
( 1) Restated to include the deferred tax credit arising on the amortisation
of acquired intangibles which was not previously included
The Group presents basic and diluted EPS data for its ordinary shares. Basic
EPS is calculated by dividing the profit attributable to ordinary shareholders
by the weighted average number of ordinary shares outstanding during the
period. For diluted EPS, the weighted average number of ordinary shares is
adjusted for the dilutive effect of potential ordinary shares arising from the
exercise of granted share options.
At 31 August 2023, the total number of ordinary shares issued and fully paid
was 59,211,639. This included 624,173 (FY22: 262,929) shares held by the EBT
to satisfy options vesting in future years. The operation of this EBT is
funded by the Group so the EBT is required to be consolidated, with the result
that the weighted average number of ordinary shares for the purpose of the
basic EPS calculation is the net of the weighted average number of shares in
issue 59,073,009 (FY22: 58,488,351) less the weighted average number of shares
held by the EBT 566,408 (FY22: 367,333). It should be noted that the only
right relinquished by the Trustees of the EBT is the right to receive
dividends. In all other respects, the shares held by the EBT have full voting
rights.
The effect of dilutive potential ordinary share issues is calculated in
accordance with IAS 33 and arises from the employee share options currently
outstanding, adjusted by the profit element as a proportion of the average
share price during the period.
11 OTHER INTANGIBLE ASSETS
Technology, products and patents
Intellectual property, licences and trademarks Internally generated - in use Acquired- in use In development Computer software Brands Total
£000 £000 £000 £000 £000 £000 £000
Cost
At 1 September 2021 1,658 21,413 23,694 6,535 1,585 20,020 74,905
Additions: Acquired separately 1,684 - - - 44 4,535 6,263
Additions: Products developed during the year 406 2,387 - 5,464 - - 8,257
Additions: Business combinations - - 4,050 1,600 - 850 6,500
Transfers (21) 3,908 1,402 (5,289) - - -
Disposals (1) - - - (245) - (246)
Foreign exchange - - 1,032 - - 913 1,945
At 31 August 2022 3,726 27,708 30,178 8,310 1,384 26,318 97,624
Additions: Acquired separately 1,706 - - - 318 - 2,024
Additions: Products developed during the year - 2,514 - 6,085 - - 8,599
Additions: Business combinations - - 4,700 450 3 400 5,553
Transfers - 5,600 801 (6,261) (140) - -
Disposals - (4,108) - - - - (4,108)
Foreign exchange (2) (183) (628) (55) - (1,010) (1,878)
At 31 August 2023 5,430 31,531 35,051 8,529 1,565 25,708 107,814
Amortisation
At 1 September 2021 1,321 16,607 4,123 728 833 2,227 25,839
Charge for the year 362 3,938 3,215 242 467 1,659 9,883
Eliminated on disposal - - - - (141) - (141)
Foreign exchange - 17 39 - - 23 79
At 31 August 2022 1,683 20,562 7,377 970 1,159 3,909 35,660
Charge for the year 342 4,824 3,536 - 244 1,885 10,831
Transfer 239 - - (239) - -
Eliminated on disposal - (4,081) - - - - (4,081)
Reversal of amortisation - - - (970) - - (970)
Foreign exchange (1) (22) (116) - - (196) (335)
At 31 August 2023 2,024 21,522 10,797 - 1,164 5,598 41,105
Carrying amount
At 31 August 2023 3,406 10,009 24,254 8,529 401 20,110 66,709
At 31 August 2022 2,043 7,146 22,801 7,340 225 22,409 61,964
At 31 August 2021 337 4,806 19,571 5,807 752 17,793 49,066
(#_ftnref1)
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