Focusrite PLC Final Results for the Year Ended 31 August 2017 (0202X)

Share Name	Share Symbol	Market	Type	Share ISIN	Share Description
Focusrite Plc	LSE:TUNE	London	Ordinary Share	GB00BSBMW716	ORD 0.1P

	Price Change	% Change	Share Price	Bid Price	Offer Price	High Price	Low Price	Open Price	Shares Traded	Last Trade
	0.00	0.00%	367.50	365.00	370.00				0.00	01:00:00

Industry Sector	Turnover	Profit	EPS - Basic	PE Ratio	Market Cap
Musical Instrument Stores	178.47M	17.8M	0.3038	12.10	215.31M

Focusrite (LSE:TUNE)
Historical Stock Chart

From Apr 2019 to Apr 2024

TIDMTUNE

RNS Number : 0202X

Focusrite PLC

21 November 2017

Strictly embargoed until: 07.00, 21 November 2017.

Focusrite Plc

("the Company" or "the Group")

Final Results for the Year Ended 31 August 2017

Focusrite Plc (AIM: TUNE), the global music and audio products company, announces Final Results for the year ended 31 August 2017.

Financial highlights

-- Group revenue grew by 21.6% (constant currency(3) : 13%) to GBP66.1 million (FY16: GBP54.3 million)

   --       Adjusted EBITDA(1) grew by 27.9% to GBP13.1 million (FY16: GBP10.2 million) 
   --       Operating profit grew 32.6% to GBP9.5 million (FY16: GBP7.1 million) 
   --       Profit before tax grew 33.5% to GBP9.5 million (FY16: GBP7.1 million) 
   --       Basic earnings per share grew 30.5% to 15.4p (FY16: 11.8p) 
   --       Adjusted(2) diluted earnings per share grew 29.8% to 14.8p (FY16: 11.4p) 
   --       Net cash of GBP14.2 million (FY16: GBP5.6 million) 
   --       Final dividend of 1.95p recommended, resulting in 2.7p for the year, up 38% on prior year

Operational highlights

   --       Strong growth continued across both our major segments, Focusrite and Novation

-- In Focusrite, Scarlett, Clarett and RedNet ranges all grew, leading to total segment revenue growth of 18.6%

-- In Novation, the growth of Launchpad and Launchkey both accelerated resulting in segment revenue growth of 37.8%

-- All major geographic regions grew, including the USA, our largest market, where revenue growth was 30.9% in the year

   --       Ten new products launched over the year with positive early industry and user feedback

-- Continued investment in the Software division has generated continued growth - now three apps with approximately 550,000 active users

   --       e-commerce website now established and delivering products globally

1 Comprising of earnings adjusted for interest, taxation, depreciation, amortisation and non-underlying items (see page 14).

   2       Adjusted for non-underlying items (see note 4).

3 Constant currency revenue growth is calculated by taking the sterling value of FY17 revenue; converting to FY16 annual average exchange rates and comparing with the reported revenue for FY16. In addition, all foreign exchange movements disclosed in revenue are excluded from both years.

Commenting on the results, Executive Chairman Phil Dudderidge said:

"I am delighted Focusrite Plc has delivered another strong year of growth. Our foundations as a company that has a history at the leading edge of music technology innovation, with an established, global customer base for its market-leading brands and a strong culture, make us well placed for further growth."

Commenting on current trading, Chief Executive Officer Tim Carroll said:

"Since the year end, revenue and cash have both grown further. We continue to see strong market acceptance across our expanding portfolio and our new product pipeline continues to grow. Our solid momentum has continued into the current year and we continue to look forward with confidence."

Availability of Annual Report and Notice of AGM

The Annual Report and Accounts for the financial year ended 31 August 2017 and notice of the Annual General Meeting ("AGM") of Focusrite will be posted to shareholders by 5 December 2017 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 10 January 2018.

The timetable for the final dividend is as follows:

 
28 December 2017     Ex-dividend Date 
29 December 2017     Record Date 
10 January 2018      AGM to approve the recommended final dividend 
19 January 2018      Dividend payment date

- ends -

Enquiries:

 
 Focusrite Plc: 
 Tim Carroll (CEO)           +44 1494 836301 
 Jeremy Wilson (CFO)         +44 1494 836301 
 
 Panmure Gordon 
 Freddy Crossley             +44 20 7886 2968 
 Tom Salvesen                +44 20 7886 2904 
 
 Belvedere Communications 
 John West                   +44 20 3567 0510 
 Kim Van Beeck               +44 7477 967 446

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 (MAR)

Notes to Editors

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

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

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

Chairman's Statement

I am very pleased to report that FY17 has proved to be another successful year, exceeding our expectations for revenue, at GBP66.1million (+21.6%), profit and cash flow. The Company's products have continued to grow market share in our established and growth markets. Revenue and profits have been boosted by the strengthening of the Euro and US Dollar but, even on a constant currency basis, the Company has enjoyed excellent growth.

This is our first set of results with Tim Carroll as CEO, having joined the Company in January 2017. He has successfully established himself with the management team and the Company more broadly and is building on Focusrite's strong foundations. Tim enjoyed almost 20 years with Avid Technology Inc, a respected business in our marketplace, in global sales roles and latterly heading the audio division, as a result of which he has an unmatched experience of the markets that Focusrite seeks to serve, from the professional to amateur.

FY17 has seen continued development of our sales channels. I am particularly pleased with the progress of our e-commerce platform, only in its second year and which is now offering the Company's products globally. Sales in the Far East, notably China, continue to grow faster than most other regions of the world. In response to this demand, the Company has established a Hong Kong office to manage our third-party distributors and marketing in the Asia-Pacific region and to provide customer support to Asian customers. This office continues to grow and, importantly, enables us to provide support to customers who use our products all over the world, 24/7. Looking forward, new distribution initiatives in Japan promise to underpin growth prospects in this important but challenging market.

Last year, I reported on the launch of the second generation of Focusrite's Scarlett range of audio interfaces. Scarlett is the market-leading range globally and our results very much reflect the outstanding success and growth of this range, that provides musicians and the wider recording community with outstanding performance and reliability. Focusrite Clarett is a premium range of interfaces for those whose recordings are more likely to have commercial potential.

Our Novation brand of musical instruments comprising synthesisers, keyboard controllers and the Launchpad grid controller family enjoyed a 37.8% uplift in demand compared with a flat 2016. A new flagship synthesiser, Peak, was launched to much acclaim.

Focusrite continues to build demand for products designed for a professional audience and business enterprises, namely the RedNet and Red ranges. A Focusrite Pro team has been formed to develop the professional and commercial sales channels, as well as bringing better focus to product development and marketing to these specialist vertical markets that include broadcast, post-production, education and entertainment facilities. This market segment is seen as an exciting growth opportunity where our investment in this segment over recent years is expected to pay off handsomely.

I am delighted Focusrite Plc has delivered another strong year of growth. Our foundations as a company that has a history at the leading edge of music technology innovation, with an established, global customer base for its market-leading brands and a strong culture, make us well placed for further growth. The Company has no debt, continues to be highly cash-generative and continues to consider acquisition opportunities that would complement the existing business.

I would like to take this opportunity to thank our employees, manufacturing partners, distribution partners and professional advisers for their contributions to our success.

Phil Dudderidge

Founder and Executive Chairman

Chief Executive's Statement

Introduction

This is my first full year report, having joined the Company in January 2017, and I am delighted to update shareholders on another year of operational and financial success. It has been another busy and productive year, during which we have expanded our product portfolio; launched two new brands; and refined our growth strategy to optimise our expansion opportunities now and for the future.

Focusrite is a business I knew well before I joined; with a well-earned reputation for high-quality products and a history of innovation and disruption, and I was honoured and proud to be asked to lead the Company into its next phase of growth. One of the primary factors that led to my decision to join the Company was the passion that came through from the employees. Many of our people are musicians, audio engineers, or DJs themselves and they use our products in real-world environments every week, bringing to work a real drive to push the boundaries of modern-day audio production. Our employee footprint continues to expand in our High Wycombe, London, Los Angeles and Hong Kong offices, as well as with remote employees all over the globe. It is a great pleasure and privilege to help guide and lead them and I thank them for their hard work and dedication.

Overview

The Group's products are now sold in approximately 160 territories and countries all over the world. We utilise an effective mix of retailers - online and 'bricks and mortar' locations, distributors in areas where localisation is a factor, a hybrid approach in the USA utilising a distributor with our own demand generation team, and direct business to consumer with our own e-commerce store and in-app software purchases.

We sold approximately 800,000 physical products to end-users last year, and our music creation apps were downloaded 2.7 million times with around 700,000 in-app customer transactions. Our manufacturing partners are located in South China and we use third-party logistics support. We employ around 190 people in the UK, USA, Germany and Hong Kong.

This is a business of considerable scale with scope for further growth and our market position, products, people and customer base are the envy of many in the industry.

The market

The global audio production market continues to grow and we believe we remain well poised to increase our market share with existing products and also to exploit opportunities to expand into adjacent product categories that would make commercial sense and are a strategic fit for our existing business. This can be done organically and, when it makes commercial and economic sense, by acquisition.

For many personal and professional audio recording customers, Focusrite technology and solutions are a cornerstone of their set-ups and creative workflows. We know that puts us in a unique position to expand our offerings and participate in more of the economic value chain. Alongside that, we recognise the opportunity to continue to make audio recording technology easier to use and more accessible to a larger addressable market.

Operating review

This year has seen further operational progress and this has translated into financial success with careful management of our cost base and a focus on cash generation. Revenues grew by 21.6% to GBP66.1 million, delivering an operating profit of GBP9.5 million, representing year-on-year growth of 32.6%. These results were materially ahead of forecasts and represent a very pleasing outcome for the Group.

This positive performance has been driven by a number of factors, including a wider market acceptance and growth of share in many of our core products; along with a suite of new innovative offerings, giving us more depth to our portfolio and the opportunity to sell more to our customer base.

The Group continues to penetrate new market segments and price points with best-in-class, user-friendly products. Customer and sales channel satisfaction feedback remains strong on new and existing products and continued high levels of end-user satisfaction are illustrated by our top net promotor scores for individual products.

Focusrite

Within Focusrite, our Scarlett, Clarett and RedNet ranges all grew, leading to total segment revenue growth of 18.6%. In each category we increased market share and experienced growth beyond the industry norms.

Sales of our second generation Scarlett USB audio interface range, upgraded and launched in June last year, were particularly strong. The Scarlett family has earned the reputation as a best-in-class, premium solution at affordable pricing. This product line remains the number one selling audio interface product in the world.

The Clarett range continues to set new price/performance standards in our mid-range interface offerings and with an advanced set of features catered to creative professionals, we are very pleased to see that Clarett has been warmly received and enjoyed numerous accolades from the industry.

Our commercial and pro-audio range, led by RedNet, is gaining momentum as applications for its use and potential customers grow, especially in post-production, education and broadcast markets. This year we have witnessed some of the top production facilities in the world transition their entire infrastructure to RedNet and reap numerous benefits in efficiency, costs and productivity.

During the year we also launched the Focusrite Pro brand to support our growing Red/RedNet business and bring key sales talent and focus to this market. This additional investment will continue next year. We believe that our portfolio of professional audio over internet protocol ('AOIP') solutions are well poised to become industry standards in post-production, broadcast, installed and live sound.

Novation

The Novation segment now consists of Novation and Ampify, the Group's own software brand.

Launchpad, Launchkey, and the synthesiser product categories all experienced accelerated sales growth, with overall growth in this business segment of 37.8%.

Wider market acceptance of grid-based controllers in the electronic music space, coupled with larger penetration from online distribution channels such as Amazon, has driven demand for Launchpad. This product range experienced significant worldwide uplift in demand with year-on-year sales volume growth of 39.0%.

Our Launchkey family of keyboard controllers also enjoyed significant uplift in worldwide demand, with its intuitive feature set and extensive integrated control features with top music-making software such as Ableton Live.

Our new flagship synthesiser, Peak, has seen widespread adoption within the professional music community and won numerous accolades from the industry as a true next-generation synthesiser; building off the legacy of the Novation brand and its many famous earlier synthesiser products.

During the year we rebranded our apps division to Ampify: a brand on which we will continue to develop powerful audio software tools for new customers and our existing customers alike. We are investing substantially in Ampify, as we aim to grow the Company's own software capability. This investment is starting to be rewarded with operational progress and we now have three music-making apps with around 550,000 active users. Revenues are still small when seen as a percentage of total Group revenue, but growing significantly year-on-year as we continue to increase our library of in-app purchases for these customers. Our apps consistently rank in the top ten for music creation tools on Apple's app store and are currently displayed in Apple stores worldwide. We recently launched Groovebox - 'a new beats and synth music studio' for iPad and iPhone - and to date it has had over 200,000 downloads and is growing fast.

Innovation

Innovation is key driver of growth and we continue to spend around 6% to 7% of revenue on research and development so as to provide a constant stream of new and relevant products for our various customer channels.

During the year we launched eight new hardware and two new software products, including: Red 8 Pre, Clarett OctoPre, Scarlett OctoPre, Scarlett OctoPre Dynamic, iTrack One Pre and Circuit Components update.

These new products are across different price segments and target customer markets, giving us further penetration and reach. Feedback from the consumer, retailer and distribution channels has been positive and acceptance so far has been pleasing.

We continue to enhance our offerings with improved drivers, new tool sets and capabilities that make our solutions easier to install and use, netting us industry-leading Net Promoter Scores and overall customer experience statistics.

Additionally, we have focused some of our development resources on the 'out-of-the-box' experience for new customers, as we believe that ensuring customers have a great first experience with our products is paramount to our overall success and growth strategy.

Geographic overview

I am pleased to report that our success this past year was truly global and sales in all major regions grew.

The USA finished with a 30.9% rise in revenue when compared with last year. Europe experienced 11.4% growth. Finally, the Rest of the World (incorporating Asia, Latin America and Canada) finished the year with 24.9% year-on-year growth.

The USA market, the largest market for our portfolio and currently 42% of total Group sales, remains a key focus for our sales efforts and we continue to expand the team in our Los Angeles office.

In Europe, where we saw increased competition between the major continental resellers, our growth was lower than our other regions but still ahead of industry averages in our segment.

Within the Rest of the World, Asia-Pacific sales were strong across most countries, especially in China, and our Hong Kong office is now fully functional and integrated with our Company systems. Additionally, we are investing in more sales talent to scale for what we believe is still a large opportunity in this region.

Finally, Latin America and Canada both had healthy growth and we will continue to invest in resources and tools to grow these regions into this next year and beyond.

Distribution and logistics initiatives

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

e-commerce initiatives

The Group's e-commerce store, which launched in March last year, accounted for over 1% of the Group's revenue and this continues to improve. With a global presence but specific emphasis on markets where localised content, language support and swift delivery to end-users are key to success, we believe this segment will grow further.

Summary and outlook

We are focused on three core goals: growing our customer base; increasing the lifetime value of our customers; and expanding into new market segments both from a price and product perspective. To achieve this we will continue to innovate, disrupt, grow our audience and ultimately continue in our tradition of making the creative process of music creation and audio recording easier for our customers.

Although competitive pressures remain strong, changes in technology and new customer requirements can emerge quickly, and macroeconomic and political factors affect our end customers and distributors alike, we remain committed to keeping abreast of these risks in order to continue to deliver strong growth.

Since the year end, revenue and cash have both grown further. We continue to see strong market acceptance across our expanding portfolio and our new product pipeline continues to grow. Our solid momentum has continued into the current year and we continue to look forward with confidence.

Tim Carroll

Chief Executive Officer

Financial Review

Overview

The Group has had an excellent year, with revenue growth of 21.6%, adjusted EBITDA growth of 27.9% and adjusted diluted earnings per share up by 29.8%. In addition, the Group has managed working capital tightly, leading to good cash generation.

Income statement

Revenue

Revenue grew from GBP54.3 million to GBP66.1 million, a rise of 21.6%. Since 2009, when the Group revenue was GBP9.1 million, the Group has grown revenue every year at a growth rate of at least 10%.

The largest segment, Focusrite, grew by 18.6%, from GBP37.6 million to GBP44.6 million, as the second generation of the Scarlett range continued to gain market share following its launch in June 2016. Scarlett is approximately three-quarters of the Focusrite segment by revenue and the Group has developed related ranges of products such as Clarett and RedNet, which are diversifying the Focusrite segment as they also grow and establish themselves in their markets.

The Novation segment consists of Novation and Ampify, the Group's new software brand. The combined revenue was GBP18.9 million, up 37.8% on GBP13.7 million last year. The Novation segment is relatively diverse: the largest range is Launchpad, which is approximately half of the segment revenue and, for which, demand grew strongly. Approximately a quarter of segment revenue is the Launchkey range and the remainder is split between synthesisers, Circuit and the remaining products.

In the UK, the Group distributes products such as microphones and monitors manufactured by other organisations. Revenue was GBP2.6 million, down 13.6% from GBP3.1 million in 2016.

All regions grew. Regionally, the USA is the largest market in the music industry and the largest market for the Group's products. Revenue in the USA grew 30.9% (constant currency: 18%) to GBP28.0 million, Europe grew 11.4% (constant currency: 7%) to GBP25.2 million and the Rest of the World grew by 24.9% (constant currency: 13%) to GBP12.9 million. The primary drivers of growth in the USA were the further consolidation of the Scarlett range in the market and strong growth of Novation. In Europe, there was increased competition between the major continental resellers which held back growth. In the Rest of the World, the major portion of the revenue is in Asia, which continues to grow as the new regional sales office in Hong Kong becomes more established.

Exchange rates were important this year. In essence, in FY16 there were ten months 'pre-Brexit' and two months post. Therefore, there was a more pronounced effect this year of the stronger US Dollar and Euro. At constant currency, revenue grew by 13%.

Gross profit

Gross profit increased to GBP26.4 million, up from GBP20.9 million in FY16. This represented a gross margin of 39.9% (FY16: 38.4%). This growth in gross margin was driven by several factors: closer attention paid to the fluctuations of market prices and then management of discounts given to resellers; the stronger Euro and a minor range mix impact.

Administrative expenses

Administrative expenses consist of sales, marketing, operations, the uncapitalised element of research and development and central functions such as legal, finance and the Group Board. These expenses were GBP16.9 million, up from GBP13.7 million last year. Directionally, the greater growth was on sales and marketing as the Group invested, via the profit and loss account, in key initiatives such as the Asia office and e-commerce.

Adjusted EBITDA

Adjusted EBITDA increased by 27.9% to GBP13.1 million (FY16: GBP10.2 million).

In FY17, there were no non-underlying costs. In FY16, there was a non-underlying cost of GBP0.5 million due to legal disputes relating to intellectual property and distribution contracts, which have no significant effect on our ongoing business. All of these legal disputes have now been resolved, with no further cost to the Group.

Income statement

 
                                2017           2017             2017            2016             2016             2016 
------------------- 
                                GBPm           GBPm             GBPm            GBPm             GBPm             GBPm 
------------------- 
                            Reported           Non-         Adjusted        Reported             Non-         Adjusted 
                                         underlying                                        underlying 
-------------------  ---------------  -------------  ---------------  --------------  ---------------  --------------- 
 Revenue                        66.1              -             66.1            54.3                -             54.3 
 Cost of sales                (39.7)              -           (39.7)          (33.4)                -           (33.4) 
-------------------  ---------------  -------------  ---------------  --------------  ---------------  --------------- 
 Gross profit                   26.4              -             26.4            20.9                -             20.9 
 Administrative 
  expenses                    (16.9)              -           (16.9)          (13.8)              0.5           (13.3) 
-------------------  ---------------  -------------  ---------------  --------------  ---------------  --------------- 
 Operating profit                9.5              -              9.5             7.1              0.5              7.6 
 Net finance income            (0.0)              -            (0.0)           (0.0)                -            (0.0) 
-------------------  ---------------  -------------  ---------------  --------------  ---------------  --------------- 
 Profit before tax               9.5              -              9.5             7.1              0.5              7.6 
 Income tax expense            (0.9)              -            (0.9)           (0.8)            (0.1)            (0.9) 
-------------------  ---------------  -------------  ---------------  --------------  ---------------  --------------- 
 Profit for the 
  period                         8.6              -              8.6             6.3              0.4              6.7 
-------------------  ---------------  -------------  ---------------  --------------  ---------------  --------------- 
 
                                2017           2017             2017            2016             2016             2016 
------------------- 
                                GBPm           GBPm             GBPm            GBPm             GBPm             GBPm 
------------------- 
                                               Non-                                              Non- 
                            Reported     underlying         Reported        Reported       underlying         Adjusted 
-------------------  ---------------  -------------  ---------------  --------------  ---------------  --------------- 
 Operating profit                9.5              -              9.5             7.1              0.5              7.6 
 Add - amortisation 
  of intangible 
  assets                         2.9              -              2.9             2.1                -              2.1 
 Add - depreciation 
  of tangible 
  assets                         0.7              -              0.7             0.5                -              0.5 
-------------------  ---------------  -------------  ---------------  --------------  ---------------  --------------- 
 EBITDA                         13.1              -             13.1             9.7              0.5             10.2 
-------------------  ---------------  -------------  ---------------  --------------  ---------------  ---------------

Foreign exchange and hedging

The Brexit vote in June 2016 changed the exchange rates substantially but there has been greater stability since then. Therefore, the average exchange rates show a strengthening of US Dollar and Euro, whereas the year-end rates are more similar.

 
 Exchange    2017   2016 
  rates 
----------  -----  ----- 
 Average 
 USD:GBP     1.27   1.45 
----------  -----  ----- 
 EUR:GBP     1.16   1.29 
----------  -----  ----- 
 
 Year end 
----------  -----  ----- 
 USD:GBP     1.29   1.31 
----------  -----  ----- 
 EUR:GBP     1.09   1.18 
----------  -----  -----

The Group buys product in US Dollars and approximately 60% of its revenue is in US Dollars so there is a natural hedge. Therefore, the US Dollar strengthening from $1.45 to $1.27 increased revenue but had little effect on gross profit.

Approximately a quarter of revenue is in Euro but little cost. The Group enters into forward contracts to convert Euro to GBP. In FY16, approximately three-quarters of Euro flows were hedged at EUR1.39, thereby creating a blended exchange rate of approximately EUR1.37. In FY17, the equivalent hedging contracts were at EUR1.28 (a blended rate of approximately EUR1.26). For FY18, the equivalent rate for the forward contracts is EUR1.12.

Hedge accounting is used, meaning that the hedging contracts have been matched to income flows and, providing the hedging contracts remain effective, movements in fair value are shown in a hedging reserve in the balance sheet, until the hedge transaction occurs.

Corporation tax

Corporation tax as a proportion of profit before tax was 10.1% (FY16: 12.2%). The effective tax rate is lower than the headline rate, largely due to enhanced tax relief on R&D, a small element of vesting share options and a lower than expected payment in the prior year. In addition, the UK headline tax rate has been reduced by 1 percentage point to 19% within the last year.

Earnings per share

The basic earnings per share for the year was 15.4 pence, up 30.5% from 11.8 pence in FY16. This rise was driven largely by the rise in profit and the fact that there were no non-underlying items in FY17. The more comparable measure, excluding non-underlying items and including the small dilutive effect of share options, is adjusted diluted earnings per share. This was 14.8 pence, up 29.8% from 11.4 pence in FY16.

Earnings per share

 
                     2017   2016   Growth 
                        p      p        % 
------------------  -----  -----  ------- 
 Basic               15.4   11.8    30.5% 
 Diluted             14.8   10.7    38.3% 
 Adjusted basic      15.4   12.6    22.2% 
 Adjusted diluted    14.8   11.4    29.8% 
------------------  -----  -----  -------

Balance sheet

 
                                 2017     2016 
                                 GBPm     GBPm 
-----------------------------  ------  ------- 
 Non-current assets               6.3      6.4 
 Current assets 
 Inventories                      8.3     11.4 
 Trade and other receivables     13.0     11.2 
 Cash                            14.2      5.6 
 Current liabilities            (8.7)   (10.4) 
 Non-current liabilities        (0.2)    (0.3) 
-----------------------------  ------  ------- 
 Net assets                      32.9     23.9 
-----------------------------  ------  -------

Cash flow

 
                                       2017   2016 
                                       GBPm   GBPm 
 Free cash flow(1)                      9.4    0.2 
 Add - non-underlying cash outflows     0.1    0.2 
------------------------------------  -----  ----- 
 Underlying free cash flow              9.5    0.4 
------------------------------------  -----  -----

(1) Defined as net cash from operating activities less net cash used in investing activities.

Balance sheet

Non-current assets

The non-current assets comprise mainly capitalised R&D costs. Between 70% and 80% of R&D costs are capitalised and they are amortised over three years. The typical product life is three to six years. This policy is unchanged from last year.

Working capital

Working capital fell from 22.4% of revenue to 19.1%. The main driver of this reduction was stock, which was reduced from GBP11.4 million to GBP8.3 million. The reduction in stock was achieved through lower levels of safety stock and the rising sales of new products, launched in FY15 and FY16, for which the Group had bought larger initial quantities to protect against possible 'stock-outs' should demand have risen more quickly than expected. As commented on in last year's Annual Report, stock quantities have been reduced as the demand pattern for these products has become more predictable. There have been no significant changes in payment terms relating to either customers or suppliers.

Cash flow

Cash at the year end was GBP14.2 million, up from GBP9.4 million at the half year and GBP5.6 million at 31 August 2016, driven by the higher profit and lower working capital explained previously. Free cash flow was strong, at GBP9.4 million (FY16: GBP0.2 million), which represented 14.3% of revenue (FY16: 0.4%). Finally, the Group has a GBP10 million revolving credit facility with HSBC.

Dividend

The Board is proposing a final dividend of 1.95 pence per share (FY16 final dividend: 1.3 pence), which would result in a total of 2.7 pence per share for the year (FY16: 1.95 pence). At this level, the dividend is covered approximately 5.5 times by earnings. This represents the first step towards an ongoing target dividend cover of between 4 and 5 times. The Group is focused on, and investing in, future growth and therefore maintains a strong dividend cover whilst maintaining a sustainable and progressive annual dividend.

Going concern

As required, the Board have considered the ability of the Group to continue as a going concern. The Board reviewed the cash position, the management of working capital, the strategic plans, the forecast cash flow and the borrowing arrangements and capacity. The Board have concluded that the Group will remain as a going concern and that this Annual Report should be prepared on that basis.

Summary

The Group has had an excellent year. Revenue has grown by 21.6%, adjusted EBITDA by 27.9%, adjusted diluted earnings per share by 29.8% and the cash balance has increased from GBP5.6 million to GBP14.2 million. The Board remains focused on extending our track record of growth in future years.

Jeremy Wilson

Chief Financial Officer

21 November 2017

Principal Risks and Uncertainties

Risk factors

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 resilience of the business for the long term. Management of risk is critical to the effective running of the business and is considered as part of the Group's decision-making processes.

 
 Risk area              Description                     Mitigation 
---------------------  ------------------------------  -------------------------------- 
 Economic environment   The Group operates              The Group sells products 
                         in the global economy           in around 160 territories 
                         and ultimately within           worldwide via two distinct 
                         a retail environment            product categories 
                         to consumer end-user            and so aims to avoid 
                         musicians. Such operations      being unduly reliant 
                         are in uenced by global         on any single product 
                         and national economic           or territory. 
                         factors. 
---------------------  ------------------------------  -------------------------------- 
 UK exit from           The impact of the               The Group has increased 
  the European           decision to exit the            selling prices in the 
  Union                  European Union remains          UK to correct the imbalance 
                         uncertain. There has            caused by the significant 
                         already been foreign            foreign exchange rate 
                         exchange volatility             changes. The Group 
                         and it is possible              will continue to monitor 
                         that, in future, the            other possible effects 
                         UK may not be part              of Brexit and act accordingly 
                         of the European free            as they become known. 
                         trade zone or the 
                         customs union. 
---------------------  ------------------------------  -------------------------------- 
 Technological          The market for the              The Group invests signi 
  changes, product       Group's products is             cantly in its R&D and 
  innovation             characterised by continued      operates a rigorous, 
  and competition        evolution in technology,        disciplined product 
                         evolving industry               introduction process 
                         standards, changes              to ensure that as far 
                         in customer needs               as possible the fast-changing 
                         and frequent new competitive    needs of its target 
                         product introductions.          markets are met. In 
                         If the Group is unable          addition, the Board 
                         to anticipate or respond        aims to operate an 
                         to these challenges,            efficient, low-cost 
                         or fails to develop             business. 
                         and introduce successful 
                         products on a timely 
                         basis, it could have 
                         an adverse impact 
                         on the Group's business 
                         and prospects. 
---------------------  ------------------------------  -------------------------------- 
 Dependence             The Group is dependent          The Group aims to diversify 
  on a small             on a small number               its risk by using four 
  number of              of suppliers, in particular     major Chinese manufacturers 
  suppliers              its largest supplier,           for the production 
                         which supplies Focusrite        of its products. The

                         interfaces. Failure             Group maintains appropriate 
                         or material delay               levels of insurance 
                         by its suppliers to             to mitigate the financial 
                         perform or failure              impacts of a failure 
                         by the Group to renew           of one of its suppliers. 
                         such arrangements               Relationships are long-lasting 
                         could have a material           and strong. Typically, 
                         adverse effect on               members of the operations 
                         the Group's business,           department within Focusrite 
                         operating results               meet each supplier 
                         and nancial position.           every quarter to review 
                                                         performance and costs. 
---------------------  ------------------------------  -------------------------------- 
 Key resellers          In certain countries,           In cases where there 
  and distributors       the Group operates              is a large distributor 
                         via a single distributor        in a significant market 
                         or has large individual         (e.g. the USA distributor 
                         reseller customers.             purchased GBP28 million 
                         In certain cases,               of stock in FY17), 
                         a failure of or breakdown       the Group also maintains 
                         in the relationship             relationships with 
                         with a key reseller             the major retailers. 
                         or distributor, or              In addition, the Group 
                         even the failure of             carefully monitors 
                         a major customer of             customer credit limits 
                         that distributor,               and has credit insurance 
                         could significantly             which typically covers 
                         and adversely affect            the majority of the 
                         the Group's business.           customer debts outstanding 
                                                         at any point in time. 
---------------------  ------------------------------  -------------------------------- 
 
 
 Risk area          Description                     Mitigation 
-----------------  ------------------------------  -------------------------------- 
 Development        Significant change              The Group or its distributors 
  of the channels    in the methods by               sell to both 'bricks 
  to market          which end-users wish            and mortar' and e-commerce 
                     to buy Focusrite                retailers so that 
                     products could significantly    the Group can satisfy 
                     affect the Group's              customer demand via 
                     business.                       both methods. 
-----------------  ------------------------------  -------------------------------- 
 Currency           The Group is exposed            There is a largely 
  risks              to currency and exchange        effective natural 
                     rate uctuations,                hedge for US Dollar 
                     which may affect                transactions in as 
                     the Group's revenue             much as the Group 
                     and costs when reported         uses its generation 
                     in Sterling.                    of US Dollars to buy 
                                                     product in US Dollars. 
                                                     In addition, the Group 
                                                     mitigates its Euro 
                                                     exposure by entering 
                                                     into forward foreign 
                                                     exchange hedging contracts 
                                                     for the conversion 
                                                     of Euros to Sterling. 
-----------------  ------------------------------  -------------------------------- 
 Scarcity           The nature of the               The Group is a leading 
  of experienced     Group's business                music industry company 
  technical          requires its employees          in the UK and so attracts 
  personnel          in the technical                high-quality technical 
                     and development teams           personnel. The Group 
                     to be highly skilled            also attracts graduates 
                     and experienced in              from music technology 
                     their respective                courses at local universities. 
                     elds. The Group is              The Group has wide-ranging 
                     dependent for its               share ownership incentives 
                     continued success               and other employment 
                     on being able to                benefits to aid retention. 
                     hire and retain such 
                     individuals. 
-----------------  ------------------------------  -------------------------------- 
 Intellectual       The intellectual                The Group has data 
  property           property and data               and information technology 
  and data           developed by the                controls which are 
  protection         Group is valuable               reviewed by the Group 
                     and the Group could             Board. Additionally, 
                     be harmed by infringement       the Group includes 
                     or loss.                        data protection provisions 
                                                     in the contracts of 
                                                     all Group employees. 
                                                     The Group also aims 
                                                     to protect its intellectual 
                                                     property and pursues 
                                                     infringements. 
-----------------  ------------------------------  -------------------------------- 
 Information        Information security            The Group has carried 
  security           and cyber threats               out a detailed review 
                     are currently a priority        of IT systems to identify 
                     across all industries           elements requiring 
                     and remain a key                upgrade. There has 
                     Government agenda               already been a widespread 
                     item.                           upgrade of core IT 
                                                     functionality and 
                                                     the improvement of 
                                                     backup and disaster 
                                                     recovery processes. 
                                                     The Group has moved 
                                                     core ERP systems to 
                                                     cloud with robust 
                                                     SLAs in place to ensure 
                                                     data availability 
                                                     and security. There 
                                                     is an improving business 
                                                     continuity framework 
                                                     and a dedicated internal 
                                                     IT support team aided 
                                                     by external support 
                                                     providers. 
-----------------  ------------------------------  --------------------------------

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