Ao World Regulatory News (AO.)

18 August 2022

 AO WORLD PLC

FINAL RESULTS FOR THE YEAR ENDED 31 MARCH 2022

RESILIENT REVENUE PERFORMANCE AGAINST CHALLENGING BACKDROP

CONFIDENCE IN LONG-TERM GROWTH OPPORTUNITIES FOR AO IN THE UK

OVER 4 MILLION NEW CUSTOMERS ADDED IN THE PAST TWO YEARS

ADDRESSABLE MARKET IN THE UK NOW £23.4BN AS A RESULT OF EXTENSION INTO NEW CATEGORIES

AO World plc ("the Group" or "AO"), a leading online electrical retailer, today announces its audited financial results for the year ended 31 March 2022 ("FY22").

Given the exceptional operating environment over the past 24 months, our performance in the comparable period in FY20 provides a more meaningful overview of our business performance than a simple comparison with FY21. Financial results for both the one-year and the two-year results are presented below. 

Financial highlights

· Group revenue growth of 52% over two-year period since FY20; resilient performance in our UK business with a one YoY decline of 5% against an extraordinary comparative performance during Covid in FY21

· Group EBITDA of £8.5m impacted by increased staff costs added during Covid in H2 FY21as well as increased marketing and logistics costs 

· Statutory loss before tax of £37m (FY21: profit of £20m)

· Overall liquidity of £50m (FY21: £143m) at 31 March 2022 with net debt3 of £33m (31 March 2021: £58m net funds)

· Capital-raising post year-end successfully secured additional liquidity of £40m with £80m revolving credit facility extended until April 2024

Operational highlights

· Over four million new customers6 experienced AO's brilliant customer service (FY20-FY22), with repeat purchase rates continuing to outperform pre-Covid levels

· Over 350,000 Trustpilot ratings, averaging an "Excellent" 4.6/5 stars and Net Promoter Scores averaging a market-leading 867New agreement with Homebase to supply appliances and installation and recycling services to Homebase's customers where Homebase agrees to purchase exclusively from AO their MDA and audio-visual appliances over an initial five-year term

· Following a strategic review, decision taken post year-end to close German business; orderly closure of the business in progress; simplification of business model and cost base to focus on the UK market in progress

· Over five million appliances, including two million fridges, have now been recycled at our AO Recycling facility. With overall Recycling revenues growing 36% year-on-year, we are now working with manufacturers to use our recycled plastic in new products

· AO remains a UK market leader in MDA with an 18% market share and 32% overall online market share

 Outlook

The new financial year marks a period of realignment for the business as we execute a strategic pivot to focus on cash and profit generation. Our plans and outlook, which were set out in July alongside the equity placing are as follows:

- We now estimate the closure cash costs of our German business will be no more than £5m, at the lower end of our original estimate of nil to £15m.

- The £40m of equity raised in July strengthens our balance sheet and provides the flexibility to capitalise on significant long term growth opportunities in the UK

- Our addressable market in the UK has grown to £23.4bn as it extends into new categories such as televisions, laptops, audio visual and small domestic appliances ("SDA"). The online segment of the market in those categories remains AO's key opportunity as the long-term structural migration to online retailing continues. 

- We are successfully leveraging our logistics and recycling platform and have signed a new five-year contract with Homebase to supply appliances and installation and recycling service to its customers, including, on an exclusive basis, MDA and audio-visual appliances. We are discussing similar partnerships with other kitchen retailers.

- We continue to rationalise, simplify and refocus our UK operations which entails exiting some lines of business that do not fit our model. This, combined with driving operational efficiencies and overhead reduction, is estimated to generate significant economic benefits by FY25 to help underpin margin expansion

- Trading through the first quarter of FY23 has remained broadly in-line with the Board's expectations for FY23, with revenues in the approximate range of £1bn to £1.25bn and Group adjusted EBITDA for the full year in the range of £20m - £30m, with the usual weighting towards the second half of the year. 

- In the short term, we expect our strategic pivot and business realignment will reduce both sales and costs, but in the medium term our ambition is to deliver average revenue growth of 10+% per annum with an EBITDA margin of 5+% and improved cash generation. 

AO's Founder and Chief Executive, John Roberts, said:

 "AO was founded on the belief that online is a better way to buy electricals. That belief is as strong as ever, even - and especially - as we go through one of the most challenging operating environments we've weathered as a company.

 "The past 12 months has been a turbulent time for business and for retail in particular, and AO hasn't been immune to those effects. Looking ahead, we certainly have more volatility to navigate, but the core fundamentals of our business remain strong. We entered the new financial year with a period of strategic realignment, and a focus on cash and profit generation.

 "AO has become the destination for electricals for millions of customers through our absolute obsession with amazing service, and that will remain our guiding star. I'd like to thank the AO team, our Chair and the Board, as well as our committed investors and stakeholders, for their continued support and passion in helping us deliver for our customers."

Webcast details

A results presentation will be held for analysts and investors at 08.30 am BST, today, 18 August 2022. Please register to join the presentation and live Q&A at

https://stream.brrmedia.co.uk/broadcast/62d02e960485375c36e3e7a6

A live Q&A session for analysts and investors will immediately follow the presentation with questions accepted during the live stream. A playback of the presentation will be available on AO World's investor website at www.ao-world.com later that day.

About AO

AO World plc, headquartered in Bolton and listed on the London Stock Exchange, is an online electrical retailer, with a mission to be the destination for electricals. Our strategy is to create value by offering our customers brilliant customer service and making AO World the destination for everything they need, in the simplest and easiest way, when buying electricals. We offer major and small domestic appliances and a growing range of mobile phones, AV, consumer electricals and laptops. We also provide ancillary services such as the installation of new and collection of old products and offer product protection plans and customer finance. AO World Business serves the B2B market in the UK, providing electricals and installation services at scale. AO World also has a majority equity stake in AO World Recycling, a WEEE processing facility, allowing AO World to ensure its customers' electronic waste is dealt with responsibly.

1The FY20 comparative excludes revenue and losses generated by AO.nl, our Netherlands website, which was closed during the third quarter of the year ended 31 March 2020

2Group Adjusted EBITDA is defined as profit/(loss) before tax, depreciation, amortisation, net finance costs, profit/loss on disposal of fixed assets, and other adjusting items. The FY20 comparative excludes losses generated by AO.nl.

3Net debt is defined as cash less borrowings less owned asset lease Liabilities but excluding right of use asset lease liabilities.

4Where comparison change is a swing from positive to negative, this is judged to be a non-meaningful ("NM") comparison.

5A customer is defined as an individual customer who has purchased via ao.com or ao.de.

6Net Promoter Score or "NPS" is an industry measure of customer loyalty and satisfaction. UK NPS comprises ao.com and mobilephonesdirect.com and is calculated on a revenue weighted average basis. Trustpilot scores sourced from their website, June 2022.

Cautionary statement

This announcement may contain certain forward-looking statements (including beliefs or opinions) with respect to the operations, performance and financial condition of the Group. These statements are made in good faith and are based on current expectations or beliefs, as well as assumptions about future events. By their nature, future events and circumstances can cause results and developments to differ materially from those anticipated. Except as is required by the Listing Rules, Disclosure Guidance and Transparency Rules and applicable laws, no undertaking is given to update the forward-looking statements contained in this document, whether as a result of new information, future events or otherwise. Nothing in this document should be construed as a profit forecast or an invitation to deal in the securities of the Company. This announcement has been prepared for the Group as a whole and therefore gives greater emphasis to those matters which are significant to AO World plc and its subsidiary undertakings when viewed as a whole.

OPERATING & STRATEGIC REVIEW

This has been a tumultuous year for business, and for the retail sector in general. The Covid restrictions during 2020 and most of 2021 curtailed consumer spending in traditional shops and accelerated the longer-term trend to online shopping. We invested significantly and boldly to meet consumer demand and capture new customers, which brought new pressures for our business in logistics, warehousing, staffing levels, inventory and delivery but enabled us to expand our category reach and to introduce over four million new customers to the brilliant AO service since the pandemic started in 2019. 

We entered the year with optimism but as the year progressed, our business faced increasing macroeconomic headwinds including global supply chain disruption, labour shortages and a well-documented growing cost of living crisis for consumers. In Germany, as Covid restrictions were lifted, customers returned to pre-pandemic behaviours to a greater degree than we anticipated. As a result of this combination of global factors, our markets weakened considerably as the year progressed.

Despite the market challenges, our UK business showed resilience, with reported revenues of £1.37 billion which decreased by 4.6% from FY21 at the height of the Covid pandemic but increased 52% on a two year like-for-like pre-Covid basis. We have an exceptionally strong customer base, adding four million customers in the past two years alone and achieving market-leading customer satisfaction scores on NPS and Trustpilot. We also retained our market share, both online and of the total market, and remain one of the leaders in the retail of major domestic appliances ("MDA") with a 32% online market share in the UK, even as customers returned to traditional bricks and mortar stores to a greater degree than was originally anticipated. Opportunities to leverage this customer base underpin our business and our future strategy.

Like many businesses, we faced a number of challenges as we emerged from the Covid lockdown. Global supply chains have struggled to cope as the global economy emerged from Covid restrictions, which led to component shortages and hugely increased container shipping rates. As a result, product and range availability was constrained for certain lines although, as one of the market leaders, we were still able to offer a wider range than many other electrical retailers. This was compounded by inflationary pressures in other costs right across our business, from staffing to vehicles, energy and fuel.

Our flexible and agile operating model meant that we could respond rapidly to the shortage of delivery drivers in the second quarter of FY22 which temporarily impacted our service levels. Through a mixture of flexing our model of self-employed drivers, temporarily introducing a limited employed model and leveraging our apprenticeship programmes, we successfully met these challenges, although at a higher ongoing operating cost. Crucially, despite these challenges, the quality of our customer service throughout the period never wavered.

We anticipate that the UK consumer will continue to be challenged by cost-of-living pressures in the near term, but that our strong market position and customer proposition will continue to underpin our resilience and our market position.

Germany closure

Following a significant migration to online shopping during the pandemic, German customers returned to traditional channels as Covid restrictions lifted to a much greater extent than we expected. However, the strong performance of the online channel through this period prompted traditional retailers to create and promote online customer acquisition models. This resulted in a huge increase in the cost of customer acquisition, as competition for online sales intensified, with the extra capacity of the online channel created through the pandemic competing for pre-pandemic levels of sales.

These factors unfortunately outweighed the economies of scale that we had achieved. After six months of intense competition, we undertook a strategic review of the business which resulted in the eventual decision to close our German business. We sincerely thank all our employees in Germany who worked so hard to build the business. We are continuing to carry out an orderly closure of the business and expect the total cash costs to be between nil to £5m in FY23.

Employees are at the heart of our success

Our dedicated and talented employees are the face of AO to our customers, and they are the reason that we consistently win market-leading customer satisfaction ratings. Our AO culture is how we deliver for our customers which is what sets us apart as a business. Behind every happy customer are around 3,600 AOers, making our customers' lives easier by helping them brilliantly. Our AOers have lived our values to make their mums proud, and we thank each and every one of them for their hard work, this year and every year.

We are acutely aware that our people have continued to deliver brilliant service whilst dealing with enormous change and uncertainty. We are determined to repay their professionalism, dedication and resilience, and we look forward to further engagement.

Outlook

The new financial year marks a period of realignment for the business as we undertake a strategic pivot to focus on cash and profit generation.

In June, following a strategic review of our German business, we announced the decision to close that operation with estimated cash costs in FY23 of nil to £5m, a significant improvement on our original estimate of nil to £15m.

In July, to strengthen the balance sheet and increase liquidity back to historical levels relative to revenue, we conducted a placing of new ordinary shares, raising c.£40m of capital. This also provides the flexibility to capitalise on significant long term growth opportunities in the UK. Our addressable market in the UK has grown to £23.4bn as it extends into new categories, and the online segment of the market in those categories remains AO's key opportunity as the migration to online retailing continues.  We are also successfully leveraging our logistics expertise and have signed an extendable five-year contract with Homebase to supply appliances and installation and recycling service to Homebase's customers, including, on an exclusive basis, MDA and audio-visual appliances. We are discussing similar partnerships with other kitchen retailers.

As the business focusses on the significant opportunity, we see in the UK, the process of simplifying operations and optimising our cost base is already underway. We continue to rationalise, simplify and refocus our UK operations, exiting some lines of business that do not fit our model and driving operational efficiencies and overhead reduction which, in aggregate, is estimated to generate significant economic benefits by FY25. In the short term, we expect our strategic pivot and business realignment will reduce both sales and costs, but in the medium term it is our ambition to deliver average revenue growth of 10+% per annum with an EBITDA margin of 5+% and improved cash generation. 

This is an unprecedented environment for business planning as the post-pandemic retail environment is substantially shifting, which presents both challenges and opportunities for AO as a leading online electricals retailer. Trading through the first quarter of FY23 has remained broadly in-line with the Board's expectations for FY23 revenues in the approximate range of £1bn to £1.25bn and Group adjusted EBITDA for the full year in the range of £20m - £30m with the usual weighting towards the second half of the year.

FINANCIAL REVIEW

At the start of our financial year in April 2021, we planned for the continuation of the elevated growth trends that we experienced during the Covid pandemic. We therefore invested in our business to build upon the foundations of expansion as well as to address some of the operational strains rapid growth had put on our infrastructure and people over the prior year. The strategy to impress as many new customers as possible proved successful, with over four million new customers experiencing the AO way since FY20. 

As the year progressed, however, macroeconomic headwinds, including rising interest rates and higher fuel and utility costs impacted customer behaviour as cost-of-living pressures increased. Where the first half of the year was impacted by driver shortages and global supply chain inefficiencies, the second half experienced progressively weaker customer demand across the sector, affecting both revenue growth and profits.

In Germany, as companies invested in building their online proposition and customers simultaneously returned to pre-Covid behaviour, our German business experienced increasingly intense competition. Despite building a competitive platform that achieved breakeven in the prior year, our German business remained subscale in the wider market. As a result, in January we started a strategic review of our business in Germany which resulted in the announcement of its closure in June 2022. As we progress with an orderly wind down of the business, we expect the total cash costs of closure in FY23 to be nil to £5m.

After the financial year end, in July 2022 we undertook a share placing to strengthen the balance sheet and increase liquidity back to historical levels (relative to revenue base), as well as providing the flexibility to capitalise on future market opportunities. This was strongly supported by shareholders and raised gross proceeds of approximately £40 million. During the year we also extended our £80m revolving credit facility which is now due to expire in April 2024. The current financial year marks a period of realignment for the business as we undertake a strategic pivot to focus on cash and profit generation. The process of simplifying operations and optimising our cost base is already underway. AO remains a market leader in MDA in the UK with an 18% market share and 32% overall online share, providing us with a strong and resilient market position. The actions we have taken, both to optimise our cost base and strengthen our balance sheet, will allow us to invest prudently in our business, seize market opportunities and leverage our significant customer base. This is a prudent approach given the difficulty of predicting the near-term market dynamics.

Revenue

Table 1

For the 12 months ended 31 March 2022, total Group revenue decreased by 6.2% to £1,557.3m (2021: £1,660.9m).

In the UK, total revenues decreased by 4.6% as shortages in key product components and driver availability in H1 impacted on our ability to deliver our traditional full product range and our delivery proposition. This decline was somewhat offset by higher average product value. The lower product sales also fed through to services revenues due to reduced installations and delivery charges. 

In Germany, total revenues declined 16.5% against a strong performance in the prior year during Covid restrictions on traditional in-store retailers and the effect of changes in consumer behaviour and intense competition.

Product revenue

Total product revenue, comprising sales generated from ao.com, ao.de, marketplaces and third-party websites, decreased by 8.8% as the overall market in the UK for consumer discretionary purchases weakened considerably in H2. In Germany, the lifting of Covid restrictions resulted in consumers returning to traditional bricks and mortar shops to a greater degree than anticipated. This was exacerbated by the ongoing supply chain disruption and a global shortage of components at manufacturers' facilities resulted in reduced product ranges across our industry.

In the UK, MDA revenue decreased by 7.3% as consumer demand weakened in H2, compounded by challenges in our logistics operations in H1, with the wide-spread shortage of drivers and skilled installers. Non-MDA revenues, comprising SDA, computing and gaming but excluding AV, declined by 10.9% in part due to shortages of gaming products. AV revenue, which includes televisions and audio visual, saw a decline of 22.0% over the comparable period last year, which was inflated by Covid lockdown purchases and the televised European football championships in the summer of 2021. B2B recorded strong growth across all its routes to market, albeit from a modest base, as we continue to gain market share and build further capabilities, winning attractive contracts.

Product revenue in Germany declined by 17.8% (a decline of 13.9% in Euros). Revenue was impacted by highly competitive market conditions and unsustainably high customer acquisition costs, as traditional retailers sought to expand their online capability. We therefore took the short-term decision to reduce our online marketing efforts in Germany which impacted sales growth.

Services

Services revenues, include fees for delivery, recycling, installation and related services, declined in line with the reduction in product revenue as well as being affected by a shortage of qualified fitters in the UK during H1. In Germany, the decline in services revenues reflected the decline in product sales. 

Commission

Commission revenue, which includes commissions generated by network connections in our Mobile business and from AO Care warranties, showed an improvement of 7.6% against prior year revenues. Overall, commissions from the sale of warranties remained broadly flat against the prior year. The number of plans sold in FY22 reduced from the highs seen in FY21 although the prior year was impacted by a c.£8m reduction of previously recognised revenue due to a significant change in customer behaviour. The business also recorded slightly elevated but temporary levels of customer cancellations in Q4, primarily due to the initial reaction from consumers to the cost-of-living crisis, similar to that we experienced at the start of the Covid pandemic. Post period end cancellations have returned to a more normalised level as customers adjusted.

In Mobile, following adjustments to our customer proposition and the removal of the redemption cashback offer, the average life of new contracts has continued to improve and with the RPI increases imposed by the networks, revenue has increased in the year.

Third Party Logistics

Third-party logistics performed well, increasing 48.9%, albeit off a modest base.  Our expertise in complex two-person delivery is highly valued in our industry, and we undertake a number of deliveries on behalf of third-party clients in the UK including Hisense and, Simba. The shortage of delivery drivers during the year resulted in some limits being put on our ability to accept incremental third-party business, but overall, we were able to satisfy partner demand and build on the number of entities we service. We continue to develop this revenue opportunity as it leverages our operational gearing.

Recycling

Recycling revenues performed well, increasing 36% over the year. Operations recovered from the periodic closures during the prior year whilst operating under Covid restrictions when councils closed household waste and recycling centres. Processed volumes have increased overall year on year and the business benefitted from a strong recovery in output prices for recycled materials.

Gross margin

Table 2

Gross margin for the Group remained broadly stable as a percentage of revenues but decreased in absolute terms due to the dilutive effect of reduced product volumes in Germany. In the UK, gross margin reflected the increased costs in fuel and driver rates, but, as an overall percentage of revenue, improved slightly due to increased product pricing. These inflationary cost increases were largely offset by an improvement in our Mobile business profitability which in the prior year had been impacted by changes in consumer behaviour.

In Germany, gross margin reduced to 3.2% as competition in the market impacted on pricing and the reduced volumes resulted in inefficiencies within delivery costs. Gross margin was also impacted by a £6.9m charge relating to the impairment of certain assets in the business.

Selling, General & Administrative Expenses ("SG&A")

Table 3

Group SG&A costs as a percentage of revenue increased during the period to £303.4m (2021: £263.6m), or as a percent of revenues from 15.9% to 19.5%. The largest increases were in warehousing and other administrative costs, mainly in response to Covid pressures. 

In the UK, SG&A costs increased to £272.7m (2021: £235.6m), or as a percent of revenues from 16.4% to 19.9%. The largest cost increase was in warehousing, which increased to £69.6m (2021: £58.7m), or as a percentage of revenues from 4.1% to 5.1%. The drop in sales volumes impacted on the recovery of the full year costs of new property leases entered into in the previous year to manage additional warehouse capacity during the pandemic. Wage inflation also contributed to cost rises.  We are currently reviewing and rationalising our warehousing footprint in view of the changing demand dynamics. 

Advertising and marketing costs in the UK increased to £46.1m (2021: £43.3m), or as a percent of revenues from 3.0% to 3.6% due to increased spending on brand awareness and customer acquisition post Covid. This was offset by a reduction in television advertising as the business changed to more targeted social media channels.

Other admin costs in the UK increased to £138.6m (2021: £118.2m), or as a percentage of revenues from 8.2% to 10.1%. This primarily reflects the investment in people made in the business in the second half of FY21 to support the significantly increased growth, particularly in our Retail business and in IT. In reaction to the slowdown seen in the market in H2, the Group has undertaken a right-sizing exercise across a number of areas to align costs with a reduced level of activities and, therefore, costs are expected to reduce as we move into FY23. Other areas of increase include insurance premiums and costs related to re-opening office premises following the Covid-related restrictions in the prior year.

In Germany, although shoppers returned to traditional retailers to a greater degree than anticipated, companies continued to build their online presence. Competition in the online space therefore intensified, which also drove up marketing costs as the cost per clicks, in some cases, up more than 100%. Warehousing and other admin increased as a percentage of sales primarily as result of lower volumes with absolute levels of spend being broadly equivalent to the prior period. 

Operating loss and Adjusted EBITDA

As a result of the above, our operating loss for the period was £32.3m (2021: £29.7m profit).

Alternative Performance Measures

The Group tracks a number of alternative performance measures in managing its business. These are not defined or specified under the requirements of IFRS because they exclude amounts that are included in, or include amounts that are excluded from, the most directly comparable measure calculated and presented in accordance with IFRS or are calculated using financial measures that are not calculated in accordance with IFRS. The Group believes that these alternative performance measures, which are not considered to be a substitute for, or superior to IFRS measures, provide stakeholders with additional helpful information on the performance of the business. These alternative performance measures are consistent with how the business performance is planned and reported within the internal management reporting to the Board. Some of these alternative performance measures are also used for the purpose of setting remuneration targets. These alternative performance measures should be viewed as supplemental to, but not as a substitute for, measures presented in the consolidated financial statements relating to the Group, which are prepared in accordance with IFRS. The Group believes that these alternative performance measures are useful indicators of its performance.

EBITDA

EBITDA is defined by the Group as earnings before interest, tax, depreciation, amortisation and profit/loss on the disposal of fixed assets.

Adjusted EBITDA

Adjusted EBITDA is calculated by adding back or deducting Adjusting Items to EBITDA. Adjusting Items are those items which the Group excludes in order to present a further measure of the Group's performance. Each of these items, costs or incomes, is considered to be significant in nature and/or quantum or are consistent with items treated as adjusting in prior periods. Excluding these items from profit metrics provides readers with helpful additional information on the performance of the business across periods because it is consistent with how the business performance is planned by, and reported to, the Board and the Chief Operating Decision Maker.

The Adjusting Items for the current year are:

· Due to the continued losses in the German business, the Group has undertaken a strategic review during the year. As a result of these losses and the subsequent decision to close that business, management have performed a full impairment review of the assets at 31 March 2022. As a consequence, management have made impairment provisions of £7.3m at 31 March 2022 of which £1.2m relates to inventory and £6.1m relates to Right of use assets and other property, plant and equipment. In addition, legal advice and other costs of the review totalled £0.9m as at the year-end resulting in a total of £8.2m of impairment and other charges in the income statement. Given the nature of these costs, they have been added back in arriving at adjusted EBITDA.

The additional Adjusting Items for the prior year were:

• In FY21, management reassessed the impact on future expected cancellation rates as a result of an increase in cancellations seen through the second half of the year. As a result, revenue for FY21 was constrained by £8.1m with a corresponding reduction in the contract asset. Given the size and nature of the adjustment, the amount was added back in arriving at Adjusted EBITDA for FY21 comparison.

• In December 2017, the Group entered into a marketing contract in Germany which was anticipated to generate significant additional revenue. In subsequent years, the performance of this contract was reassessed due to significant losses being incurred and the benefits expected from the contract not materialising. The Group renegotiated the contract with new terms taking effect from April 2021. However, the existing terms up to 31 March 2021 resulted in the cost of fulfilling the contract over its life exceeding any benefit gained from it and therefore management added back the full cost in the prior period of £2.2m.

The reconciliation of statutory operating (loss)/ profit to Adjusted EBITDA is as follows:

Table 4

Taxation

The tax credit for the year was £7.1m (2021: tax charge of £3.1m), resulting in an effective rate of tax for the year of 19.0%.

The Group is subject to taxes in the UK and Germany. The Group continued to be able to offset its German losses against profits within the UK through its registered branch structure in Germany. No overseas tax is attributable to Germany in the year due to its trading results.

A prior period adjustment to deferred tax of £0.6m had been recognised in the period due to an increase in carried forward losses.

Our tax strategy can be found at www.ao-world.com/responsibility/group-tax-strategy.

Retained loss and loss per share

Retained loss for the period was £30.1m (2021: £17.1m profit).

Basic loss per share was 6.33p (2021: 3.73p profit) and diluted loss per share was 6.33p (2021: 3.68p earnings). Basic loss per share is reconciled to adjusted basic loss per share (after excluding the impact of foreign exchange differences) of 6.10p (2021: 5.15p earnings) as follows:

Table 5

The diluted loss per share has been restricted to the basic loss per share for the 12 months ended 31 March 2022 to prevent having an anti-dilutive effect.

Foreign exchange differences are deducted to arrive at adjusted (loss) / earnings. The loss of £1.1m (2021: £6.8m) relates to the impact of the Euro/Sterling exchange rate on the value of intra-group loans held in GBP in Germany.

Cash resources and cash flow

At 31 March 2022, the Group's net debt was £32.7m (31 March 2021: £57.5m net funds). Net debt comprises cash balances less borrowings and owned asset lease liabilities. At 31 March 2022, the Group's Total net debt, being net debt less right of use asset lease liabilities, was £134.1m (31 March 2021: £28.2m).

Cash balances at 31 March 2022 were £19.5m (31 March 2021: £67.1m). The decrease in cash since 31 March 2021 is largely driven by the outflow from working capital (see below), capital expenditure and the repayment of lease liabilities offset by drawdown on the Group's revolving credit facility.

Borrowings of £45.0m (31 March 2021: £nil;) relate to short term funding drawn from the Group's revolving credit facility.

Lease liabilities increased by £13.4m to £108.6m (31 March 2021: £95.2m) reflecting new right of use lease liabilities of £45.4m and the downward reassessment of lease terms net of lease payments in the period. The new leases in the year principally relate to an additional warehouse in Crewe, four new out-bases, the new London creative studio and delivery fleets in both the UK and Germany.

During the year, the Group extended the term of its £80m revolving credit facility by 12 months and this now expires in April 2024. At 31 March 2022, the Group had £30.1m available on this facility. The amount utilised represents £45.0m of cash borrowings (see above) and £4.9m of letters of credit/guarantees.

Working Capital

At 31 March 2022, the Group had net current liabilities of £91.5m (31 March 2021: £59.0m).

At 31 March 2022, UK inventories were £82.0m (31 March 2021: £115.0m) and UK stock days were 34 days (31 March 2021: 39 days). Inventory levels were high at the end of the previous year in response to the ongoing impact of the pandemic and to ensure that we could respond to customers with our excellent AO customer service. As traditional retailing started to open in FY22, stock levels returned to more normal levels and, as the overall market remained soft throughout H2, we further realigned inventory levels to reduced levels of sales.

UK trade and other receivables (both non-current and current) were £243.9m as at 31 March 2022 (31 March 2021: £230.4m) reflecting an increase in trade with our B2B customers, which are on longer working capital cycles, and the timing of supplier marketing commissions.

UK trade and other payables were £296.9m at 31 March 2022 (31 March 2021: £391.7m). Investment in inventory at the end of FY21 drove up payables at the prior period end with the working capital benefit unwinding as purchasing patterns returned to more normal levels during FY22. Trade payables days at 31 March 2022 were 47 days (31 March 2021: 52 days).

Net working capital decreased from £17.8m to £9.8m in Germany, driven primarily by a significant reduction in inventory levels from the abnormal levels seen at the prior year end as well as reduction to align with the lower level of sales seen during the latter part of FY22.

Table 6

Capital Expenditure

Total cash capital expenditure for the 12-month period was £7.6m (2021: £6.3m), largely related to ongoing investment in our recycling facility, new out-base fit out costs and investment in our new creative studio in London.

Post balance sheet event

During FY22, the Group's German business incurred losses EBITDA losses of £21.3m. A strategic review was started in Q4 FY22 and on 9 June 2022 it was announced that the Group had taken the decision to close the business.

As a consequence of the losses and the post year end decision to close, management have reviewed the carrying value of that businesses assets. This has been performed using third party information regarding fixed assets, including ROU assets, together with an assessment of the realisable value of any remaining inventory.

As a result, provisions of £7.3m have been made at 31 March 2022 to impair the relevant assets and this, together with £0.9m of adviser costs accrued prior to 31 March 2022, have been included as "Adjusting" items in note 6 to the financial statements.

The closure process is expected to be completed during FY23.On 11 July 2022 the Company completed a Capital Raise through the issue of 93,801,251 new ordinary shares of 0.25p each in the Company raising £40.3million (before expenses). The net proceeds of the Capital Raise will strengthen the balance sheet and increase liquidity back to historic levels (relative to revenue base) and provide the flexibility to capitalise on market opportunities.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the 12 months ended 31 March 2022

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 31 March 22

CONDENSED CONSOLIDATED STATEMENT OF CHANGE IN EQUITY

At 31 March 2022

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

For the 12 months ended 31 March 2022

NOTES TO THE FINANCIAL INFORMATION

1. Basis of preparation

This financial information has been prepared and approved by the Directors in accordance with UK adopted International Accounting Standards ("UK adopted IFRS").

Whilst the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRSs), this announcement does not itself contain sufficient information to comply with IFRSs.

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 March 2022 or 2021 but is derived from those accounts. Statutory accounts for 2021 have been delivered to the Registrar of Companies and those for 2022 will be delivered following the Company's Annual General Meeting. The auditor has reported on those accounts; the report was unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under section 498(2) or (3) Companies Act 2006.

Certain financial data have been rounded. As a result of this rounding, the totals of data presented in this document may vary slightly from the actual arithmetic totals of such data.

Adoption of new and revised standards

The accounting policies set out in Note 3 of the financial statements have been applied in preparing this financial information.

New accounting standards in issue but not yet effective

New standards and interpretations that are in issue but not yet effective are listed below:

· Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 'Interest Rate Benchmark Reform' - phase 2

· Annual Improvements to IFRS Standards 2018 - 2020

The Group continues to monitor the potential impact of other new standards and interpretations which may be endorsed and require adoption by the Group in future reporting periods. The Group does not consider that any other standards, amendments or interpretations issued by the IASB, but not yet applicable, will have a significant impact on the financial statements.

Going concern

Notwithstanding net current liabilities of £91.5m as at 31 March 2022, a cash outflow of £47.6m, and an increase in net debt of £105.9m in the year ended 31 March 2022, the financial statements have been prepared on a going concern basis which the Directors consider to be appropriate for the following reasons:

The Group meets its day-to-day working capital requirements from its cash balances and the availability of its £80m revolving credit facility (which was extended by 12 months to now expire in April 2024). At the date of approval of these financial statements total liquidity amounted to £60.7m.

The Directors have prepared base and sensitised cash flow forecasts for the Group covering a period of at least 12 months from the date of approval of these financial statements ("the going concern period") which indicate that the Group will remain compliant with its covenants and will have sufficient funds through its existing cash balances and availability of funds from Revolving Credit Facility to meet its liabilities as they fall due for that period. The forecasts take account of current trading, management's view on future performance and their assessment of the impact of market uncertainty and volatility.

In assessing the going concern basis, the Directors have taken into account severe but plausible downsides to sensitise its base case and have run these in combination. These primarily include:

· a downside of negative growth in the financial year 2023 and in the subsequent periods to account for how the overall electrical online market could be impacted by the continuing macro-economic factors exacerbated by the conflict in Ukraine, such as inflation, consumer confidence, interest rate increases.

· the cost of exit from Germany and potential volatility in the timing and amount of cash inflows as a result of this exit;

· product protection plan cancellation increases as a result of macroeconomic trends;

· cost inflation being higher than anticipated particularly in relation to wages; and

· a tightening of credit terms with suppliers as a result of potential withdrawals or reductions of credit insurance which could in turn, result in a reduction in trade creditor days. The severe but plausible downside has been considered at a reduction of 34% on the cumulative average trade creditor days over the previous five years.

Under this severe but plausible downside scenario the Group continues to demonstrate headroom on its banking facilities and remains compliant with quarterly covenants which are linked to interest cover, dividend cover and leverage and its annual covenant linked to net assets.

Consequently, the Directors are confident that the Group and Company will have sufficient funds to continue to meet its 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.

Critical accounting judgements and key sources of estimation uncertainty

In the 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 and are reviewed on an ongoing basis. Actual results could differ from these estimates and any subsequent changes are accounted for with an effect on income at the time such updated information becomes available.

Accounting standards require the Directors to disclose those areas of critical accounting judgement and key sources of estimation uncertainty which carry a significant risk of causing material adjustment to the carrying value of assets and liabilities within the next 12 months. These are discussed below:

Impairment of intangible assets and goodwill

As part of the acquisition of Mobile Phones Direct Limited in 2018, the Group recognised amounts totalling £16.3m in relation to the valuation of the intangible assets and £14.7m in relation to residual goodwill. At 31 March 2022 these amounted to £25.1m.

Intangible assets are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill is reviewed for impairment on an annual basis. When a review for impairment is conducted, the recoverable amount is determined based on the higher of value in use and fair value less costs to sell. The value in use method requires the Group to determine appropriate assumptions (which are sources of estimation uncertainty) in relation to the cash flow projections over the three-year strategic plan period, the long-term growth rate to be applied beyond this three-year period and the risk-adjusted pre-tax discount rate used to discount the assumed cash flows to present value.

Whilst at 31 March 2022, the Directors have concluded that the carrying value of the intangibles and goodwill is appropriate (after considering certain sensitivities which are set out in Note 8), changes in any of these assumptions, which could be driven by the end customer behaviour with the Mobile Network Operators, could give rise to an impairment in the carrying value.

Revenue recognition and recoverability of income from product protection plans

Revenue recognised in respect of commissions receivable over the lifetime of the plan for the sale of product protection plans is recognised in line with the principles of IFRS 15, when the Group obtains the right to consideration as a result of performance of its contractual obligations (acting as an agent for a third party).

Revenue in any one year therefore represents an estimate of the commission due on the plans sold, which management estimate reliably based upon a number of key inputs, including:

· the contractual agreed margins;

· the number of live plans;

· the discount rate;

· the estimated length of the plan;

· the estimated historic rate of attrition; and

· the estimated overall performance of the scheme.

Commission receivable also depends for certain transactions on customer behaviour after the point of sale. Assumptions are therefore required, particularly in relation to levels of customer attrition within the contract period, expected levels of customer spend, and customer behaviour beyond the initial contract period. Such assumptions are based on extensive historical evidence, and adjustment to the amount of revenue recognised is made for the risk of potential changes in customer behaviour, but they are nonetheless inherently uncertain e.g., changes seen in the previous year as a result of Covid-19.

Reliance on historical data assumes that current and future experience will follow past trends. The Directors believe that the quantity and quality of historical data available provides an appropriate proxy for current and future trends. Any information about future market trends, or economic conditions that we believe suggests historical experience would need to be adjusted, is taken into account when finalising our assumptions each year. Our experience over the last decade, which has been a turbulent period for the UK economy as a whole, is that variations in economic conditions have not had a material impact on consumer behaviour and, therefore, no adjustment to commissions is made for future market trends and economic conditions.

In assessing how consistent our observations have been, we compare cash received in a period versus the forecast expectation for that period as we believe this is the most appropriate check on revenue recognised. Small variations in this measure support the assumptions made.

For plans sold prior to 1 December 2016, the commission rates receivable are based on pre-determined rates. For plans sold after that date, base-assumed commissions will continue to be earned on pre-determined rates but overall commissions now include a variable element based on the future overall performance of the scheme.

Changes in estimates recognised as an increase or decrease to revenue may be made, where for example, more reliable information is available, and any such changes are required to be recognised in the income statement. During the year, management have refined the estimations in relation to claims (which impacts profit share) based on more granular information from Domestic & General regarding the claims performance of specific cohorts. This has resulted in an increase in revenue recognised of £2.7m. As with all years, other small refinements have been made but have had an immaterial impact on the revenue recognised.

The commission receivable balance as at 31 March 2022 was £90.7m (2021: £80.7m). The rate used to discount the revenue for the FY22 cohort is 3.54% (2021: 3.55%). The weighted average of discount rates used in the years prior to FY22 was 4.12% (2021: 4.63%).

Revenue recognition and recoverability of income in relation to network commissions

Revenue in respect of commissions receivable from Mobile Network Operators ("MNOs") for the brokerage of network contracts is recognised in line with the principles of IFRS 15, when the Group obtains the right to consideration as a result of performance of its contractual obligations (acting as an agent for a third party).

Revenue in any one year therefore represents an estimate of the commission due on the contracts sold, which management estimates reliably based upon a number of key inputs, including:

· The contractually agreed revenue share percentage - the percentage of the consumer's spend (to MNOs) to which the Group is entitled;

· The discount rate using external market data (including risk free rate and counter party credit risk) - 0.53% (2021: 0.1%);

· The length of contract entered into by the consumer (12 - 24 months); and

· The estimated consumer average tenure which takes account of both the default rate during the contract period and the expectations that some customers will continue beyond the initial contract period and generate out of contract ("OOC") revenue (c4%).

The commission receivable on mobile phone connections can therefore depend on customer behaviour after the point of sale. The revenue recognised and associated receivable in the month of connection is estimated based on all future cash flows that will be received from the MNOs and these are discounted based on the timing of receipt.

This also takes into account the potential clawback of commission by the MNOs and any additional churn expected as a result of recent price increases announced and applied by the MNO's, for which a reduction to revenue is made based on historical experience. The Directors consider that the quality and quantity of the data available from the MNOs is appropriate for making these estimates and, as the contracts are primarily for 24 months, the period over which the amounts are estimated is relatively short. As with commissions recognised on the sale of product protection plans, the Directors compare the cash received to the initial amount recognised in assessing the appropriateness of the assumptions used.

Changes in estimates recognised as an increase or decrease to revenue may be made, where for example, more reliable information is available, and any such changes are required to be recognised in the income statement. During the year, management have refined the estimations in relation to the assumed collection of commissions utilising more recent trends (and ignoring the unusual factors seen during FY21). This has resulted in an increase in revenue recognised of £1.4m. Other small refinements have been made which have had an immaterial impact on the revenue recognised.

The commission receivable balance as at 31 March 2022 was £83.4m (2021: £91.5m). The rate used to discount the current year revenue is 0.53% (2021: 0.10%).

Impairment of assets in AO Deutschland

Due to the continued losses in Germany, pre-year end management commenced a strategic review of the operations in the country. Post year end, a decision was taken to close that business which indicated the assets were impaired at 31 March 2022. An impairment assessment as at 31 March 2022 was undertaken and this has resulted in the write down of certain assets at the year-end. A judgement was taken to assess whether there were conditions in existence at the year end.

These write downs include:

· A one-off provision of £1.2m against unsold inventory which is considered as outside normal provision policies.

· An impairment provision of £6.1m against rights of use property and other assets after considering the recoverable value being whether the company is able to either return the assets back to the landlord or sublet the assets. To the extent that management can negotiate the exit from the leases, there is the possibility that the overall rights of use asset may in part be recovered, however this is uncertainty and therefore an impairment provision is recorded.

Negotiations are ongoing with suppliers with regards to the amount due to or from the German business with regards to trading balances including returned stock, payables and rebates. At 31 March 2022, the amounts included in the balance sheet regarding suppliers are either contractually due or payable. Management however note that discussion are ongoing with suppliers and until these discussions are concluded it may not be possible to determine how much will be settled.

The above may not be finalised until later in FY23 and therefore are included to ensure the uncertainties are properly disclosed.

Recoverability of Deferred tax assets

At 31 March 2022, the Group has UK tax losses of £39.7m and accordingly has recognised a deferred tax asset of £8.0m.

In recognising the asset, management have taken account of the historic profitability of the UK business together with its forecasts (utilising the same information as in the going concern and viability statement). In recent years, other than FY22, the UK business has been profitable. The unprecedented circumstances which have affected the post Covid trading period have been the prime reason for the result in FY22 and management have taken actions to mitigate the impacts of the current cost of living squeeze and difficult macro-economic conditions. The business therefore expects to be profitable in the future and therefore has assessed that utilising the losses is probable and as such the asset has been recognised.

Management acknowledge that the economic environment is providing a difficult backdrop on which to forecast but believes that its forecasts reflect the impact of the current challenges. However, as a consequence of the significance of the asset, this is disclosed as a significant area of accounting judgement.

2. Revenue

The table below shows the Group's revenue by main geographical area and major business area. All revenue is accounted for at a point in time as the Group has satisfied its performance obligations on the sale of its products / services.

Major product / services lines

3. Segmental analysis

The Group has two reportable segments, online retailing of domestic appliances and ancillary services to customers in the UK, and online retailing of domestic appliances and ancillary services to customers in Germany.

Operating segments are determined by the internal reporting regularly provided to the Group's Chief Operating Decision Maker. The Chief Operating Decision Maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Executive Directors and has determined that the primary segmental reporting format of the Group is geographical by customer location, based on the Group's management and internal reporting structure. Transactions between segments are undertaken on an arm's length basis using appropriate transfer pricing policies.

The following is an analysis of the Group's revenue and results by reportable segments.

4. Finance income

5. Finance costs

6. Taxation

The expected corporation tax charge for the year is calculated at the UK corporation tax rate of 19% (2021: 19%) on the (loss) / profit before tax for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions in which the Group operates.

The (credit) / charge for the year can be reconciled to the (loss) / profit in the statement of comprehensive income as follows:

An increase in the UK corporation rate from 19% to 25% (effective 1 April 2023) was substantively enacted on 24 May 2021. The impact of the rate change has been considered when recognising the deferred tax in relation to UK companies, and where there is a material difference between deferred tax recognition at 25% and deferred tax recognition at 19%, the deferred tax has been recognised at the rate in which it is expected to unwind.

7. (Loss) / Earnings per share

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

The diluted loss per share has been restricted to the basic loss per share to prevent having an anti-dilutive effect.

The basic (loss) / earnings per share is affected by significant non-cash foreign exchange movements arising from intra-Group funding arrangements. Management have therefore presented an adjusted (loss) / earnings per share which is based on an adjusted (loss) / earnings attributable to the owners of the parent company and the diluted weighted average number of shares as they believe it provides helpful additional information for stakeholders in assessing the performance of the business. The foreign exchange movement has arisen as a result of the change in the exchange rate between sterling and the euro in the period.

8. Goodwill

Goodwill relates to purchase of Expert Logistics Limited, the purchase by DRL Holdings Limited (now AO World PLC) of DRL Limited (now AO Retail Limited), the acquisition of AO Recycling Limited (formerly The Recycling Group Limited) and the acquisition of Mobile Phones Direct Limited (now AO Mobile Limited) by AO Limited.

Impairment of goodwill

UK CGU - £13.5m

At 31 March 2022, goodwill acquired through UK business combinations (excluding Mobile Phones Direct Limited) was allocated to the UK cash-generating unit ("CGU") which is also the UK operating segment.

This represents the lowest level within the Group at which goodwill is monitored for internal management purposes.

The Group performed its annual impairment test as at 31 March 2022. The recoverable amount of the CGU has been determined based on the value in use calculations. The Group prepares cash flow forecasts derived from the most recent financial budget and financial plan for three years, and extrapolates cash flows for the following years, up until year five, based on an estimated growth rate of 1%. This rate does not exceed the average long term growth rate for the market. The final year cash flow is used to calculate a terminal value.

Management estimate discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to this CGU. In arriving at the appropriate discount rate to use, we adjust the CGU's post-tax weighted average cost of capital to reflect the impact of risks and tax effects specific to the cash flows. The weighted average pre-tax discount rate we used was approximately 9.7% (2021: 9.1%).

The key assumptions, which take account of historic trends, upon which management have based their cash flow projections are sales growth rates, selling prices and product margin.

Management do not believe that any reasonable possible sensitivity would result in any impairment to this goodwill.

Mobile Phones Direct Limited - £14.7m

The Group has assessed the goodwill arising on the acquisition of Mobile Phones Direct Limited in December 2018. This was performed based on a value in use calculation in the same way as for the UK business noted previously but using a pre-tax weighted average cost of capital appropriate for Mobile Phones Direct Limited as a standalone business of 14.8% (2021: 14.2%).

The total recoverable amount in respect of goodwill for this CGU is greater than its carrying value by £0.7m in management's base case.

The main assumptions underlying the value in use calculation are the volume of mobile connections (and hence revenue) where growth is forecast at 3% per annum per year, EBITDA margin that is assumed to stay flat at c.2% and the discount rate.

The Directors have performed sensitivity analysis on the numbers included in the three-year strategic plan for the business in assessing the value in use. Management believe that the key assumptions are revenue, margin and the discount rate. If revenue growth was 4% lower than forecast, it would have an impact of £(0.8)m on the amount of headroom. If margin reduced by 2% this would have an impact of £(0.7)m on the amount of headroom (without management taking any mitigating action). If the discount rate increased by 5% it would have a £(0.8)m impact on the amount of headroom assuming all other factors remained the same.

However, management believe that based on the range of possible outcomes noted above, whilst the value in use is broadly equivalent to the carrying value, there is no current impairment. If the key assumptions were to move by more than the sensitivities identified above, there is a possible upside to the forecast relating to contractual inflationary price increases as disclosed in note 9.

Further details of this area of estimation uncertainty are set out in Note 4 of the annual report.

9. Trade and other receivables

The trade and other receivables are classified as:

All of the amounts classified as non-current assets relate to contract assets.

Contract assets

Contract assets represent the expected future commissions receivable in respect of product protection plans and mobile phone connections. The Group recognises revenue in relation to these plans and connections when it obtains the right to consideration as a result of performance of its contractual obligations (acting as an agent for a third party). Revenue in any one year therefore represents the estimate of the commission due on the plans sold or connections made.

The reconciliation of opening and closing balances for contract assets is shown below:

* Revenue recognised is gross, that is excluding the deduction of cashback payments, which are deducted from revenue in the Income statement but are shown as contract liabilities in the Statement of Financial Position.

Included in the contract asset balance in relation to product protection plans at 31 March 2021 is an amount of £0.4m in relation to variable consideration recognised as revenue up to that date which has reversed in the year ended 31 March 2022. This is included in the revisions to estimates above.

Included in the contract asset balance in relation to network commissions at 31 March 2021 was an amount of £4.8m in relation to previously constrained revenue which has now been recognised in the year ended 31 March 2022. This is included in the revisions to estimates above.

The Group still recognises that there is inherent risk in the amount of revenue recognised as it is dependent on future customer behaviour which is outside of the Group's control and therefore at 31 March 2022 an amount of £8.9m has been constrained in relation to revenue recognised.

Product protection plans

Under our arrangement with Domestic & General ("D&G"), the Group receives commission in relation to its role as agent for introducing its customers to D&G and recognises revenue at the point of sale as it has no future obligations following this introduction. A discounted cash flow methodology is used to measure the estimated value of the revenue and contract assets in the month of sale of the relevant plan, by estimating all future cash flows that will be received from D&G and discounting these based on the expected timing of receipt. Subsequently, the contract asset is measured at the present value of the estimated future cash flows. The key inputs into the model which forms the base case for management's considerations are:

• the contractually agreed margins, which differ for each individual product covered by the plan as is included in the agreement with D&G;

• the number of live plans based on information provided by D&G;

• the discount rate for plans sold in the year using external market data - 3.54% (2021: 3.55%);

• the estimate of profit share relating to the scheme as a whole based on information provided by D&G;

• historic rate of customer attrition that uses actual cancellation data for each month since the start of the plans in 2008 to form an estimate of the cancellation rates to use by month going forward (range of 0% to 9.1% weighted average cancellation by month); and

• the estimated length of the plan based on historical data plus external assessments of the potential life of products (5 to 16 years).

The last two inputs are estimated based on extensive historical evidence obtained from our own records and from D&G. The Group has accumulated historical empirical data over the last 13 years from c.2.8m plans that have been sold. Of these, c.1.05m are live. Applying all the information above, management calculate their initial estimate of commission receivable. Consideration is then given to other factors outside of the historical data noted above that could impact the valuation. This primarily considers the reliance on historical data as this assumes that current and future experience will follow past trends. There is, therefore, a risk that changes in consumer behaviour could reduce or increase the total cash flows ultimately realised over the forecast period. Management makes a regular assessment of the data and assumptions with a detailed review at half year and full year to ensure this continues to reflect the best estimate of expected future trends.

As set out in Note 2, the Directors do not believe there is a significant risk of a material adjustment to the revenue recognised in relation to these plans over the next 12 months. The sensitivity analysis below is disclosed as we believe it provides useful insight to the users of the financial statements into the factors taken into account when calculating the revenue to be recognised. The table shows the sensitivity of the carrying value of the commission receivables and revenue to a reasonably possible change in inputs to the discounted cash flow model over the next 12 months.

Cancellations

The number of cancellations and therefore the cancellation rate can fluctuate based on a number of factors. These include macroeconomic changes e.g., unemployment, but will also reflect the change in nature of the plan itself (insurance plan vs service plan). The impact of reasonable potential changes is shown in the sensitivities above.

Profit share

The profit share attaching to the overall scheme is dependent on factors such as the price of the plan, the cost of claims and the administration of the scheme itself. Given changes in macro-economic conditions, there is an increased risk that claims cost could increase but also the possibility that to counter any increase in cost that D&G could (with agreement from AO) increase the price per plan. The above sensitivity considers what any reasonable change in either of these could mean to the overall profit share.

Network commissions

The Group operates under contracts with a number of Mobile Network Operators ("MNOs"). Over the life of these contracts, the service provided by the Group to each MNO is the procurement of connections to the MNO's networks. The individual consumer enters into a contract with the MNO for the MNO to supply the ongoing airtime over that contract period. The Group earns a commission for the service provided to each MNO. Revenue is recognised at the point the individual consumer signs a contract and is connected with the MNO. Consideration from the MNO becomes receivable over the course of the contract between the MNO and the consumer. The Group has determined that the number and value of consumers provided to each MNO in any given month represents the measure of satisfaction of each performance obligation under the contract. A discounted cash flow methodology is used to measure the estimated value of the revenue and contract assets in the month of connection, by estimating all future cash flows that will be received from the MNOs and discounting these based on the expected timing of receipt. Subsequently, the contract asset is measured at the present value of the estimated future cash flows.

The key inputs to management's base case model are:

• revenue share percentage, i.e., the percentage of the consumer's spend (to the MNO) to which the Group is entitled;

• the discount rate using external market data - 0.53% (2021: 0.10%);

• the length of contract entered into by the consumer (12 - 24 months); and

• consumer average tenure that takes account of both the default rate during the contract period and the expectations that some customers will continue beyond the initial contract period and generate out of contract revenue.

The last two input is estimated based on extensive historical evidence obtained from the networks, and adjustment is made for the risk of potential changes in consumer behaviour. Applying all the information above, management calculate their initial estimate of commission receivable. Consideration is then given to other factors outside of the historical data noted above which could impact the valuation. This primarily considers the reliance on historical data as this assumes that current and future experience will follow past trends.

The risk remains that changes in consumer behaviour may continue and could reduce or increase the total cash flows ultimately realised over the forecast period. Management make a regular assessment of the data and assumptions with a detailed review at half year and full year to ensure this continues to reflect the best estimate of expected future trends and appropriate revisions are made to the estimates. The sensitivity analysis below is disclosed as we believe it provides useful insight to the users of the financial statements by giving insight into the factors taken into account when calculating the revenue to be recognised. The table shows the sensitivity of the carrying value of the commission receivables and revenue to a reasonably possible change in inputs to the discounted cash flow model over the next 12 months, having taken account of the changes in behaviour experienced in the period.

Cancellations

The number of cancellations and therefore the cancellation rate can fluctuate based on a number of factors. These include macroeconomic changes e.g., unemployment, interest rates and inflation. The impact of reasonable potential changes is shown in the sensitivities above.

Contractual entitlement

The entitlement from the MNO's is based on our percentage share of the customers spend. As monthly spend may increase given prices are linked to RPI the Group's potential share of spend could increase. Countering this, any increase in prices may result in increased churn and therefore the above sensitivity aims to provide a reasonable estimate of what any further change in RPI (primarily from April 2023) could have on our contractual entitlement.

Prepayments and accrued income

At 31 March 2022, there is £19.0m (2021: £18.2m) included in prepayments and accrued income in relation to volume rebates receivable. The amounts are largely coterminous and are mainly agreed in the month after recognition.

At 30 June 2022, the balance outstanding was £3.3m (31 May 2021: £4.1m).

10. Trade and other payables

Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 47 days (2021: 52 days), the reduction reflecting the conclusion of certain extended term agreements during the prior year.

Contract liabilities includes payments on account from Mobile Network Operators where there is no right of set off with the contract asset and cashback liabilities due to the end customer within the mobile business.

Historically, certain mobile phone contracts included variable consideration resulting from cash back rights that a customer must claim periodically and as a consequence the Group have constrained the transaction price in relation to the potential cashback redemptions based on historical data. As a result of a change in the sales proposition, from Q4 of FY21 cashback incentives were not offered and therefore during the current year no amounts have been added to the liability which amounted to £8.2m at 31 March 2021. Redemptions have taken place against the liability and at 31 March 2022 the liability now amounts to £0.1m compared to a total maximum liability of £0.2m. During the year there has been no reversal of amounts recognised in prior periods (2021: £7.2m).

Trade and other payables are classified as:

11. Net debt and movement in financial liabilities

Whilst not required by IAS 1 Presentation of Financial Statements, the Group has elected to disclose its Lease liabilities split by the nature of the asset that they relate to. This is to give the users of these Financial Statements additional information that the director's feel will be useful to the readers understanding of the business.

Movement in financial liabilities in the year was as follows: