Focusrite's report cites supply chain issues, but will demand pose the real problem?

Focusrite, the British global audio equipment company listed on AIM (#TUNE), published its annual results for the year ended 31 August 2021 this week. The company reported revenue growth of 34%, gross margin of 48% and operating margin of 21%. Their solid performance for the full year was explained by the continued success of their legacy products, new product integrations, an accelerating growth of their user base and further evolution of their routes to market.

In their annual report, the company cited supply chain issues as causing a decline in growth in the second half of the year, but what truly concerns me is demand for Focusrite's products, and whether this demand can be sustained. Will Focusrite continue to grow without the growth driver of the Covid-19 global lockdowns causing an increase in consumers purchasing their core brands? Will the newly acquired Martin Audio be able to encourage enough growth in their live markets to offset any decline in home studio purchasing?

In this article, I will analyse Focusrite six months on from my first article, and ask what investors should do now with the shares.

For more on Focusrite’s history and business model, see my previous article here, written after their H1’21 results.


Recent Results Overview

The table in the image shows Focusrite's income statement for the full year 2021 compared to the full year 2020. Key takeaways from this table are discussed in the paragraph underneath the image.
Source: Focusrite's FY'21 Annual Report

In the recent results for the full year, Focusrite experienced revenue growth of 33.7%, with an organic constant currency growth rate of 28%, (it is worth noting that in FY’21, Martin Audio contributed a full year’s worth of revenue compared to just eight months in FY’20. FY'21 also includes the acquisition of Sequential at the end of April 2020, which contributed four months of revenue).

Revenue growth declined in the second half of the year (HY’21 saw 91% revenue growth compared to FY’21 of 34%). Focusrite explains this decline as partly due to the strong comparators in H2’20 during the initial lockdowns, but also due to the supply constraints experienced in the second-half of 2021 across many industries, but in particular for electronic chips, which are used in many of the Group’s products. The company reassured that their operations teams have secured supply and largely prevented stock outages with their supply partners, but that this caused a drag on their second half results. The company expects the problems caused by the supply chain constraints to continue throughout at least the first half of next financial year.

Gross profit margin was 48.4%, up from 46% in FY20 and from 42.3% in 2019. This steady increase is the result of several short and long-term factors. One such factor is Focusrite’s sales mix, as the company reduced sales through distributors and increased DTC sales (direct to consumer). In the long term, Focusrite expects this trend of margin expansion to continue as they shift away from distributors and the weighting from high margin product lines such as Adam Audio increases.

On the other hand, and explained further in the Risks section below, the Group is mindful of the impact of component shortages and increased freight chargers on future revenue and underlying gross margin.

Recent Results by Business Segment

The image shows a table, which shows the split of Focusrite's business in terms of revenue and organic revenue. Focusrite has four business segments, FAEL, ADAM audio, Martin audio and Sequential. The table compares the revenue for the full year 2020 of each segment to the revenue in the full year of 2021 of each segment. Key takeaways from this table are discussed in the paragraphs below the image.
Source: The Twenties Trader, figures from Focusrite's FY'21 Annual Report

The above table shows the segmented revenue for Focusrite’s business. The business is split into four segments:

  • FAEL (Focusrite Audio Engineering Limited)

  • ADAM Audio (acquired in 2019)

  • Martin Audio (acquired in 2019)

  • Sequential (acquired in 2020)

The FAEL segment (Focusrite Audio Engineering Limited) comprises Focusrite’s core products used in the recording and broadcasting of music or voice. The primary ranges in this segment are Scarlett and Clarett, which are Focusrite’s biggest selling products. The FAEL segment also includes the brand Novation and the brand Ampify. In FAEL, revenue increased by 24% to £124.4 million (FY20: £100.7 million), driven by ongoing strong demand across their user base.

The image shows Focusrite's core products in its Focusrite and Focusrite Pro ranges. In Focusrite, there is the Scarlett mass market interface (which retails for $100 to $500) and the Clarett intermediate/professional user console (which retails for $400 to $1200 dollars). In Focusrite Pro, there is the RedNet, which is built for enterprise, live, broadcast and education (which retails for $3000 upwards). Also in Focusrite Pro, there is the Red, which is for creative professionals in music and post-production (which retails for $2000 to $3500).
Source: Focusrite's FY'21 Results Presentation