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Focusrite PLC (TUNE)

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Tuesday 24 April, 2018

Focusrite PLC

Half Year Results

RNS Number : 8472L
Focusrite PLC
24 April 2018
 

Strictly embargoed until 07:00: 24 April 2018

 

Focusrite Plc ("Focusrite" or "the Group")

Half Year Results for the period ended 28 February 2018

 

Focusrite Plc, the global music and audio products company supplying hardware and software products used by professional and amateur musicians, today announces its Half Year Results for the six months ended 28 February 2018.

 

 

Financial highlights

·  Group revenue up by 21.2% (26% at constant currency1) to £38.8 million (HY17: £32.0 million)

·  EBITDA2 up by 30.0% to £8.0 million (HY17: £6.1 million)

·  Operating profit up by 36.3% to £6.2 million (HY17: £4.6 million)

·  Profit before tax up by 26.8% to £5.8 million (HY17: £4.6 million)

·  Basic earnings per share up 23.3% to 9.0p (HY17: 7.3p)

·  Diluted earnings per share up by 27.1% to 8.9p (HY17: 7.0p)

·  Free cash flow3 up by 49.7% to £6.4 million (HY17: £4.3 million)

·  Net cash of £19.7 million (FY17: £14.2 million, HY17: £9.4 million)

·  Interim dividend of 1.0 pence, up 33.3% from 0.75 pence in HY17

 

Operational highlights

·  Revenue growth in all major regions and across both the Focusrite and Novation segments

·  R&D remains core: five new products launched and five software upgrades

·  New Focusrite Professional initiative progressing well

·  Strong Christmas holiday season for the more consumer-priced products

·  Within Novation, sales of synthesizers up 90% as our new flagship, PEAK, has gained wide recognition

·  Cumulative downloads of apps now up to 8.5 million with over 500,000 active users

·  Increased localisation of our eCommerce store, especially in areas less well-served by resellers

·  Queen's Award for Innovation 2018; fourth time the Group has received a Queen's Award

 

Tim Carroll, Chief Executive Officer, commented:

"Our strategy of innovation and expansion continues to underpin our growth and we remain committed to making music easier to make for professionals and hobbyists alike.  Our success is driven by our entrepreneurial and talented team, many of whom are themselves musicians, and their skill and loyalty is the bedrock of our success.

 

I am delighted with the Group's performance in the first half which benefited from an especially strong Christmas holiday season. Since the half year end, revenue and cash have continued to grow although, as expected, at a slower rate than in the first half.  We remain confident about the outlook for the rest of the year and beyond: future product plans are taking shape, the geographic expansion continues and the strategy developments are bearing fruit."

 

Philip Dudderidge, Executive Chairman, added:

"It has been a great first six months.  We have again increased revenue in all of our major regions and across all of our product ranges, and the whole team should be congratulated.  I am particularly honoured that we have been awarded our fourth Queen's Award this April. The playing and recording of music is such a great positive force and I am so pleased that this continues to grow across the world, with Focusrite at its core."   

 

1 Where we make reference to constant currency growth rates, these are prepared by retranslating the current year revenues using the average exchange rates that prevailed in the prior year rather than the actual exchange rates that applied in the current year. 

2 Comprising of earnings adjusted for interest, taxation, depreciation and amortization. This is shown on the face of the income statement.

3 Free cash flow equals net cash inflow from operating activities less net cash used in investing activities.

 

 

Dividend timetable

The timetable for the interim dividend is as follows:

 

3 May 2018

Ex-dividend Date

4 May 2018

Record Date

30 May 2018

Dividend payment date

 

 

Enquiries:

 

Focusrite Plc:

+44 1494 836301

Tim Carroll (CEO)  

 

Jeremy Wilson (CFO)

 

 

 

Panmure Gordon

+44 20 7886 2500

(Nominated Adviser and Broker)

 

Freddy Crossley

 

 

 

Belvedere Communications

+44 20 3567 0510 

John West

 

Kim Van Beeck

 

 

The information communicated in this announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) No. 596/2014.

 

Notes to Editors

 

Focusrite plc is a global music and audio products group that develops and markets proprietary hardware and software products. Used by audio professionals and amateur musicians alike, its solutions facilitate the high-quality production of recorded and live sound. The Focusrite Group trades under four established and rapidly growing brands: Focusrite, Focusrite Pro, Novation and Ampify.

 

With a high-quality reputation and a rich heritage spanning decades, its brands are category leaders in the music-making industry. Focusrite and Focusrite Pro offer audio interfaces and other products for recording musicians, producers and professional audio facilities. Novation and Ampify products are used in the creation of electronic music, from synthesisers and grooveboxes to industry-shaping controllers and inspirational music-making apps.

 

The Focusrite Group has a global customer base with a distribution network covering approximately 160 territories. Focusrite is headquartered in High Wycombe, UK, with marketing offices in Los Angeles and Hong Kong. Focusrite plc is traded on the AIM market, London Stock Exchange.

 

 

Business and operating review

 

Overview

Focusrite is pleased to report Half Year Results that show continued strong organic growth across the business.  Year-on-year growth in the first half of the current financial year continued, with revenue growing by 21.2%.

 

Total revenue for the period grew to £38.8 million (HY17: £32.0 million), resulting in an operating profit of £6.2 million (HY17: £4.6 million), with EBITDA up to £8.0 million (HY17: £6.1 million).  

 

Revenue growth on a constant currency basis accelerated further to 26% (HY17: 12%).   The Group had an especially strong Christmas holiday season for the more consumer-priced products. We also saw the benefit of our focused efforts in previously identified geographies with growth potential, and growth in our professional product lines from our newly formed Professional division.  

 

Research and development remains core to our strategy and a key driver of our growth.  During this half year, we introduced five new products and delivered five upgrades to existing products.  Additionally, we delivered new tools focused on simplifying the new user experience, thereby significantly reducing the actual time between first contact with our products and making music.  These efforts have been well received by our customers and played a key role in the strong performance reported today, especially for our products and solutions aimed at the new user. 

 

Sales grew in all major geographies and particularly in the USA.  We have invested resources into high-potential growth markets such as Asia and Latin America which have begun generating significant year-on-year gains.  Additionally, we continue to grow in our other more established markets such as the UK and mainland Europe.

 

Our strategy of innovation and expansion continues to underpin our growth and we remain committed to making music easier to make for professionals and hobbyists alike.  Our success is driven by our entrepreneurial and talented team, many of whom are themselves musicians, and their skill and loyalty is the bedrock of our success.

 

We will add more people globally to our sales, marketing, engineering and product groups to support our future growth plans.

 

Operating review

We continue to exceed our core growth KPI benchmarks and consequently the Group continues to perform well both operationally and financially.  The management team is committed to pursuing its stated goals of innovation; disruption; making music easier to make; and expanding our addressable market.  We have firmly established ourselves as a market leader and our aim is to capitalise further on this by continuing to excite and empower our customers.  By improving the product and customer experience, we will seek to extend the customer lifecycle, encouraging them to use our products longer throughout their music-making lifetime.

 

 

Segmental analysis - markets

 

 

Six months to
28 February 2018 (unaudited)

Six months to
28 February 2017 (unaudited)

Year to
31 August 2017 (audited)

£'000

£'000

£'000

Continuing operations

 

 

 

 

USA

 

16,123

13,246

27,990

Europe, Middle East and Africa

 

15,997

                            12,958

                       25,153

Rest of World

 

                              6,699

                              5,816

12,912

Consolidated revenue

 

38,819

                            32,020

                         66,055

 

Regionally, the USA grew by 34% on a constant currency basis.  This was driven by a number of factors, including continued success and market share gain in our 2nd generation Scarlett series of audio interfaces, as well as continued growth of our Launch products for electronic musicians, and progress by our new Focusrite Professional division into new vertical markets such as post-production.

 

In Europe, Middle East and Africa, sales were up by 19% on a constant currency basis.  All of the major territories (UK, Germany and mainland Europe) have experienced solid growth.  Overall, we have seen increased stabilisation in the market along with an increased awareness and acceptance of our Focusrite and Novation solutions.

 

The Rest of World grew at 26% on a constant currency basis, and in particular Asia performed well showing a healthy increase following our investment in a local office and the addition of more people.  We continue to invest more resources into regional localisation and support to maintain our growth momentum.

 

eCommerce

The Group's eCommerce store, which launched in March 2016, now accounts for over 1% of the Group's total revenue and this continues to grow.  In addition to providing a direct revenue stream, the store creates improved conversion through all sales channels. We have expanded this and it now ships a wider range of products globally, with targeted regional strategies in place to support operations.  Part of our recent efforts include localisation in Spanish, Korean and Japanese languages.

 

Segmental analysis - products

 

Six months to
28 February 2018

Six months to
28 February 2017

Year to
31 August 2017

 

(unaudited)

(unaudited)

(audited)

 

£'000

£'000

£'000

Revenue from external customers

 

 

 

Focusrite

25,693

                           20,856

44,552

Novation

11,419

9,604

                     18,862

Distribution

1,707

1,560

                        2,641

Total

38,819

                           32,020

                     66,055

 

 

 

Alongside engineering, innovation is paramount to our success and we continue to spend around 6% of annual revenue on research and development to provide a constant pipeline of new and relevant products for our various channels.

 

We launched five new products during the period:  the Clarett USB family (three products), Red 16 and Red X2P, as well as significant software updates including those for Circuit, Launchpad, Groovebox and BlocsWave.  These new products and updates are across different price segments and target customer markets, giving us further penetration and reach.  Feedback from the consumer, retailer and distribution channels has been positive and acceptance so far has been pleasing.

 

Focusrite

Among existing products, our 2nd generation Scarlett USB audio interface range has continued to gain market share since its launch in June 2016.  The Clarett range has also seen solid growth of 28% year on year, mostly driven by the launch of our USB range this half year.  Rednet and Red ranges have also grown as our newly formed Focusrite Professional division begins netting strategic sales wins in previously untargeted vertical markets such as the post-production and broadcast sectors.

 

Novation

Launchpad, Novation's grid instrument that comes pre-loaded with Ableton Live Lite software, continues to grow worldwide with revenue increasing by 26% over the period.  This is due, in part, to a wider market acceptance of grid controllers, especially amongst younger musicians, and the addition of more consumer electronic partners added to the distribution channel.  This move has created greater reach into both new and existing mainstream audiences. Online sales remain an area of importance for the Group, as we seek to stay relevant to the way consumers shop and spend.

 

Additionally, within the Novation business the Synthesizer category is up 90% year on year as our new flagship offering, PEAK, establishes itself as a best-in-class solution for professionals in electronic music.

 

Circuit, the inspirational grid-based groove box, continues to build a foundation in the market.  We are pleased with its progress and are watching the groove box product space carefully to ascertain how we should progress in this specific area.

 

The London Innovation division continues to disrupt the market with a growing portfolio of innovative music-making software.  The new Ampify brand continues to drive awareness of music creation to a vast new market of music creators, which in turn supports the growth of the Focusrite and Novation brands.  The suite of music apps has now reached an impressive 8.5 million downloads, and this number is increasing at around 200,000 per month.  Software is a crucial component of the business strategy to solve the problems of music creation, increasing customer loyalty and overall lifetime value.

 

Distribution

Focusrite's distribution of adjacent products, such as KRK monitors and sE microphones, remains a small overall proportion of Group revenue, but it is profitable and it remains important to us as it offers add-on products within the music-making industry and provides us with valuable market feedback, insight and knowledge.

 

 

 

 

Financial review

Revenue and profit

Group revenue for the half year was £38.8 million, up 21.2% on the previous year and up 26% on a constant currency basis.  All major product groups and geographical areas increased, with the biggest increases in the Launch range of products (within the Novation segment), which had a volume increase of 24%, and the Scarlett range of products (within the Focusrite segment), which had a volume increase of 38%. 

 

The gross margin also increased to 41.7% (HY17: 40.1%), helped by the stronger Euro and closer monitoring of the discounts given to distributors and dealers.  As explained at the last year end, operating costs were increased in sales and marketing to support the strategic initiatives around the professional products within the Focusrite segment and the eCommerce sales channel.  Operating costs were increased by 20.4%.  Taking these factors into account, EBITDA for the period grew by 30.0% to £8.0 million (HY17: £6.1 million).

 

Capitalisation of research and development

The Group typically spends approximately 6% of its revenue on research and development, developing future ranges of products.  The normal product life is between three and six years.  Where costs can be reliably assigned to a particular product, the costs are capitalised and written-off over three years.  Typically around 70% of R&D costs are capitalised.  The net income statement effect of the capitalisation less the amortisation in the period was a gain of £0.1 million (HY17: a gain of £0.3 million).

 

Foreign currency

 

Six months to
28 February 2018

Six months to
28 February 2017

Year to
31 August 2017

Exchange rates

 

 

 

Average $:£

1.35

1.26

1.27

Average €:£

1.13

1.16

1.16

 

 

 

 

Period end $:£

1.38

1.24

1.29

Period end €:£

1.13

1.17

1.09

 

The movements in exchange rates were far smaller than in the previous year.  The US Dollar weakened by 7% and the Euro strengthened marginally.  The US Dollar accounts for approximately 60% of Group revenue (North America, Asia and Latin America) and all of the purchases of product from Chinese contract manufacturers.  Therefore there is a substantial natural hedge in place.  Consequently, the 7% weakening of the US Dollar reduced revenue but had little impact on profit. 

 

The Euro accounts for approximately 25% of Group revenue with very little related Euro cost.  The Group has hedged approximately 2/3 of its Euro flows to convert them into Sterling at an average rate of €1.12.  Therefore the blended Euro exchange rate in the period was €1.12 (HY17: €1.25). 

 

The Group has hedged approximately 2/3 of the Euro cash flows for the rest of this financial year (at an average rate of €1.12) and approximately 25% of Euro cash flows for 2018/19 at an average rate of €1.07. 

 

The Group uses hedge accounting, meaning that the hedging contracts have been matched to the associated income flows.  Therefore, provided that the hedge remains effective, movements in the fair value of unexpired hedge contracts are shown in a hedging reserve in the balance sheet.

 

Net financing charges

The net financing charges were £0.4 million (HY17: £nil) due largely to the revaluation of bank balances held in US Dollars.

 

Profit before tax

Reported profit before tax grew to £5.8 million, up 26.8% on the prior period (HY17: £4.6 million) driven by all of the factors discussed above, most particularly the higher revenue and the increased gross margin.

 

Tax

The standard rate of Corporation Tax in the UK is 19%.  The Group gains additional tax relief on the substantial research and development effort, which reduces the effective tax rate to 12% (HY17: 12%).

 

Profit after tax and earnings per share

Profit after tax was £5.1 million, up 26.6% on the prior year (HY17: £4.0 million).

 

The reported basic earnings per share increased by 23.3% to 9.0 pence (HY17: 7.3 pence).  This was lower than the increase in the profit after tax because the number of shares in issue was increased due largely to the vesting of 1.4 million options which were satisfied out of the Employee Benefit Trust.

 

A much smaller number of new share options was issued during the period so the diluted earnings per share increased by 27.1% to 8.9 pence (HY17: 7.0 pence), a rate similar to the increase in profit before tax.

 

Balance sheet

Non-current assets totalled £6.6 million (28 February 2017: £6.7 million).  These are mainly capitalised research and development costs and during the period capitalised R&D costs were similar to the amortisation.

 

Stock as at 28 February 2018 was £10.9 million (28 February 2017: £10.1 million).  This 7% increase compares well with the 21% increase in revenue, signalling the continued positive efforts to manage stock carefully whilst ensuring that the business has the ability to satisfy customer demand.

 

Debtors totalled £10.9 million (28 February 2017: £10.2 million).  The Group has an effective credit control process including credit limits and a potential refusal to supply if the customer has overdue debts. At 28 February 2018 the debtors balance represented 49 days' sales (28 February 2017: 51 days).

 

Trade and other payables increased to £9.1 million (28 February 2017: £6.4 million).  This was due to the increased stock purchases close to the period end. 

 

Cash flow

The conversion of profit to cash has been strong with free cash flow up 49.7% to £6.4 million (HY17: £4.3 million). In part, this was assisted by control over the working capital.  Normally, it would be reasonable to assume an increase in working capital of about 20% of the increase in revenue, driven by higher debtors and a higher value of stock to service that demand.  In this period, the movement in working capital has been an inflow (decrease) of £1.0 million (HY17: £nil), due to a reduction in debtors since the prior year end.

 

Overall, cash flow from operating activities was 105% (HY17: 101%) of EBITDA and free cash flow was 16% of revenue (HY17: 13%).  Both of these measures have been strong; however, it should be noted that the average of free cash flow as a percentage of revenue since the IPO has been approximately 7%. 

 

As a result of this cash generation, cash balances grew from £14.2 million in August 2017 to £19.7 million as at 28 February 2018. It is intended that this will fund the Group's entry into related market segments, which is a key element of the Group's growth strategy.

 

Dividend

At the last year end, the Group announced that it would move towards an ongoing dividend cover of 4-5x.  Therefore, as a step towards that, the interim dividend is raised by 33.3% from 0.75 pence to 1.0 pence per share.

 

Outlook and current trading

The first half benefited from an especially strong Christmas holiday season. Since the half year end, revenue and cash have continued to grow although, as expected, at a slower rate than in the first half.  We remain confident about the outlook for the rest of the year and beyond: future product plans are taking shape, the geographic expansion continues and the strategy developments are bearing fruit. 

 

 

 

Tim Carroll                                                          Jeremy Wilson

Chief Executive Officer                                    Chief Financial Officer

 

 

Condensed Consolidated Income Statement

For the six months ended 28 February 2018

 

Note

 

Six months to 
28 February 2018

 

Six months to
28 February 2017

 

Year to
31 August 2017

 

 

 

(unaudited)

 

(unaudited)

 

(audited)

 

 

 

£'000

 

£'000

 

£'000

Revenue

2

 

38,819

 

32,020

 

66,055

Cost of sales

 

 

(22,619)

 

(19,165)

 

(39,704)

Gross profit

 

 

16,200

 

12,855

 

26,351

Administrative expenses

 

 

 

(8,284)

 

(16,881)

EBITDA (non-GAAP measure)

 

 

7,969

 

6,131

 

13,109

Depreciation and amortisation

 

 

 

(1,560)

 

(3,639)

Operating profit

 

 

6,230

 

4,571

 

9,470

Finance income

 

 

 

52

 

86

Finance costs

 

 

(398)

 

(24)

 

(44)

Profit before tax

 

 

 

4,599

 

9,512

Income tax expense

4

 

(709)

 

(552)

 

(959)

Profit for the period from continuing operations

 

5,124

 

4,047

 

8,553

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

From continuing operations

 

 

 

 

 

 

Basic (pence per share)

6

 

9.0

 

7.3

 

15.4

Diluted (pence per share)

6

 

8.9

 

7.0

 

14.8

 

 

 

Condensed Consolidated Statement of Other Comprehensive Income

For the six months ended 28 February 2018

 

 

Six months to 
28 February 2018

 

Six months to
28 February 2017

 

Year to
31 August 2017

 

 

(unaudited)

 

(unaudited)

 

(audited)

 

 

£'000

 

£'000

 

£'000

Profit for the period

 

5,124

 

4,047

 

8,553

Items that may be reclassified subsequently to the income statement

 

 

 

 

Exchange differences on translation of foreign operations

 

(30)

 

29

 

(8)

Gain/(loss) on forward foreign exchange contracts designated and effective as a hedging instrument

 

743

 

700

 

659

Tax on hedging instrument

 

(144)

 

(142)

 

(134)

Total comprehensive income for the period

 

5,693

 

4,634

 

9,070

Profit attributable to:

 

 

 

 

 

 

Equity holders of the Company

 

5,693

 

4,634

 

9,070

 

 

5,693

 

4,634

 

9,070

 

Condensed Consolidated Statement of Financial Position

 

 

Note

 


28 February 2018

 


28 February 2017

 


31 August 2017

 

 

 

(unaudited)

 

(unaudited)

 

(audited)

 

 

 

£'000

 

£'000

 

£'000

Assets

 

 

 

 

 

 

 

Non-current assets

 

 

 

 

 

 

 

Goodwill

 

 

419

 

419

 

419

Other intangible assets

 

 

4,818

 

4,823

 

4,544

Property, plant and equipment

 

 

1,369

 

1,502

 

1,369

Total non-current assets

3

 

6,606

 

6,744

 

6,332

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Inventories

 

 

10,894

 

10,145

 

8,334

Trade and other receivables

 

 

10,811

 

10,234

 

12,952

Derivative financial instruments

7

 

258

 

-     

 

-     

Cash and cash equivalents

7

 

19,734

 

9,391

 

14,174

Total current assets

 

 

41,697

 

29,770

 

35,460

Total assets

 

 

48,303

 

36,514

 

41,792

 

 

 

 

 

 

 

 

Equity and liabilities

 

 

 

 

 

 

 

Capital and reserves

 

 

 

 

 

 

 

Share capital

 

 

58

 

58

 

58

Share premium

 

 

114

 

-     

 

-     

Merger reserve

 

 

14,595

 

14,595

 

14,595

Merger difference reserve

 

 

(13,147)

 

(13,147)

 

(13,147)

Translation reserve

 

 

1

 

68

 

31

Hedging reserve

 

 

210

 

(356)

 

(389)

Treasury reserve

 

 

(2)

 

(3)

 

(3)

Retained earnings

 

 

36,451

 

27,428

 

31,739

Equity attributable to owners of the Company

 

 

38,280

 

28,643

 

32,884

Total equity

 

 

38,280

 

28,643

 

32,884

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Trade and other payables

 

 

9,126

 

6,390

 

7,720

Current tax liabilities

 

 

257

 

523

 

459

Derivative financial instruments

7

 

-     

 

443

 

484

Total current liabilities

 

 

9,383

 

7,356

 

8,663

 

 

 

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

 

 

Deferred tax

 

 

640

 

515

 

245

Total liabilities

 

 

10,023

 

7,871

 

8,908

Total equity and liabilities

 

 

48,303

 

36,514

 

41,792

 

 

 

Condensed Consolidated Statements of Changes in Equity

For the six months ended 28 February 2018

Share capital

Share premium

Merger reserve

Merger difference reserve

Translation reserve

Hedging reserve

Treasury share reserve1

Retained earnings2

Total

 

£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

Balance at 1 September 2017

58

 

 

-

14,595

(13,147)

31

(389)

(3)

31,739

32,884

Profit for the period

-

 

-

-

-

-

-

-

5,124

5,124

Other comprehensive income for the period

-

 

 

 

-

-

-

(30)

599

-

-

569

Total comprehensive income for the period

-

 

 

 

-

-

-

(30)

599

-

5,124

5,693

Transactions with owners of the Company:

 

 

 

 

 

 

 

 

 

Share-based payment deferred tax deduction in excess of remuneration expense

-

 

   

 

 

 

 

-

-

-

-

-

-

(254)

(254)

Share-based payment current tax deduction in excess of remuneration expense

-

 

 

 

 

 

 

-

-

-

-

-

-

661

661

Shares from EBT exercised

-

 

-

-

-

-

-

1

188

189

New shares issued

-

 

114

-

-

-

-

-

-

114

Share-based payments

-

 

-

-

-

-

-

103

103

Dividends paid

-

-

-

-

-

-

-

(1,110)

(1,110)

Balance at 28 February 2018

58

114

14,595

(13,147)

1

210

(2)

36,451

38,280

 

1The reserve for the Company's treasury shares comprises the cost of the Company's shares held by the Group.  At 28 February 2018, the Employee Benefit Trust held 1,188,025 of the Company's shares (six months ended 28 February 2017: 2,586,845).

 

2Of the retained earnings totalling £36,451,000, £615,000 (28 February 2017: £421,000) relates to the gain on exercise of share options from the EBT and is therefore non-distributable.

 

Condensed Consolidated Statements of Changes in Equity (Continued)

 

For the six months ended 28 February 2017

Share capital

Merger reserve

Merger difference reserve

Translation reserve

Hedging reserve

Treasury share reserve

Retained earnings

Total

 

£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

Balance at 1 September 2016

58

14,595

(13,147)

39

(914)

(5)

23,251

23,877

Profit for the period

-

-

-

-

-

-

4,047

4,047

Other comprehensive income for the period

-

-

-

29

558

-

-

587

Total comprehensive income for the period

-

-

-

29

558

-

4,047

4,634

Transactions with owners of the Company:

Share-based payment deferred tax deduction in excess of remuneration expense

-

-

-

-

-

-

(30)

(30)

Share-based payment current tax deduction in excess of remuneration expense

-

-

-

-

-

-

556

556

Shares from EBT exercised

-

-

-

-

-

2

250

252

Share-based payments

-

-

-

-

-

-

75

75

Dividends paid

-

-

-

-

-

-

(721)

(721)

Balance at 28 February 2017

58

14,595

(13,147)

68

(356)

(3)

27,428

28,643

 

 

 

Condensed Consolidated Statements of Changes in Equity (Continued)

 

For the year ended 31 August 2017

Share capital

Merger reserve

Merger difference reserve

Translation reserve

Hedging reserve

Treasury share reserve

Retained earnings

Total

 

£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

Balance at 1 September 2016

58

14,595

(13,147)

39

(914)

(5)

23,251

23,877

Profit for the period

-

-

-

-

-

-

8,553

8,553

Other comprehensive income for the period

-

-

-

(8)

525

-

-

517

Total comprehensive income for the period

-

-

-

(8)

525

-

8,553

9,070

Transactions with owners of the Company:

 

 

 

 

 

 

 

 

Share-based payment deferred tax deduction in excess of remuneration expense

-

-

-

-

-

-

114

114

Share-based payment current tax deduction in excess of remuneration expense

-

-

-

-

-

-

558

558

Shares from EBT exercised

-

-

-

-

-

2

256

258

Share-based payments

-

-

-

-

-

-

145

145

Dividends paid

-

-

-

-

-

-

(1,138)

(1,138)

Balance at 31 August 2017

58

14,595

(13,147)

31

(389)

(3)

31,739

32,884

 

 

 

Consolidated Statement of Cash Flow

For the six months ended 28 February 2018

 

 

 

Six months to
28 February 2018

Six months to
28 February 2017

Year to
31 August 2017

 

 

£'000

£'000

£'00

Cash flows from operating activities

 

 

 

 

Profit for the period

 

5,124

4,047

8,553

Adjustments for:

 

 

 

 

Income tax expense

 

709

552

959

Net finance charge/(income)

 

397

(28)

(42)

Loss/(profit) on disposal of property, plant and equipment

 

-

8

(8)

Amortisation of intangibles

 

1,399

1,198

2,950

Depreciation of property, plant and equipment

 

340

362

689

Share-based payment charge

 

103

75

145

Operating cash flow before movements in working capital

 

8,072

6,214

13,246

Decrease/(increase) in trade and other receivables

 

2,141

990

(1,728)

(Increase)/decrease in inventories

 

(2,560)

1,216

3,027

Increase/(decrease) in trade and other payables

 

1,406

(2,222)

(892)

Operating cash flow before interest and tax paid

 

9,059

6,198

13,653

Net interest paid

 

(29)

(22)

(42)

Income tax paid

 

(253)

(56)

(633)

Cash generated by operations

 

8,777

6,120

12,978

Net foreign exchange movement

 

(397)

78

84

Net cash inflow from operating activities

 

6,198

13,062

Cash flows from investing activities

 

 

 

 

Purchases of property, plant and equipment

 

(340)

(299)

(493)

Development of intangible assets

 

(1,673)

(1,645)

(3,121)

Net cash used in investing activities

 

(2,013)

(1,944)

(3,614)

Cash flows from financing activities

 

 

 

 

Issue of equity shares

 

303

252

258

Equity dividends paid

 

(1,110)

(721)

(1,138)

Net cash used in financing activities

 

(807)

(469)

(880)

Net increase in cash and cash equivalents

5,560

3,785

8,568

 

 

 

 

 

Cash and cash equivalents at beginning of the period

 

14,174

5,606

5,606

Cash and cash equivalents at end of the period

 

19,734

9,391

14,174

 

 

 

 

 

 

Notes to the Condensed Consolidated Interim Financial Statements

 

1.      Basis of preparation and significant accounting policies

Focusrite Plc (the 'Company') is a company incorporated in the UK. The condensed consolidated interim financial statements ('interim financial statements') as at and for the six months ended 28 February 2018 comprised the Company and its subsidiaries (together referred to as the 'Group').

 

The Group is a business engaged in the development, manufacture and marketing of professional audio and electronic music products. 

 

Statement of compliance

The interim financial statements are for the six months ended 28 February 2018 and are presented in pounds Sterling ('GBP'). This is the functional currency of the Group. The statement is presented to the nearest £1,000 ("£'000"). The  interim financial report has  been  prepared  in  accordance  with  the  International  Financial  Reporting Standards  ('IFRS'), International Accounting Standards ('IAS') and interpretations currently endorsed by the International Accounting Standards Board ('IASB') and its committees as adopted by the EU and as required to be adopted by AIM listed companies.  AIM listed companies are not required to comply with IAS 34 'Interim Financial Reporting' and accordingly the Company has taken advantage of this exemption. They do not include all the information required for a complete set of IFRS financial statements. However, selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in the Group's financial position and performance since the last annual consolidated financial statements as at and for the year ended 31 August 2017.

 

These interim financial statements were authorised for issue by the Company's Board of Directors on 24 April 2018.

 

Significant accounting policies

The interim financial statements have been prepared in accordance with the accounting policies adopted in the Group's financial statements for the year ended 31 August 2017.

 

1.1          Basis of consolidation

The consolidated financial statements comprise the financial statements of the Company and subsidiaries controlled by the Company drawn up to 28 February 2018.

 

1.2       Subsidiaries

Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that are currently exercisable. The acquisition date is the date on which control is transferred to the acquirer. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date control ceases.

 

1.3       Going concern

The Board of Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, the financial statements have been prepared on a going concern basis.

 

1.4       Earnings per share

The Group presents basic and diluted earnings per share ('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.

 

1.5       Accounting estimates and judgements

In application of the Group's accounting policies, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

In preparing these condensed consolidated interim financial statements, the significant judgements made by the Directors in applying the Group's accounting policies and key sources of estimation uncertainty were the same as those applied to the Group's financial statements for the year ended 31 August 2017.

 

1.6       Foreign currencies

The individual financial statements of each subsidiary are presented in the currency of the primary economic environment in which it operates (its functional currency). Sterling is the predominant functional currency of the Group and presentation currency for the consolidated financial information.

 

In preparing the financial statements of the individual companies, transactions in currencies other than the entity's functional currency (foreign currencies) are recognised at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

 

Exchange differences are recognised in profit or loss in the period in which they arise except for:

 

·     Exchange differences on transactions entered into to hedge certain foreign currency risks

·    Exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur (therefore forming part of the net investment in the foreign operation), which are recognised initially in other comprehensive income and reclassified from equity to profit or loss on disposal or partial disposal of the net investment.

 

For the purpose of presenting consolidated financial information, the assets and liabilities of the Group's foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the date of the transactions are used. Exchange differences arising, if any, are recognised in the income statement.

 

1.7       Hedge accounting

For the year ended 31 August 2016 and subsequent years, the Group has adopted hedge accounting for qualifying transactions. Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at each balance sheet date. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship. The Group designates certain derivatives as either hedges of the fair value of recognised assets or liabilities of firm commitments (fair value hedges), hedges of highly probable forecast transactions or hedges of foreign currency risk of firm commitments (cash flow hedges), or hedges of net investments in foreign operations.

 

Cash flow hedges

Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecast transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in the hedging reserve.  Any ineffective portion of the hedge is recognised immediately in the income statement.

 

For cash flow hedges, the associated cumulative gain or loss is removed from equity and recognised in the income statement in the same period or periods during which the hedged forecast transaction affects profit or loss.

 

When a hedging instrument expires or is sold, terminated or exercised, or the entity revokes designation of the hedge relationship but the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, the cumulative unrealised gain or loss recognised in equity is recognised in the income statement immediately.

 

A derivative with a positive fair value is recognised as a financial asset whereas a derivative with a negative fair value is recognised as a financial liability.

 

2.            Revenue

 

An analysis of the Group's revenue is as follows:

 

 

Six months to
28 February 2018 (unaudited)

Six months to
28 February 2017 (unaudited)

Year to
31 August 2017 (audited)

£'000

£'000

£'000

Continuing operations

 

 

 

 

USA

 

16,123

                               13,246

                         27,990

Europe, Middle East and Africa

 

                            15,997

                             12,958

                         25,153

Rest of World

 

                              6,699

                               5,816

                            12,912

Consolidated revenue

 

                            38,819

                             32,020

                         66,055

 

3.            Operating segments

 

Products and services from which reportable segments derive their revenues

 

Information reported to the Group's Chief Executive Officer (who has been determined to be the Group's Chief Operating Decision Maker) for the purposes of resource allocation and assessment of segment performance is focused on the main product groups which the Group sells. 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 and Ampify branded products

Distribution                               -                  Distribution of third party brands, including KRK speakers, Stanton, Cerwin Vega,            Cakewalk and sE Electronics

The revenue and profit generated by each of the Group's operating segments are summarised as follows:

 

Six months to
28 February 2018

Six months to
28 February 2017

Year to
31 August 2017

 

(unaudited)

(unaudited)

(audited)

 

£'000

£'000

£'000

Revenue from external customers

 

 

 

Focusrite

25,693

20,856

                     44,552

Novation

                             11,419

                             9,604

                     18,862

Distribution

                             1,707

                             1,560

                        2,641

Total

                           38,819

                           32,020

                     66,055

Segment profit

 

 

 

Focusrite

12,503

                             9,873

                     20,221

Novation

                             6,000

                             4,773

                        9,198

Distribution

                                 481

                                 434

                           711

 

                           18,984

                           15,080

                     30,130

Central distribution costs and administrative expenses

(12,754)

(10,509)

(20,660)

Operating profit

6,230

                   4,571

                        9,470

Finance income

1

                                    52

86

Finance costs

(398)

(24)

                               (44)  

Profit before tax

5,833

                             4,599

                        9,512

Tax

(709)

(552)

(959)

Profit after tax

                            5,124

                             4,047

                        8,553

 

 

 

Segment profit represents the profit earned by each segment without allocation of the share of central administration costs, including Directors' salaries, finance income and finance costs, and income tax expense. This is the measure reported to the Group's Chief Executive Officer 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 charge relating to the share option scheme of £103,000 for the six-month period to 28 February 2018 (six months to 28 February 2017: £75,000; year to 31 August 2017: £145,000).

Segment net assets and other segment information

Management does not make use of segmental data relating to net assets and other balance sheet information for the purposes of monitoring segment performance and allocating resources between segments.  Accordingly, other than the analysis of the Group's non-current assets by region shown below, this information is not available for disclosure in the consolidated financial information.

 

The Group's non-current assets, analysed by region, were as follows:

 

 

28 February 2018

28 February 2017

31 August 2017

 

(unaudited)

(unaudited)

(audited)

 

£'000

£'000

£'000

Non-current assets

 

 

 

USA

                                  99

                                   59

                            52

Europe, Middle East and Africa

                             5,865

                             5,998

                        5,676

Rest of World

                                 642

                                 687

                           604

Total non-current assets

                             6,606

                             6,744

                        6,332

 

 

4.            Taxation

 

The tax charge for the six months to 28 February 2018 is based on the estimated tax rate for the full year in each jurisdiction.

 

 

5.            Dividends

 

The following equity dividends have been declared:

 

Six months to
28 February 2018 (unaudited)

Six months to
28 February 2017 (unaudited)

Year to
31 August 2017
 (audited)

Dividend per qualifying ordinary share

1.00p

 0.75p

 2.70p

 

During the period, the Company paid a final dividend in respect of the year ended 31 August 2017 of 1.95 pence per share, amounting to £1,110,000.

 

6.            Earnings per share

 

Reported earnings per share

The calculation of the basic and diluted earnings per share is based on the following data:

 

Six months to
28 February

2018

(unaudited)

Six months to
28 February 2017

(unaudited)

Year to
31 August

2017

(audited)

Earnings

£'000

£'000

£'000

Earnings for the purposes of basic and diluted earnings per share being net profit for the period

                    5,124

4,047

                 8,553

 

 

 

 

 

Six months to
28 February

2018

Six months to
28 February

2017

Year to
31 August

2017

 

number

number

number

 Number of shares

'000

'000

'000

Weighted average number of ordinary shares for the purposes of basic earnings per share calculation

56,690

                  55,298

               55,432

Effect of dilutive potential ordinary shares:

 

 

 

EMI share option scheme and unapproved share option plan

1,151

                    2,356

                  2,357

Weighted average number of ordinary shares for the purposes of diluted earnings per share calculation

57,841

                  57,654

               57,789

 

 

 

 

Earnings per share

Pence

Pence

Pence

Basic earnings per share

9.0

7.3

15.4

Diluted earnings per share

8.9

7.0

14.8

 

 

 

At 28 February 2018, the total number of ordinary shares issued and fully paid was 58,111,639. This included 1,188,025 shares held by the Employee Benefit Trust ('EBT') to satisfy options vesting in future years. The operation of this Employee Benefit Trust 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 earnings per share calculation is the net of the weighted average number of shares in issue (58,094,838) less the weighted average number of shares held by the Employee Benefit Trust (1,405,082).  It should be noted that the only right relinquished by the Trustees of the Employee Benefit Trust is the right to receive dividends. In all other respects, the shares held by the Employee Benefit Trust 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.  

 

7.            Financial instruments

 

The fair value of the Group's derivative financial instruments is calculated using the quoted prices. Where such prices are not available, a discounted cash flow analysis is performed using applicable yield curve for the duration of the instruments for non-optional derivatives, and option pricing model for optional derivatives. Foreign currency forward contracts are measured using quoted forward exchange rates and yield curves derived from quoted interest rates matching maturities of the contract.

 

IFRS 13 Fair Value Measurements requires the Group's derivative financial instruments to be disclosed at fair value and categorised in three levels according to the inputs used in the calculation of their fair value.

 

Financial instruments carried at fair value should be measured with reference to the following levels:

·        Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

·        Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or

liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

·        Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The financial instruments held by the Group that are measured at fair value all related to financial assets/(liabilities) measured using a Level 2 valuation method.

 

 

 

The fair value of financial assets and liabilities held by the Group are:

 

 


28 February 2018


28 February 2017


31 August 2017

 

(unaudited)

(unaudited)

(audited)

 

£'000

£'000

£'000

Financial assets

 

 

 

Amortised cost

 

 

 

Cash and cash equivalents

19,734

9,391

14,174

Trade and other receivables

10,243

9,211

11,203

Designated cash flow hedge relationships

 

 

 

Derivative financial assets designated and effective as cash flow hedging instruments

                       258

 

                    -     

-

 

30,235

18,602

25,377

Financial liabilities

 

 

 

Designated cash flow hedge relationships

 

 

 

Derivative financial liabilities designated and effective as cash flow hedging instruments

-

443

484

Amortised cost

 

 

 

Trade and other payables

8,861

3,468

4,042

 

8,861

3,911

4,526

 

 

 

 

 

 

 

 

Independent Review Report to Focusrite Plc 

Conclusion

We have been engaged by the company to review the condensed set of financial statements in the half-yearly report for the six months ended 28 February 2018 which comprises the Condensed Consolidated Income Statement, Condensed Consolidated Statement of Other Comprehensive Income, Condensed Consolidated Statement of Financial Position, Condensed Consolidated Statement of Changes in Equity, Condensed Consolidated Statement of Cash Flow and the related explanatory notes. 

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly report for the six months ended 28 February 2018 is not prepared, in all material respects, in accordance with the recognition and measurement requirements of International Financial Reporting Standards (IFRSs) as adopted by the EU and the AIM Rules.

Scope of review 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK.  A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.  We read the other information contained in the half-yearly report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. 

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit.  Accordingly, we do not express an audit opinion. 

Directors' responsibilities 

The half-yearly report is the responsibility of, and has been approved by, the directors.  The directors are responsible for preparing the half-yearly report in accordance with the AIM Rules. 

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the EU.  The directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with the recognition and measurement requirements of IFRSs as adopted by the EU. 

Our responsibility 

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly report based on our review.

 

 

The purpose of our review work and to whom we owe our responsibilities

This report is made solely to the company in accordance with the terms of our engagement.  Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose.  To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached. 

 

 

Peter Meehan

for and on behalf of KPMG LLP 

Chartered Accountants 

One Snowhill

Snow Hill Queensway

Birmingham

B4 6GH

24 April 2018

 


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