Focusrite Regulatory News (TUNE)

Strictly embargoed until 07.00: 9 December 2015

Focusrite Plc

("Focusrite" or "the Group")

Results for the year ended 31 August 2015

Focusrite Plc (AIM: TUNE) the global music and audio products company supplying hardware and software products used by professional and amateur musicians, today announces its results for the year ended 31 August 2015.

Financial Highlights

• Group revenue up by 17.2% to £48.0 million (FY14: £41.0 million)

• Adjusted EBITDA1 up by 13.1% to £9.3 million (FY14: £8.2 million)

• Operating profit up by 10.7% to £6.3 million (FY14: £5.7 million)

• Basic earnings per share up by 1.6% to 10.4p (FY14: 10.3p)

• Adjusted diluted earnings2 per share up by 4.3% to 10.5p (FY14: 10.1p)

• Net cash up by 62.3% to £6.2 million (FY14: £3.8 million)

• Maiden final dividend of 1.2p recommended, making 1.8p for the year

Operational Highlights

• Successful first year of trading since IPO and admission to AIM in December 2014

• Revenue growth across both operating brands Focusrite and Novation and in all major territories

o USA growing by 29.3%, Europe, Middle East and Africa by 9.4% and Rest of World by 14.5%

• 19 new products

o Entry into lucrative higher price range segments with Clarett Thunderbolt and Launchpad Pro

o Entry into new Live and Broadcast market segment with RedNet audio

• Downloads of Novation's Launchpad App for Apple's iOS platform grew by 87%; and revenue grew by 185%

• Rated, for the fourth consecutive year, as one of the '100 Best Small Companies to Work For' by The Sunday Times

Philip Dudderidge, Executive Chairman of Focusrite Plc, commented:

"This is the first set of annual results since Focusrite Plc floated and I am pleased that we have performed well, meeting market expectations with record revenues and profits for the year. We issued 19 new products this year and we will continue to invest in our research and development programme to develop future generations of products."

Commenting on current trading and outlook, Dave Froker, CEO said:

"Products launched at the end of the financial year have been well received by the market, with excellent reviews across the industry. Revenue in the first quarter of the current year was ahead of that for FY15, itself a record quarter, in spite of slower than expected initial sales of new products. Pleasingly, existing products continue to perform as expected."

He added: "Notwithstanding the weaker Euro, our continued significant investment in R&D and an exciting new launch schedule for the current year give us confidence that FY16 will be a further year of revenue growth."

1.Comprising of earnings adjusted for interest, taxation, depreciation, amortisation and non-underlying items.

2.Adjusted for non-underlying items.

Availability of Annual Report and Notice of AGM

The Annual Report and Accounts for the financial year ended 31 August 2015 and notice of the Annual General Meeting ("AGM") of Focusrite will be posted to shareholders on 16 December 2015 and will be available on Focusrite's website at www.focusriteplc.com.

Dividend timetable

The final dividend is subject to shareholder approval, which is being sought at Focusrite's Annual General Meeting to be held on 29 January 2016.

If approved, the final dividend in respect of the year ended 31 August 2015 will be paid on 3 February 2016 to shareholders on the register as at 18 December 2015.

The timetable for the final dividend is as follows:

Enquiries:

Notes to Editors

Focusrite is a global music and audio products group supplying hardware and software products used by professional and amateur musicians, which enables the high quality production of music.

The Group has two established and rapidly growing brands: Focusrite and Novation. The Focusrite brand makes audio interface and other products for audio recording musicians. The Novation brand allows its customers to make electronic music using synthesisers and computer-enabled technology.

The Group has a global customer base with a distribution network covering approximately 160 territories. Focusrite is headquartered in High Wycombe, United Kingdom with a marketing subsidiary in Los Angeles, United States and has around 160 employees.  

Chairman's Statement

I would like to express my appreciation to the shareholders that participated in the flotation of Focusrite Plc on AIM in December 2014 and welcome new shareholders that have acquired shares in Focusrite subsequently.

This is the first set of annual results since Focusrite Plc floated and I am pleased that we have performed well, meeting market expectations with record revenues and profit for the year. We issued 19 new products this year and will continue to invest in our research and development programme to develop future generations of product.

Our Group offers its products under two brands; Focusrite, which is the global leader in Audio Interfaces for recording with computers (the modern paradigm), and Novation, a brand acquired 11 years ago that specialises in synthesisers, keyboards and grid controllers for the Electronic Music market.

Both brands have a strong reputation for innovation, quality of build and performance, resulting in ever greater levels of customer satisfaction and resultant growth.

As a 26-year-old business we have a depth of management experience that belies the fact that the average age of our workforce is around 30. We employ new graduates in music technology and audio engineering in the business every year. Most employees are musicians as well as development engineers, sales, support and marketing staff (even Dave Froker, the CEO, is an accomplished rock guitarist!). This means that we have a strong empathy with the aspirations of our customers and indeed all our musician employees use our products in their personal creative endeavours. In turn we are proud that our employees have voted Focusrite as one of the '100 Best Small Companies to Work For' (Sunday Times), for the past four years.

The Group was fortunate to go into the recession following the 2008 financial crisis with no debt and we have built the Group to five times the 2009 revenue since then. Despite having invested heavily in product development and marketing to build the business aggressively to meet the ever expanding demand, we remain debt free and highly cash generative.

As a result the Directors have recommended a final dividend of 1.2 pence per share, making a total of 1.8 pence per share for the year. The final dividend is subject to shareholder approval, which is being sought at Focusrite's Annual General Meeting to be held in January 2016.

Our largest market by revenue is the United States, where our brands are well represented in all the leading resellers of music equipment, notably Guitar Center - a chain of 280 stores - and Sweetwater Sound, a unique, proactive and online business that sells nationally from a single location in Indiana, as well as Amazon and many independent retailers. This strong brand representation in our product categories is reflected in the UK, Europe and almost everywhere people are recording and performing music.

There has never been a better time to be in the musical instrument and music recording market and we are making the best of the opportunity, taking a leading role in the changes that are sweeping our marketplace.

Finally, a big thank you to all the employees in the business for their teamwork and commitment to our collective goals and to our distribution and retail partners for their continued support.

Philip Dudderidge

Executive Chairman

Strategic Report

CEO Review

Overview

We intend to continue innovating, which has been the engine of our growth, and we are continuing to disrupt traditional methods of music making. This is liberating musicians with transparent technology that allows them to stay in the flow of creating, producing, recording and distributing their music. And we intend to continue extending the boundaries of our market with steps into adjacent segments.

Innovating for growth

On the strength of our 19 new product launches, revenue continued its pattern of annual growth, rising to £48.0 million (2014: £41.0 million) representing a rise of 17.2% (2014: 13.5%). All business segments grew, including Focusrite products rising by 16.3% from £26.8 million to £31.2 million, and Novation products rising by 22.7% from £11.5 million to £14.2 million.

In addition, revenue increased in all regions: USA grew by 29.3%, Europe, Middle East and Africa ('EMEA') by 9.4% and Rest of World by 14.5%. We grew Adjusted EBITDA by 13.1%, with Adjusted EBITDA representing 19.4% of revenue. The growth was relatively consistent across our two brands. Two key new products, the Focusrite Clarett range of audio interfaces and Novation's Launchpad Pro, arrived near the end of the financial year which, along with upcoming new product launches in the new financial year, should provide a good basis for future growth.

The market

Globally the overall music gear market is growing, with macroeconomic forces affecting regions differently. The USA, not surprisingly with its relatively healthy economy, is in better shape than the Eurozone and Latin America. Asia continues to grow faster than the rest of the world even with China's slowdown, although that is currently a small part of our business.

Driving disruption

More important to our business is the changing nature of music making, production and distribution. Focusrite is well-placed to take advantage of the shift to electronic dance music ('EDM'), mobile ways of making and recording music, and the use of Spotify and YouTube as media for awareness and delivering music to fans. As a measure of both the changing use of musical instruments and the reliance on mobile platforms, downloads of Novation's Launchpad App for Apple's iOS platform grew by 87% and the revenue derived from that app, albeit still a relatively small percentage of overall revenue, grew by 185%.

Making it easy

Musicians today face an unending stream of hurdles while creating, producing and performing music. Our drive to make music easy to make - at all levels of expertise - is paying off: the percentage of new owners of our products calling for help from Tech Support continues to decline to 3.5% from 6.5% last year. Critical praise from the press and end-users tells us our focus is paying off.

Expanding into new segments 

The launch of the Clarett Thunderbolt line of interfaces takes Focusrite into a new, lucrative segment of the market, where products sell for between $500 and $1,500. Initial reviews by users and press experts suggest we'll do well with Clarett. Focusrite, with its lower-priced Scarlett range of interfaces, already claims the number one worldwide position under $500.

Launchpad Pro thrusts Novation into a new, higher price segment of grid controllers for the widely used software Ableton Live. Our entry into interfaces for the nascent iOS recording market, the iTrack line, is exploring new markets as musicians are just starting to experiment with mobile recording platforms.

Finally, our introduction of RedNet audio networking products is causing excitement in the demanding 'the-show-must-go-on' Live and Broadcast segments. We intend to expand further by continuing to explore new market segments, both through acquisition and home-grown investment.

Managing margins

As explained more fully in the Financial Review, gross margin remained similar to the prior year. Our Euro exchange rate hedging kept our performance insulated from the volatility experienced during the year. As ever we kept a close control on product manufacturing costs, which have defied Chinese inflation trends. Operating costs continue to be managed carefully.

A great place to work 

With our rapid growth we face the enviable but difficult task of hiring the talented people we need to work with us. We place great emphasis on our recruiting, interviewing and hiring decision-making skills. Each employee has a bespoke training programme to raise their skills and further their careers. Our strategy is clear to employees and their goals and objectives are tied to the Company's overall goals. We are delighted that for the fourth year in a row Focusrite was named one of Britain's 100 Best Small Companies to Work For. At the same time our continued focus on cost control and efficiency meant our revenue per employee increased. We grew headcount costs by 7.1%, less than revenue and profit growth. We thrive on hard work, fun and results.

Executing operationally

In the spring we relaunched the Novation brand, which followed a careful analysis of the brand's strategy, heritage, values and an understanding of customer perception. We also reorganised our R&D department to make it more focused, fleeter of foot, and metric-driven, while we launched 19 new products. Finally we have worked closely with our channel partners and upgraded where necessary.

Current trading and outlook

Products launched at the end of the financial year have been well received by the market, with excellent reviews across the industry. Revenue in the first quarter of the current year was ahead of that for FY15, itself a record quarter, in spite of slower than expected initial sales of new products. Pleasingly, existing products continue to perform as expected.

Notwithstanding the weaker Euro, our continued significant investment in R&D and an exciting new launch schedule for the current year give us confidence that FY16 will be a further year of revenue growth.

Dave Froker

Chief Executive Officer

Financial Review

Overview

The Group had a positive year in which revenue increased by 17.2% to £48.0 million (2014: £41.0 million), gross margin was consistent at 38.8% and adjusted earnings before interest, tax, depreciation and amortisation ('Adjusted EBITDA') was £9.3 million (2014: £8.2 million), up 13.1%. The balance of cash and cash equivalents at 31 August 2015 was £6.2 million, up from £3.8 million at 31 August 2014.

Income statement

Income statement

Revenue

Revenue continued its pattern of annual growth, rising to £48.0 million (2014: £41.0 million) representing a rise of 17.2% (2014: 13.5%). All business segments grew, including Focusrite products rising by 16.3% from £26.8 million to £31.2 million, and Novation products rising by 22.7% from £11.5 million to £14.2 million.

In addition, revenue increased in all regions: USA grew by 29.3%, EMEA by 9.4% and Rest of World by 14.5%.

Gross profit

Gross profit comprises the revenue earned from the sale of stock, less the cost of sales of those products including the material cost, freight, storage, royalties and revenue based sales commissions. Gross profit increased to £18.6 million (2014: £15.9 million). Gross margin was consistent with the prior year at 38.8%. At constant exchange rates, the gross margin was 40.1%.

Administrative and other expenses

Administrative and other expenses comprise uncapitalised research and development costs, engineering and operations costs, sales and marketing costs, administrative expenses and depreciation and amortisation. Overall, the administrative expenses were £12.3 million.

Within administrative expenses, there are some increased costs associated with the Group now being a quoted company. These totalled £0.5 million. Excluding these, the rise in ongoing administrative costs was 12.7%, less than the increase in the revenue.

In addition, the administrative expenses include one-off costs of £0.7 million (2014: £0.7 million) associated with the Initial Public Offering.

Adjusting for these one-off costs, the Adjusted EBITDA increased by 13.1% from £8.2 million to £9.3 million.

Currency exposure and hedging

During the period, there have been significant movements in both the US Dollar and the Euro.

US Dollar

The US Dollar has strengthened against Sterling to an average rate of $1.56 (2014: $1.65). The Group purchases stock from several suppliers in China and pays for that stock in US Dollars. The vast majority of that cash outflow is matched by the cash inflow from the US Dollar denominated revenue in the US, Canada, South America and Asia Pacific. This means that a strengthening of the US Dollar leads to an increase in revenue but has little effect on gross profit.

Euro

During the period, the Euro weakened against Sterling to an average rate of €1.35 (2014: €1.21). Around 27% of the Group's revenue is generated in European countries. There are few costs denominated in Euros. This means that a weakening in the Euro leads to a decrease in revenue and a consequential decrease in gross profit.

Hedging

To compensate for these movements, the Group has a policy of entering into forward exchange contracts ensuring that the major portion of cash flow movements are hedged for the forthcoming financial year.

In the financial year ended 31 August 2015, the contracts have protected against some of the downside pressure caused by the weakening of the Euro. During the period, the gains realised on the exchange rate hedging totalled £0.8 million and are included within revenue. In addition, under IFRS, the Group is required to fair value the committed future hedge contracts and so, at the period end, an asset of £0.2 million is included on the balance sheet (31 August 2014: an asset of £0.1 million). The change in fair value of these contracts is included within financial income and finance costs in the Income Statement.

At constant exchange rates, the revenue growth would have been 14.9% compared with the reported growth rate of 17.2%. Conversely, at constant exchange rates, the gross margin would have been 40.1% compared with the reported gross margin of 38.8% (2014, 38.8%).

For the year from September 2015 to August 2016, the total value of Euro hedge contracts is for €15.6 million, comprising €14.4 million to be converted to pounds Sterling at an average protected rate of €1.39:£1.00 and €1.2 million to be converted to US Dollars at an average protected rate of $1.22:€1.00. These forward contracts improve certainty and protect against further currency weakening although they do reflect the weaker Euro from last year's hedged rate of €1.27.

Corporation tax

The majority of the profit made by the Group is taxed in UK. The Group benefits from tax allowances (R&D tax credits) on the significant research and development costs explained above, thereby reducing the effective tax rate. In contrast, IPO costs are, typically, not allowable for corporation tax. The total tax charge is calculated as £1.0 million (2014: £0.8 million) representing 15.8% of profit before tax, up from 13.1% in the prior year. Note that, excluding the IPO costs, the effective tax rate is 14.2%.

Earnings per share

The adjusted basic and diluted earnings per share figures exclude the impact of the non-underlying costs in each financial year. One factor influencing the EPS growth was the issue of shares prior to the IPO. Were it not for these pre IPO share issues, the adjusted diluted EPS would have increased by 6.9%.

Balance sheet

Non-current assets

The major non-current assets are capitalised development costs, shown within other intangible assets, and tooling, shown within property, plant and equipment.

The total value of development costs capitalised during the year was £2.7 million, up from £1.9 million in the prior year. The increased capitalisation was a function of bringing 19 products to market compared with eight in the prior year. These costs are amortised over their useful life which we have deemed to be three years.

Within property, plant and equipment, the total additions during the year were £0.8 million (2014: £0.8 million) of which £0.4 million was tooling for new products.

Working capital

Working capital comprises inventories plus trade and other receivables, less trade and other payables. Overall, working capital was 16.6% of revenue as at 31 August 2015 compared with 15.3% in the prior year. Generally, receivables and payables increase largely in line with revenue. The main reason for the higher working capital was increased inventories due to new product lines.

Inventories

Inventories increased to £8.6 million, up from £6.6 million at 31 August 2014. When compared to the annual cost of sales, this represents a stock turn of 3.4 times compared with 3.8 times in the prior year. The stock has been increased partly to support the additional revenue and partly because 14 out of the 19 products were introduced in the second half of the year and the Group invested in stock to support the anticipated demand of new products.

Trade and other receivables

Trade and other receivables were £7.8 million, up from £6.4 million at 31 August 2014. The primary increase was as a result of increased revenue and the trade receivables represented 49 days of sales, compared with 53 days last year.

Trade and other payables

Trade and other payables totalled £8.4 million, up from £6.7 million at 31 August 2014. The major element is outstanding invoices for the purchase of stock. This increased as a result of the greater purchases of stock close to the end of the financial year. At the year end, the credit period taken for trade purchases averaged 66 days (31 August 2014: 59 days), helped by one significant supplier changing their accepted terms from 45 days to 60 days.

Cash

The year-end cash balance was £6.2 million, up from £3.8 million at 31 August 2014. The Group does not have any borrowings.

However, on 3 December 2015, after the end of the reported period, the Group completed the arrangement of a committed five-year £10 million revolving credit facility ('RCF') with HSBC.

This provides the Group with additional financial resources to take advantage of growth opportunities as well as further strengthening the balance sheet.

Cash flow

Free cash flow (being net cash from operating activities, less net cash used in investing activities) was £2.7 million (2014: £6.2 million). Particular areas of focus during the year have been an increased spend on research and development costs associated with developing new products and shepherding the production process to ensure that good quality new products are sold to dealers at the planned time. The total of these costs was £3.4 million (2014: £2.5 million). This represents an increase of 37.1% which resulted in 19 new products being introduced in the year, up from eight products in the prior year. The lifespan of new products is normally at least three years so the benefit is expected to accrue over several years. The total capitalised during the year was £2.7 million (2014: £1.9 million).

The exceptional cash flows comprised mainly the cost of the IPO and the repayment, in the year ended 31 August 2014, of a loan made to a related party during 2012. Adjusting for these, the free cash flow was £3.9 million and represented 8.0% of revenue and 62% of profit after tax adjusted for exceptional items (2014, £5.3 million, representing 13.1% of revenue and 93% of profit after tax adjusted for exceptional items). The main difference was that in 2014, there was a reduction of working capital whereas in 2015 there was an increase in working capital as described previously.

Dividend

During the year, the Company paid an interim dividend in respect of the year ended 31 August 2015 of 0.6p per share, amounting to £0.3 million. In addition, following the year end, on 9 December 2015, the Directors proposed a final dividend of 1.2 pence per share, making a total of 1.8 pence per share for the year.

The dividend is subject to shareholder approval, which is being sought at Focusrite's Annual General Meeting to be held on 29 January 2016.

The Group intends to adopt a sustainable and progressive dividend policy, subject to ensuring that the business retains sufficient cash to invest adequately in research and development to develop the products which will drive future growth.

Summary

In summary, the Group has had a strong year: revenue has grown by 17.2%, Adjusted EBITDA has increased from £8.2 million to £9.3 million and cash generation has been good despite the greater investment in new stock. As a result, the cash balance has increased from £3.8 million to £6.2 million and the Directors believe that this, combined with the new RCF, arranged since the year end, adds further robustness to the Group's balance sheet and will help the Group to execute its strategy.

Jeremy Wilson

Chief Financial Officer

Principal Risks and Uncertainties

Risk factors

The risks have not changed significantly from the IPO, however, as this is the first annual results announcement and there is not a prior annual report to refer to, they have been disclosed here as well as the annual report.

In common with all businesses, the Group faces risks, the effective management of which is necessary to enable it to achieve its strategic objectives and secure the business for the long term and is critical to the effective running of the business. Risk management is considered as part of the Group's decision-making processes.

Forward looking statements

Certain statements in this full year report are forward looking. Although the Directors believe that their expectations are based on reasonable assumptions, any statements about future outlook may be influenced by factors that could cause actual outcomes and results to be materially different.

Consolidated income statement

For the year ended 31 August 2015

Consolidated statement of comprehensive income

For the year ended 31 August 2015

Consolidated statement of financial position

As at 31 August 2015

Consolidated statement of changes in equity

for the year ended 31 August 2015

3The reserve for the Company's treasury shares comprises the cost of the Company's shares held by the Group. At 31 August 2015, the Employee Benefit Trust held 5,676,000 of the Company's shares (2014: nil)

Consolidated cash flow statement

for the year ended 31 August 2015

Notes to the Group financial statements

Basis of preparation

Copies of the 31 August 2015 audited accounts will be will be available on 10 December on the Company's website (www.focusriteplc.com/investors) for the purposes of AIM rule 26 and will be posted to shareholders in due course.

1. Revenue

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

2. Business Segments

Information reported to the Group's Chief Executive (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 Focusrite sells. The Group's reportable segments under IFRS 8 are therefore as follows:

Segment revenues and results

The following is an analysis of the Group's revenue and results by reportable segment:

The accounting policies of the reportable segments are the same as the Group's accounting policies. Segment profit represents the profit earned by each segment without allocation of the share of central administration costs including Directors' salaries, investment revenue and finance costs, and income tax expense. This is the measure reported to the Group's Chief Executive 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 Focusrite and its US subsidiary, net of inter-Company commission income. Also included within central administration costs is the charge relating to the share option scheme of £122,000 for the year ended 31 August 2015 (2014: £12,000).

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 geographical location shown below, this information is not available for disclosure in the consolidated financial information.

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

Information about major customers

Included in revenues shown for 2015 is £18.5 million (2014 £14.3 million) attributed to the Group's largest customer, American Music & Sound. Amounts owed at end of year is £2.7 million (2014 £3.2 million)

3. Profit for the year

Profit for the year has been arrived at after charging (crediting):

4. Non-underlying items

In December 2014, the Group floated on the London Stock Exchange AIM market. Non-recurring IPO related costs totalled £704,000, which were charged to the income statement (31 August 2014: £552,000). In addition, in 2014 the Group made a non-recurring pension contribution of £170,000 to the Chairman.

5. Tax

Corporation tax is calculated at 20.58% (2014: 22.17%) of the estimated taxable profit for the year. Taxation for the US subsidiary is calculated at the rates prevailing in the respective jurisdiction.

The tax charge for each year can be reconciled to the profit per the income statement as follows:

6. Dividends

The following equity dividends have been declared and paid.

During the year, the Company paid an interim dividend in respect of the year ended 31 August 2015 of 0.6pence per share, amounting to £314,394. On 9 December 2015, the Directors recommended a final dividend of 1.2 pence per share, making a total of 1.8 pence per share for the year.

7. Earnings per share

Reported earnings per share

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

At 31 August 2015, the total number of ordinary shares issued and fully paid was 58,075,000. This included 5,676,000 shares held by the Employee Benefit Trust 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 total number of shares in issue (58,075,000) less the number of shares held by the Employee Benefit Trust (5,676,000). 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. Diluted EPS in 2014 has not been restated for any subsequent changes in assumptions made in calculating the effect of dilutive potential ordinary share issues such as average share price.

Adjusted earnings per share

8. Notes to the cash flow statement

Cash and cash equivalents

Cash and cash equivalents comprise cash and short-term bank deposits with an original maturity of three months or less, net of outstanding bank overdrafts. The carrying amount of these assets is approximately equal to their fair value.