The song remains the same

Focusrite 21 November 2018 Outlook
Download PDF

Focusrite

The song remains the same

FY18 results

Consumer electronics

 

21 November 2018

Price

432.5p

Market cap

£251m

Net cash (£m) at 31 August 2018

22.8

Shares in issue

58.1m

Free float

59%

Code

TUNE

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

6.8

(5.8)

43.0

Rel (local)

8.6

3.3

52.5

52-week high/low

504.0p

312.5p

Business description

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

Next event

AGM statement

January 2019

Analysts

Paul Hickman

+44 (0)20 3681 2501

Kate Heseltine

+44 (0)20 3077 5700

Focusrite is a research client of Edison Investment Research Limited

The investment case for Focusrite is not so much its trading growth, impressive though that is with 19% pre-tax growth in FY18, but its ability to sustain expansion into the future. Both in category terms, with the professional and app-based products developing their markets, and geographically, with Asia taking over as the fastest growth region, management demonstrates its longer-term aspirations and capabilities. In our view, the inconvenience of US tariffs is likely to be temporary and does not affect long-term value, which we define as 457p per share.

Year end

Revenue (£m)

PBT* (£m)

EPS* (p)

DPS (p)

P/E (x)

EV/EBITDA (x)

Yield (%)

08/17

66.1

9.5

14.8

2.7

29.2

18.1

0.6

08/18

75.1

11.3

17.5

3.3

24.7

15.3

0.8

08/19e

78.0

11.8

17.9

3.6

24.2

14.9

0.8

08/20e

81.7

12.0

18.0

3.7

24.0

13.8

0.9

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Developing markets for musicmaking

Focusrite continues to expand into and develop markets for musicmaking. Sales in its 160 countries and territories grew 13.7% to £75.1m in FY18 and pre-tax profit grew 19.2% to £11.3m, 5% above our forecast. Five new products were launched in FY18 and the Scarlett interface won the company’s fourth Queen’s award. The highest growth in currency terms was in Rest of the World (RoW), where Asia drove 21% growth despite weakness in Latin America, and Canada is now becoming a marketing focus. The Focusrite Pro B2B marketing group is harnessing new high-profile clients such as NBC for the professional product with specific opportunities in post-production, broadcast, on-air and other verticals, while the Ampify app development arm is intensifying and expanding its product area.

Underlying growth despite tariff impact

We cautiously forecast underlying revenue growth of c 6% for FY19 and FY20, lower than past forecasts that have been beaten. Our forecasts do not reflect enhancement from any business that the company might acquire with its £22.8m cash. Inconveniently, sales in the US, the company’s largest market with 41% of revenue, are caught by US tariffs on goods sourced in China. Although we expect these to be temporary, we anticipate that whether Focusrite absorbs them or passes them on (we assume the latter) there will be a short-term revenue impact. Assuming pricing power from the company’s market leadership, we upgrade our EPS forecast by 5.4% in FY19 to 17.9p, and by 2.6% in FY20 to 18.0p. We introduce our FY21e forecast with 3.4% earnings growth to 18.6p.

Valuation: Reflecting cash, half the balance sheet

At £22.8m, net cash is over half of the company’s balance sheet and grew £8.6m in the year. Management is actively examining acquisition targets, while applying strict criteria. Against peers, Focusrite’s valuation is above the wider peer group although closer to music specialists, and the shares’ market valuation appears to discount use of the cash at a c 10% post-tax return. Our DCF valuation is 457p.

Investment summary
Company description: Global music and audio products group

Focusrite is a global music and audio products group supplying hardware and software used by professional and amateur musicians. Its products fall into two main brand groups, Focusrite and Novation. The Focusrite product sector (around two-thirds of revenue) produces audio interfaces under the Focusrite and Focusrite Pro brands. The Novation product sector (around one-third of revenue) focuses on hardware and software for creating and playing electronic music and includes Ampify, a newly created division for music-making apps. The strategy is to pursue growth through innovation, disruption and expansion, with three core goals: growing the customer base, increasing the lifetime value of customers, and expanding into new and high potential market segments.

Financials: Double-digit sales growth and FX margin boost

FY18 results beat our expectations with pre-tax profit of £11.3m, growth of 19.2% and 5% above our forecast. Both product groups performed well with Focusrite growing revenue by 17.2% and Novation by 6.4% against an extraordinary 37.8% in FY17: overall revenue growth of 13.7%. North American sales grew 17% in constant currency, though performance was held back by Canada. EMEA sales, up 11% in constant currency, benefited from an 11% strengthening in hedged euro rates, translating to 18% sterling growth and contributing strongly to margin. In the RoW (up 21% in constant currency) Asian sales were strong although smaller Latin American markets were weak. Operating costs were controlled, contributing to operating profit growth of 23% to £11.6m with a 1.2ppt margin rise to 15.5%. Net cash at £22.8m was up by £8.6m. Our FY19 and FY20 forecasts are affected by the US tariffs on goods sourced from China, although we assume some strength from market leadership of both product groups. We upgrade our EPS forecast by 5.4% in FY19 to 17.9p, close to the FY18 beat, and by 2.6% in FY20e to 18.0p. We introduce our FY21e forecast with 3.4% earnings growth to 18.6p.

Sensitivities: Demand, technology, tariffs and FX

Sensitivities include the cyclicality of consumer demand in Focusrite’s ultimate markets and the continued technical execution of excellent new products. Our forecasts assume the company will continue to identify and exploit new technological and product opportunities that build its share of the market and monetise its substantial investment in R&D. Focusrite’s products are sourced from China and c 41% of sales are to the US and therefore exposed to tariffs, which have been reflected in our forecasts but may change for better or worse. It has a currency risk on its c 25% euro-denominated revenue although it hedges the majority of this euro exposure one year ahead. There is a natural hedge in relation to the US dollar. Potential effects of Brexit on currency and movement of goods are unknowable. Focusrite depends on a small number of suppliers, key resellers and distributors, so the interruption of such relationships could be damaging. The achievement of the company’s plans also depends on the knowledge, judgments and experience of a small management team, so continuity is important and unexpected change could bring risks.

Valuation: Long-term valuation profile looks through tariff issue

We value the shares on a DCF basis to evaluate the longer-term income stream with reference to a peer group of smaller companies. Our long-term view of Focusrite’s value is not substantially affected by the Trump tariffs and we value the shares at 457p. Against peers, Focusrite’s P/E and EV/EBITDA valuations are above the wider peer group though closer to music specialists. However, we believe the market is discounting use of Focusrite’s cash at a post-tax return of c 10%.

Company description: All about music

Focusrite is an international music and audio products group supplying hardware and software products for professional and amateur musicians. It has two main product groups centred on different aspects of facilitating music production. Company strategy relates to growth through innovation, disruption and expansion, specifically defined as three goals:

Grow the core customer base. This encompasses new product offerings as well as next-generation versions and enhancements to the current portfolio. It includes customer-relevant hardware and software to enable and enhance the creative process. It also relies on new disruptive solutions that increase the addressable market.

Increase lifetime value of customers. Here the focus is on building a connected experience to tie the company’s solutions together. That includes add-on software tools and content, and participation in more of the traditional value chain.

Expand into new and high potential markets. The company aims to leverage its current portfolio and IP to enter new markets. It will continue to expand into geographies with large potential. Acquisitions will be considered if the right opportunities are found, and the company has appointed a business development manager to help it examine and process prospects.

Music production through recording and sound generation

The company has two main divisions: the Focusrite product group (69% of FY18 revenue) produces audio interface equipment used in recording; and the Novation product group (27% of FY18) focuses on sound-generating hardware and software that creates electronic music and other types of music. In 2017 the company created two new sub-groups: Focusrite Pro (part of the Focusrite segment), focused on the higher-priced B2B space, and Ampify (part of the Novation segment), dedicated to app development based on Novation sound-generation technology. The small Distribution division (4% of FY18) is UK distributor for third-party brands.

The common focus is to serve musicians at all levels to realise their potential by creating high-quality audio without technical complication.

Focusrite aims to provide the best-quality product at each price point. Products range from those at personal budget levels to sophisticated professional specifications, with consistently high standards throughout. Product ranges are continuously refreshed to remain at the forefront of the market. The company’s markets are widely spread internationally, with FY18 revenue split 43% North America, 40% EMEA and 17% RoW.

History: Rooted in the music industry

Focusrite was developed over 25 years before its IPO by its chairman Phil Dudderidge, originally a sound engineer with Led Zeppelin. He acquired the Focusrite business in 1989 after selling his own audio business, Soundcraft. Focusrite was originally formed by the celebrated British sound engineer Rupert Neve to create a console of ultimate quality based on the ISA 110 and ISA 130 mic pre module designed for Sir George Martin in 1985. The Focusrite studios became legendary in the sound recording world, although only 10 were ever built. During the 1980s and 1990s they were used by Frank Sinatra, the Mamas and the Papas, Quincy Jones and Nat King Cole among others. The early history is documented in Exhibit 1.

Exhibit 1: The Story of the Focusrite Studio Console

Source: Focusrite

Having acquired the assets, Phil Dudderidge’s team began to broaden the range of products to serve a wider customer base of professional, commercial and hobbyist musicians. Focusrite’s first audio interface, the M Box, was launched in 2002.

The Novation business, originally a manufacturer of keyboard controllers and synthesisers, was acquired in 2004. The 2014 IPO was by way of a vendor placing of 17.8m shares at 126p. No new funds were raised and its main effect was to bring in institutional investors and reduce Phil Dudderidge’s holding from 77% to 52% (it is now 38%).

The business today

Under CEO Tim Carroll, appointed in FY17, the business continues to expand, innovate and develop its markets. Its products are sold in c 160 territories and countries. Routes to market are a mix: distributors in select areas, a hybrid model in North America utilising a distributor with Focusrite’s own sales backup, and direct B2C via direct e-commerce and in-app software purchases. Product teams keep in close touch with customers, and customers have responded by awarding high net promoter scores averaging +50 to +70 reflecting the quality of product and perceived high service levels. The company’s recent investment focus has been in developing its customer-facing websites, greater local marketing intensity in markets such as Japan, Mexico and Germany, and social media demand generation.

The Focusrite product sector (69% of revenue)

The main brand categories are:

Scarlett: an industry-leading USB audio interface, contributing about two-thirds of the product group’s revenue, and helping the company to win four Queen’s Awards. Scarlett’s target market typically comprises individual musicians seeking to record their work. The product offers studio-quality analogue-to-digital conversion at an accessible price point of US$109–549, optimising sound quality, response speed and ease of operation. Following a 2016 second-generation brand refresh and further additions, there are 8 products, reflecting design improvements, embedded technology and software to further enhance performance. For example, the Scarlett 2i2, at $159, has a 2-in/2-out USB interface with 106dB dynamic range. It features an upgraded instrument input of +22dBu (formerly 14dBu), 24-bit audio with sample rates up to 192kHz (from 96kHz) and direct latency-free monitoring. Quality is reflected in the aluminium body and metal control knob, with larger models having additional inputs and outputs.

Exhibit 2: The Second Generation Scarlett Range

Source: Focusrite

Clarett: a serious hobbyist to professional range, with lower noise and higher gain characteristics than Scarlett. It originally used the industry-specific Thunderbolt connection protocol, enabling faster data transfer and low latency. Models (2Pre, 4Pre, 8Pre, 8PreX, and OctoPre) span two, four and eight preamps, but in H118 the range was extended to a USB family of three products. All have a full aluminium finish and are priced at US$439–1,199.

Exhibit 3: The Clarett USB Range

Source: Focusrite

Novation product sector (27% of revenue)

Novation’s products are instruments and software for making electronic music, in four categories:

Launchpad: Novation’s leading brand is a disruptive product that created a new market from 2009 and has become industry standard. Unlike traditional synthesiser keyboards, it has a grid of lighted keys used to create bass, drums and melody. Launchpad featured in Pop Culture, a YouTube mash-up created by the 17-year old Hugo Pierre Leclercq (aka Madeon) in July 2011. The video went viral with 31 million views. Launchpad now has a subculture of users who create cover versions of music tracks. For instance, the Ed Sheeran, Shape of You (Ellis Remix) Launchpad Cover by Kaskobi has had 46m views since its release a year ago.

Exhibit 4: Ed Sheeran - Shape Of You (Ellis Remix) // Launchpad Cover

Source: YouTube

Supported by industry-standard software Ableton, Launchpad has been extended to a family including Launchpad Pro and Launchpad Mini. Price points are US$99–299.

Synthesisers: these were Novation’s original products. Current models are radically compressed compared with early designs and are typically a portable unit with a short keyboard. There are five models: Bass Station II (analogue monosynth), MiniNova (digital microsynth), UltraNova (analogue-modelling synth), Circuit Mono Station (sequenced monosynth) and Peak Polyphonic Synthesiser (eight-voice desktop polyphonic synthesiser) priced at US$439–1,399.

Keyboard controllers: these transmit MIDI data to synthesisers, computer software synthesisers, or hardware or software sequencers. Novation’s keyboard controllers integrate with Ableton or other studio software to create sounds. Prices range between US$99 and US$699. Products include: Launchkey Mini, a compact 25-note MIDI keyboard controller with 16 additional pads; Launchkey, a MIDI controller with 25 or 49 keys with pads, knobs and faders; Impulse, a higher-spec controller in the same note sizes with fully assignable controls; and SL MkII/MkIII, an advanced professional range with built in recording functionality.

Groovebox/Circuit: launched October 2015, a standalone grid-based portable unit capable of producing its own synth, drum machine and sample sequences through its own speaker, as well as connecting to other hardware. The price is US$359–499.

Recent sub-groups: Focusrite Pro and Ampify

Focusrite has set up two brand sub-groups targeting opportunities in the high-end interface and app segments:

Focusrite Pro is a sub-group within the Focusrite product group focused on the higher-priced B2B space. This moves on from Focsurite’s origins in the personal music-making space, to target expanding opportunities with applications in recording studios, film, TV and radio studios, live sound rigs, houses of worship, audio distribution installations and postproduction environments. Such commercial communications are rapidly developing from standard networking or fibre-optic cable technologies to ethernet cable, which has hugely increased functionality per unit cost. Customers include NBC, the BBC and Microsoft. There is a specific opportunity from the massive upsurge in demand for new content driven by both legacy content creators as well as new entities such as Netflix and Amazon.

The marketing skills required to fully exploit this area are different to those required for personal product ranges. The Focusrite Pro team marks an investment in this incremental product area.

The main product ranges falling under the new brand are:

Red: the Red range offers professional quality digital conversion, remote-controlled microphone preamplifiers, and built-in monitor controls coupled with very low latency Pro Tools, Thunderbolt and Dante interface technology. With very low noise, low distortion and ultra-linear design, they give extremely accurate representation of original acoustics. The low-latency, highly reliable drivers provide seamless integration with many digital audio workstations, while the DigiLink Mini ports allow connection directly to Pro Tools|HDX, Pro Tools|HD native and older Pro Tools|HD TDM systems. Price points are US$2,699–3,779.

Exhibit 5: Red 4Pre Thunderbolt Audio Interface

Source: Sweetwater

RedNet is a scalable, near zero latency (150–500 microseconds) audio distribution system that can be used to expand I/O channel count, interface digital components, and/or bridge between Pro Tools|HD or MADI, and the Dante audio network. Price points for RedNet models are US$399–3,599.

Exhibit 6: RedNet at Galaxy StudiosFci

Source: Focusrite

Ampify

Ampify is part of the Novation product group and marks the formalisation of the company’s initiatives in app development based on its Novation sound-generation technology. There are three app products that now have over 9.5m downloads and c 500,000 active users. They are all structured as a freemium model with priced add-on features.

Launchpad: the original app venture, launched in 2013. Launchpad allows the user to create and remix electronic beats and music on the iPad or iPhone, and to record and share performances.

Exhibit 7: Launchpad for iOS

Source: Ampify

Blocs Wave: a more sophisticated product launched in 2016 as a priced product, but now also moved to the freemium model. Blocs Wave is designed to make and record new music quickly, building up new ideas and using real-time loop recording.

Exhibit 8: Blocs Wave

Source: Sweetwater

Groovebox: a flexible and creative app designed to turn ideas into full songs. Groovebox uses ‘Song Sections’ to help the user build and arrange ideas. Tracks can be structured by adding, duplicating, moving and deleting sections. Groovebox is also a freemium offer.

Exhibit 9: GrooveBox by Ampify

Source: Ampify

The company has seen an accelerating rate of downloads with 2.0m in the year. Margins are higher than for physical products, despite third-party origination costs. These are initially high and should reduce as the venture gains scale and they can be brought in-house. The music creation app space is intensely competitive and barriers to entry are relatively low; however, the products hold their position in the top 10 Apple music creation apps.

Distribution (4% of revenue)

The company is the UK distributor for the leading brands KRK (studio monitors) and sE Electronics (microphones). These are adjacent areas technically but are not currently growing.

Market and competition

The global music instrument and pro audio wholesale market was £2.7bn in 2013, according to Music Trades magazine (source: admission document), growing at c 2% pa. However, that market is disparate and fragmented, including conventional instruments and traditional technology, as well as electronic technologies relevant to Focusrite. At the time of the IPO, management estimated the addressable market for its portfolio was c £450m, being £250m in the recording segment, £100m in the EDM segment and £100m in the commercial segment. Against this, and allowing for market growth of 2% as above, FY18 revenue represents a c 15% share. In addition, Focusrite’s five-year revenue CAGR of 24% is considerably higher than estimated growth in the market as a whole.

Significant competitor brands for the Focusrite division are PreSonus and Apogee (vs Scarlett), Avid Pro Tools and Universal Audio Apollo (vs Clarett), and Avid HD and Apogee Symphony (vs RedNet). Launchpad competes against Ableton Push and Akai APC Mini ranges. Management estimates a c 50%+ share of the mass interface market, c 15–20% of the semi-professional Thunderbolt market and 2–3% of the commercial market. According to management’s US market analysis, the company is number one in the overall interface market, and management believes it is in the top three across Novation’s markets.

It is difficult to define share in the app market, with its lower barriers to entry. However, the Launchpad app has generated over 9.5m downloads to date, helped by, and helping, the strength of the Novation brand. We believe Novation’s ability to add advanced features to the Blocs Wave app will be key in this fast-developing market.

From H118 there has been a broadening of the market that is probably attributable to two factors:

The products of both divisions have been available on third-party websites such as Amazon and Gear4music, which has introduced them to a new class of customer (for example, parents who may be buying a Launchpad or Scarlett interface for a child’s Christmas present) who would not normally set foot in a specialist equipment dealer.

The Launchpad has enjoyed a surge of popularity amongst teenagers worldwide.

Management

The board is headed by executive chairman Phil Dudderidge, who has a lifetime of sound engineering experience. Tim Carroll was appointed CEO effective January 2017; his substantial career was with Avid Technology where he was most recently vice president with responsibility for audio products. Jeremy Wilson, CFO, formerly of Regenersis, DHL and Electrocomponents, was appointed in 2014. Biographies are on page 18.

The senior management team has experience in all relevant product and market areas. Most managers are musicians, qualified technically for their roles, and are passionate supporters of the strategy. The culture is entrepreneurial and opportunistic.

Although the chairman is a 38% shareholder, he remains actively engaged with other shareholders, and the board is also advised by two experienced non-executive directors: David Bezem, an investment banker formerly at Altium Corporate Finance, and Paul Dean, formerly group finance director of Ultra Electronics.

Sensitivities

Product quality: Focusrite’s market leadership is based on the technical quality of its products, as well as their direct and intuitive user feel and lack of complication. It has well-developed testing and product review capabilities; nevertheless, a product issue requiring a major recall, for example, would be a negative event. We believe product excellence will continue to be a strength.

Technological opportunities: our forecasts assume the company will continue to identify, exploit and market new product opportunities that build share, and to monetise the investment in R&D. We note that Focusrite is actively expanding its markets with Focusrite Pro and Ampify. If instead the initiative were grasped by competitors, growth could be affected.

Consumer demand: the company is subject to cyclicality of demand in its consumer markets. Even for products aimed at the B2B market, demand is also ultimately driven by consumers. However, exposure to a range of international markets provides a measure of protection.

US sanctions, Brexit and currency risk: Focusrite’s products are sourced from China and c 40% of sales are to the US and are therefore, in many cases, subject to tariffs. Although this is reflected in our forecasts, the US/China relationship is inherently unstable and could get better or worse, with consequent effects on the company. We believe it is most likely that a normalisation of trade relationships will lead to an improvement in prospects for the North American business, but the timing is uncertain. The main physical risk from Brexit is that customs hold-ups following a no-deal conclusion might affect distribution of Focusrite’s product. On the plus side, the company supplies distributors, who in turn supply end retailers, so fine timing is not a major issue. Also, Focusrite uses internationally established freight forwarders who are likely to have the best systems and strategies for avoiding unnecessary delays.

Around 60% of Focusrite’s revenue and c 100% of cost of sales (since all production is in the Far East) are in US dollars or related currencies, which provides a natural hedge. However, c 25% of its revenue is in euros. Focusrite uses forward contracts to lock in budget certainty against 75% of euro exposures; however, since it reports in sterling it has an element of exposure to the euro, and to the extent that the natural hedge is approximate, to the US dollar. On this basis, a 10% change in the US dollar against sterling would have little profit effect. However, a 10% movement in the euro would affect revenue by £1.6m (before hedging protection).

Management team: in its technical product area, the achievement of the company’s plans depends on the knowledge, judgments and actions of the management team. The team has a uniquely relevant blend of experience and any unexpected changes could affect the realisation of its plans.

Dependence on trade relationships: Focusrite depends on a small number of suppliers, key resellers and distributors, so an interruption of such relationships could be damaging. We note that the company has started to distribute via Amazon and directly online, which, while still small in scale, prospectively reduces its absolute dependence on third parties.

Acquisition risk: with a significant part of its balance sheet in cash and a strategy that includes potential acquisitions, it is likely Focusrite will make an acquisition at some point. An acquisition would bring a different set of risks, such as the price, fit, management transition, and execution of the related strategy.

Financials
Revenue and profit: Beating forecasts

Exhibit 10: Half- and full-year results

£000s

H117

H217

FY17

H118

H218

FY18

H1 y-o-y

H2 y-o-y

FY y-o-y

Revenue

32,020

34,035

66,055

38,819

36,302

75,121

21.2%

6.7%

13.7%

Gross profit

12,855

13,496

26,351

16,200

15,474

31,674

26.0%

14.7%

20.2%

Gross margin

40.1%

39.7%

39.9%

41.7%

42.6%

42.2%

3.9%

7.5%

5.7%

Adjusted EBITDA

6,131

6,978

13,109

7,969

7,516

15,485

30.0%

7.7%

18.1%

Adjusted EBITDA margin

19.1%

20.5%

19.8%

20.5%

20.7%

20.6%

7.2%

1.0%

3.9%

Operating profit

4,571

4,899

9,470

6,230

5,383

11,613

36.3%

9.9%

22.6%

Pre-tax profit

4,599

4,913

9,512

5,833

5,510

11,343

26.8%

12.1%

19.2%

EPS (p)

7.0

7.8

14.8

8.9

8.6

17.5

26.6%

10.7%

18.2%

Net cash

9,391

14,174

14,174

19,734

22,811

22,811

110.1%

60.9%

60.9%

Source: Focusrite, Edison Investment Research. Note: Adjusted.

Results for the year were better than we expected. Revenue of £75.1m was slightly lower than our forecast of £75.4m but still showed 13.7% year-on-year growth. It came at stronger margin however, with EBITDA margin of 20.6% against our forecast 20.1%, so pre-tax profit of £11.3m was 5% above our £10.8m forecast with growth of 19.2%. EPS increased by 18% and the dividend for the year was raised 22% to 3.3p.

Focusrite division performance

Both product groups performed well during the year but Focusrite continued to grow strongly in the second half, contributing to 17.2% revenue growth in the year. The Scarlett, Clarett and RedNet ranges all participated in that performance, which was therefore spread across the price range. Scarlett forms around three-quarters of revenue and its second-generation USB audio interface range, which is the world’s number one selling audio interface, further strengthened its market share with 15% growth based on extended functionality.

The mid-price Clarett range has disrupted the market with superior price to performance relationship and has now widened the gap with a new USB range.

Focusrite’s commercial range, led by RedNet, has received additional impetus from the formation of the Focusrite Pro organisation. This has helped to drive growing applications in post-production, education, installed sound and broadcast markets. Markets in original content production, live sound events and live on-air productions are growing rapidly. New customers include NBC, and Formosa Group, a Hollywood post-production house.

Novation division performance

Novation grew revenue by a more modest 6.4% to £20.1m, but that was against the backdrop of an extraordinary 37.8% expansion in FY17, when escalating Launchpad demand combined with wider distribution reach including Amazon. In FY18 the synthesiser range took the lead with 46% growth led by the top-of range $1,399 Peak model, which has captured a market swing back to more sophisticated products, leaving the larger Launchpad (c 50% of Novation) and Launchkey to grow more slowly.

Geographical performance and gross margin

Constant currency growth was strong across all regions:

Exhibit 11: Geographical revenue

£000s

FY17

% of revenue

FY18

% of revenue

Growth

CC growth

North America

29,702

45.0%

32,720

43.6%

10.2%

17%

Europe and Middle East

25,153

38.1%

29,706

39.5%

18.1%

11%

Rest of World

11,200

17.0%

12,695

16.9%

13.3%

21%

Total

66,055

100.0%

75,121

100.0%

13.7%

15.3%

Source: Focusrite, Edison Investment Research

Given that euro sales are around 25% of the total, and US and ROW sales total c 60%, some 85% of total revenue is in currencies other than pounds sterling. A natural hedge against the US dollar protected the company from a 6% strengthening of sterling against the currency. However, after reflecting its 75% euro hedging policy, sales in Europe benefited from an 11% weakening, making EMEA the highest growth region in sterling terms and contributing strongly to margin.

The US is the company’s largest market with c 41% of total sales. Here growth was 11% (in £) with a weighting to the first half. North American performance as a whole was held back by flat sales in Canada, around 2% of sales. Canada is an area of marketing focus, utilising among other things the US marketing team (c 30 heads based in Los Angeles), and management expects to see growth developing here.

EMEA delivered constant currency growth of 11%, up from 6% in FY17. Continental Europe developed strong performance, although sales growth in the UK was relatively weak. In the rest of the world, Asian sales were very strong, following the strengthening of the Hong Kong office with c 5 heads, while Latin American markets were weak. Currency was an important factor in a gross margin rise of 2.3pp to 42.2%, contributing to operating profit growth of 23% to £11.6m with a 1.2pp margin rise to 15.5%.

Cash: Strong performance and working capital efficiency

Net cash at £22.8m was up from £14.2m at August 2017. Net inflow of £8.6m matched FY17 and is 85% of profit after tax. It is after a £0.4m recovery in working capital, which in FY17 approached constraining levels. Nonetheless, net working capital reduced from 72 to 68 days’ sales.

 

Forecasts: Underlying growth continues

Exhibit 12: Changes to forecasts

£m

FY19e old

FY19e new

Change

FY20e old

FY20e new

Change

Revenues

80.0

78.0

-2.5%

86.0

81.7

-5.0%

Gross profit

33.4

33.3

-0.4%

35.9

34.9

-2.8%

Gross margin

41.7%

42.7%

0.9%

41.7%

42.7%

1.0%

Adjusted EBITDA

15.7

15.9

1.5%

16.7

16.5

-0.8%

Adjusted EBITDA margin

19.6%

20.4%

0.8%

19.4%

20.2%

0.8%

Normalised operating profit

11.5

11.8

2.8%

12.2

12.0

-1.7%

Normalised PBT

11.5

11.8

2.6%

12.2

12.0

-1.6%

Normalised (diluted) EPS (p)

17.0

17.9

5.4%

17.6

18.0

2.6%

Net cash

26.5

27.9

5.3%

30.5

33.8

11.1%

Source: Edison Investment Research

We cautiously assume FY19 underlying revenue growth of c 6%, below half of that in FY18 and a little lower than our previous assumptions, which have been surpassed. However, we have to recognise the reality that Focusrite’s product, which is all manufactured is China, is now subject to tariffs when exported to the US. The tariffs were introduced in late September at a 10% rate, with the potential to be increased to 25% from January 2019.

Tariff assumptions

We assume that an amount equal to the tariff will be added to the sales price, subject to individual price points. The company has taken this approach with the 10% tariff introduced on 1 October, with no perceptible volume impact. If the company were to absorb part of the tariff effect, there would be an automatic margin hit. It appears that competitors are taking this approach so far, but may increase prices if a 25% tariff is imposed.

We take the view that a 25% average price increase will have an effect in terms of price elasticity. The exact effect is highly uncertain, however. The price elasticity of comparable product groups lies in a range of -0.85 to -1.2 with a mean of -1.0, according to academic sources: however, in both its main divisions Focusrite is clear market leader and we assume that a significant price inelasticity effect results from that. It is important to note that in 2016 in the UK, Focusrite increased prices by c 15%, passing on the effective input cost increases from the weakening of sterling with no noticeable effect.

We therefore take a working assumption of price elasticity of -0.5. The implication is that a price increase of 25% would result in a 12.5% decrease in volume of products sold. We set out some alternative scenarios in Exhibit 13 below.

On the basis that the tariff on any product is treated as a sales tax, the price increase raises gross sales, but net of the tariff net sales are unchanged. Reduced volumes affect COS but the GP percentage to net sales is maintained in principle.

Time weighted, the effect is 10% effect on our forecast US revenue across FY19. However, we also assume that cost prices will be negotiated down equivalent to a 6% market anticipated devaluation of the renminbi from January 2019.

For FY20 there is an annualisation of the 25% increase in the retail price, but we also assume the market effect will start to mitigate as a result of the passing of the shock effect of a sudden price increase, reassertion of brand leadership and the making of purchase decisions previously delayed. We assume a 10% mitigation of the volume declines suffered in FY19, time adjusted. These effects largely cancel to leave a net forecast 11% revenue impact.

As a result and including the £0.5m pre-tax beat in FY18, as well as a lower tax assumption, we are upgrading our forecast FY19 EBITDA, PBT and EPS by 1.5%, 2.6% and 5.3% respectively. In FY20e our assumptions of annualisation and a softening of the impact effectively cancel each other out and changes are smaller, with a 1.6% decline in normalised PBT. However, we now assume that Focusrite’s low tax rate, which results from allowances on its R&D investment, continues at 12% from FY19 (FY18: 10%). We previously assumed it rose to 15% by FY20. As a result, we upgrade our FY20e EPS by 2.6%.

The effect of alternative assumptions on price elasticity is as follows:

Exhibit 13: Scenarios for differing elasticity of 25% price rise (£m)

Price elasticity index (-)

1

0.75

0.5

0.25

0

FY19 revenue

74.7

76.4

78.0

79.6

81.2

FY19 EBITDA

14.4

15.1

15.9

16.7

17.4

FY19 PBT

10.3

11.0

11.8

12.6

13.3

FY20 revenue

77.4

79.5

81.7

83.9

86.1

FY20 EBITDA

14.6

15.5

16.5

17.5

18.6

FY20 PBT

10.1

11.0

12.0

13.0

14.1

Source: Edison Investment Research

The zero case FY19e PBT projection is 23% higher than our last published forecast mainly because of the margin benefit above, combined with the FY18 forecast beat. Note that the scenarios analysed above only reflect differing elasticity, not the situation in which the tariffs were suspended.

We also introduce our FY21 forecasts with an EPS growth forecast of 3% to 18.6p.

Valuation

We value the shares using DCF techniques to evaluate the longer-term income stream available to investors. As a secondary metric, we consider valuation in relation to a peer group of smaller companies on near-term earnings expectations, although few of these are close peers. However, as discussed below, neither metric fully reflects the potential of the company’s cash of £22.8m.

DCF valuation: Demonstrating the long-term value

It is important to stress that the short-term downgrade to our forecasts as a result of the Trump tariffs has no substantial effect on our long-term valuation of Focusrite. The business retains its potential to expand its markets and products and as we assume the tariffs are essentially a negotiating tactic by President Trump, we do not believe they will have a lasting effect on the business.

Within our 10-year projection we assume annual revenue growth years 4–8 of 10% (against CAGR of 16.2% in the last three reported years), then fading our terminal growth rate of 2%.

Exhibit 14: DCF projections

£000

2019e

2020e

2021e

2022e

2023e

2024e

2025e

2026e

2027e

2028e

Term

Revenue

77,985

81,709

85,794

94,373

103,811

114,192

125,611

138,172

147,844

155,236

158,341

EBITDA

15,901

16,519

17,292

19,210

21,339

23,574

26,043

28,770

30,916

32,560

33,252

Free cash flow

7,308

8,259

7,592

9,738

11,583

13,136

14,884

16,850

18,540

19,970

21,483

Source: Edison Investment Research

We assume a terminal EBITDA margin of 21% (19.8% was already achieved in FY17) and capex at 7% of revenue, reducing to 5% by the terminal year. We assume equity-only cost of capital of 8.4%.

As a result, we value the shares at 457p. Exhibit 15 below shows the share price implication of alternative sales growth rates, as well as terminal margin assumptions.

Exhibit 15: Sensitivity to medium-term growth rate and terminal margin

Sales growth FY22–26

8%

10%

12%

14%

16%

Terminal margin

23.0%

463

498

536

576

619

22.0%

444

478

513

551

592

21.0%

425

457

490

527

565

20.0%

406

436

468

502

538

19.0%

387

415

445

477

511

Source: Edison Investment Research

Peer group reference: Mixed picture

Focusrite does not have a direct peer, but we compare it with UK smaller-cap tech, electronics and consumer companies in the relevant subsectors, as well as relevant companies in US and European markets. This is far from an exact comparison but does give some context in terms of market valuations in adjacent sectors. While Focusrite’s Yr1e P/E of 24.2x is above the wider group, it is comparable with companies having more direct product relevance such as Avid Technology, Gear4music and Bang & Olufsen.

Exhibit 16: Peer group valuation

RIC

Company

Country

Last report

Share price (CCY)

Market cap (CCY)

P/E FY1e (x)

P/E FY2e (x)

EV/EBITDA FY1e (x)

EV/EBITDA FY2e (x)

EV/S FY1e (x)

UEIC.O

Universal Electronics

US

31/12/2017

34.5

476.3

14.3

12.3

8.3

6.7

0.8

TIVO.O

TiVo

US

31/12/2017

10.3

1278.9

9.6

8.1

9.1

8.4

2.8

MGAMM.L

Morgan Adv. Materials

UK

31/12/2017

2.7

777.9

10.9

10.0

6.2

5.9

0.9

PHTM.L

Photo-Me International

UK

30/04/2018

1.1

426.1

11.8

10.8

5.7

5.3

1.7

OXIG.L

Oxford Instruments

UK

31/03/2018

9.0

539.3

15.0

14.0

10.0

9.5

1.8

BO.CO

Bang & Olufsen

DK

31/05/2018

133.4

5788.5

24.6

13.7

9.7

7.3

1.3

XPP.L

XP Power

UK

31/12/2017

24.0

473.2

13.7

12.4

9.9

8.8

2.4

AVID.O

Avid Technology

US

31/12/2017

6.7

278.7

43.5

14.2

10.0

9.2

1.1

GHH.L

Gooch & Housego

UK

30/09/2017

16.5

411.0

29.4

25.3

17.3

14.7

3.2

DIAL.L

Dialight

UK

31/12/2017

3.7

118.1

19.3

10.5

8.0

5.2

0.6

QXT.L

Quixant

UK

31/12/2017

3.6

236.2

19.5

16.8

14.5

12.7

2.5

JDG.L

Judges Scientific

UK

31/12/2017

23.2

144.9

15.0

14.6

11.4

11.1

2.0

G4M.L

Gear4music

UK

28/02/2018

5.6

117.9

55.4

35.0

24.7

17.9

1.1

Average

21.7

15.2

11.1

9.4

1.7

TUNE.L

Focusrite

UK

31/08/2017

432.5

251.2

24.2

24.0

14.9

13.8

3.0

Premium

15.7%

62.5%

40.5%

59.1%

81.6%

Source: Thomson Reuters. Note: Based on market prices at 16 November 2018.

On an EV/EBITDA basis, however, it trades at a substantial premium to most of the group, as also on an EV/sales basis. We believe this is a function of the market anticipating the use of Focusrite’s excess cash in terms of an acquisition.

Valuing the possible use of cash

Here we consider the likely effect of using it to make an accretive acquisition.

As we analysed in our April 2018 note, Focusrite generates high average taxed ROCE rates of 45–51%. It is not likely the company could generate such returns from an acquisition. However, using a range of lower ROCE rates, the cash would imply additional value as follows:

Exhibit 17: Potential value impact of excess cash (£m/p per share)

ROCE rate

5%

10%

15%

Excess cash

22.8

22.8

22.8

Post-tax earnings

1.1

2.3

3.4

Incremental EPS

2.0

3.9

5.9

Pro forma FY19 EPS

19.8

21.8

23.8

Peer P/E

20

20

20

Implied share valuation (p)

397

436

475

Source: Edison Investment Research

Hence, it would seem the market appears to be discounting investment of the net cash balance at a c 10% post-tax return.

Exhibit 18: Financial summary

£'000s

2016

2017

2018

2019e

2020e

2021e

31-August

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

54,301

66,055

75,121

77,985

81,709

85,794

Cost of Sales

(33,439)

(39,704)

(43,447)

(44,722)

(46,786)

(49,039)

Gross Profit

20,862

26,351

31,674

33,264

34,923

36,755

EBITDA

 

 

10,249

13,109

15,485

15,901

16,519

17,292

Operating profit (before amort. and except).

 

7,677

9,470

11,613

11,790

11,972

12,243

Amortisation of acquired intangibles

0

0

0

0

0

0

Exceptionals

(537)

0

329

0

0

0

Share-based payments

0

0

0

0

0

0

Reported operating profit

7,140

9,470

11,942

11,790

11,972

12,243

Net Interest

(14)

42

(270)

20

60

70

Joint ventures & associates (post tax)

0

0

0

0

0

0

Exceptionals

0

0

0

0

0

0

Profit Before Tax (norm)

 

 

7,663

9,512

11,343

11,810

12,032

12,313

Profit Before Tax (reported)

 

 

7,126

9,512

11,672

11,810

12,032

12,313

Reported tax

(870)

(959)

(1,199)

(1,417)

(1,444)

(1,478)

Profit After Tax (norm)

6,793

8,553

10,144

10,393

10,588

10,836

Profit After Tax (reported)

6,256

8,553

10,473

10,393

10,588

10,836

Minority interests

0

0

0

0

0

0

Discontinued operations

0

0

0

0

0

0

Net income (normalised)

6,900

8,553

10,144

10,393

10,588

10,836

Net income (reported)

6,256

8,553

10,473

10,393

10,588

10,836

Average number of Shares Outstanding (m)

53.2

55.4

56.8

56.8

56.8

56.8

EPS - basic normalised (p)

 

 

13.0

15.4

17.9

18.3

18.6

19.1

EPS - normalised (p)

 

 

11.8

14.8

17.5

17.9

18.0

18.6

EPS - basic reported (p)

 

 

11.8

15.4

18.4

18.3

18.6

19.1

Dividend per share (p)

2.0

2.7

3.3

3.6

3.7

3.9

Revenue growth (%)

13.1

21.6

13.7

3.8

4.8

5.0

Gross Margin (%)

38.4

39.9

42.2

42.7

42.7

42.8

EBITDA Margin (%)

18.9

19.8

20.6

20.4

20.2

20.2

Normalised Operating Margin

14.1

14.3

15.5

15.1

14.7

14.3

BALANCE SHEET

Fixed Assets

 

 

6,367

6,332

7,314

8,653

9,845

10,822

Intangible Assets

4,792

4,963

6,039

7,559

8,884

10,074

Tangible Assets

1,575

1,369

1,275

1,094

961

749

Investments & other

0

0

0

0

0

0

Current Assets

 

 

28,191

36,126

47,612

54,270

61,460

68,674

Stocks

11,361

9,000

11,391

11,995

12,548

13,287

Debtors

11,224

12,952

13,310

14,288

14,970

15,953

Cash & cash equivalents

5,606

14,174

22,811

27,886

33,838

39,328

Other

0

0

100

102

104

106

Current Liabilities

 

 

(9,256)

(8,663)

(11,136)

(11,258)

(11,764)

(12,184)

Creditors

(8,612)

(8,204)

(10,709)

(10,754)

(11,250)

(11,657)

Tax and social security

(644)

(459)

(427)

(505)

(514)

(526)

Short term borrowings

0

0

0

0

0

0

Other

0

0

0

0

0

0

Long Term Liabilities

 

 

(282)

(245)

(300)

(381)

(452)

(515)

Long term borrowings

0

0

0

0

0

0

Other long term liabilities

(282)

(245)

(300)

(381)

(452)

(515)

Net Assets

 

 

25,020

33,550

43,490

51,283

59,089

66,797

Minority interests

0

0

0

0

0

0

Shareholders' equity

 

 

25,020

33,550

43,490

51,283

59,089

66,797

CASH FLOW

Op Cash Flow before WC and tax

10,249

13,109

15,485

15,901

16,519

17,292

Working capital

(6,009)

407

(427)

(1,537)

(739)

(1,315)

Exceptional & other

(417)

137

203

(0)

(0)

(0)

Tax

(165)

(633)

(478)

(1,417)

(1,444)

(1,478)

Net operating cash flow

 

 

3,658

13,020

14,783

12,947

14,335

14,500

Capex

(3,675)

(3,614)

(4,507)

(5,850)

(6,293)

(6,814)

Acquisitions/disposals

0

0

0

0

0

0

Net interest

(111)

(42)

(36)

20

60

70

Equity financing

172

258

306

0

0

0

Dividends

(976)

(1,138)

(1,679)

(2,042)

(2,150)

(2,266)

Other

365

84

(230)

0

0

0

Net Cash Flow

(567)

8,568

8,637

5,075

5,952

5,490

Opening net debt/(cash)

 

 

(6,173)

(5,606)

(14,174)

(22,811)

(27,886)

(33,838)

FX

0

0

0

0

0

0

Other non-cash movements

0

0

0

0

0

0

Closing net debt/(cash)

 

 

(5,606)

(14,174)

(22,811)

(27,886)

(33,838)

(39,328)

Source: Focusrite, Edison Investment Research

Contact details

Revenue by geography

Windsor House Turnpike Road High Wycombe Bucks HP12 3FX +44 (0)1494 462246 uk.focusrite.com

Contact details

Windsor House Turnpike Road High Wycombe Bucks HP12 3FX +44 (0)1494 462246 uk.focusrite.com

Revenue by geography

Management team

Executive chairman and founder: Phil Dudderidge

Chief executive officer: Tim Carroll

Phil has a distinguished career in the professional audio industry, including working as Led Zeppelin’s first dedicated live soundman. He set up RSD in 1971, building bespoke PA systems with custom-built mixing consoles. In 1973, Phil set up Soundcraft Electronics, a company specialising in live audio mixing consoles, which was sold to Harman International in 1988. Phil acquired the assets of Focusrite in 1989. Phil served as CEO of Focusrite from 1989 until he became chairman in 2012.

Tim was appointed CEO of Focusrite in January 2017 on the retirement of Dave Froker, the previous CEO. He has extensive sector-relevant management and sales experience, having enjoyed a distinguished career with Avid Technology Inc. Most recently, he was a vice-president with global responsibility for audio products. Previously, he was VP for worldwide audio sales (2008–15) and has held other senior sales roles since 1998. In his most recent position, he was responsible for all audio categories in Avid's executive committees and held senior management responsibility for the Audio Division. He is a professional musician by background, having attended the New England Conservatory of Music and having recorded and toured for nearly 20 years as a keyboard player before joining Avid.

Chief financial officer: Jeremy Wilson

Jeremy was appointed CFO of Focusrite in September 2014. He has prior public market experience in a number of finance roles. Most recently, Jeremy was CFO of Atex Group, a leading worldwide developer of content management and advertising software to the media industry. Previously, he was CFO at Regenersis, an AIM-listed support services business. Before his CFO roles, Jeremy held several senior finance roles at DHL Express (UK) and Electrocomponents. He qualified as a chartered accountant at KPMG in 1992.

Management team

Executive chairman and founder: Phil Dudderidge

Phil has a distinguished career in the professional audio industry, including working as Led Zeppelin’s first dedicated live soundman. He set up RSD in 1971, building bespoke PA systems with custom-built mixing consoles. In 1973, Phil set up Soundcraft Electronics, a company specialising in live audio mixing consoles, which was sold to Harman International in 1988. Phil acquired the assets of Focusrite in 1989. Phil served as CEO of Focusrite from 1989 until he became chairman in 2012.

Chief executive officer: Tim Carroll

Tim was appointed CEO of Focusrite in January 2017 on the retirement of Dave Froker, the previous CEO. He has extensive sector-relevant management and sales experience, having enjoyed a distinguished career with Avid Technology Inc. Most recently, he was a vice-president with global responsibility for audio products. Previously, he was VP for worldwide audio sales (2008–15) and has held other senior sales roles since 1998. In his most recent position, he was responsible for all audio categories in Avid's executive committees and held senior management responsibility for the Audio Division. He is a professional musician by background, having attended the New England Conservatory of Music and having recorded and toured for nearly 20 years as a keyboard player before joining Avid.

Chief financial officer: Jeremy Wilson

Jeremy was appointed CFO of Focusrite in September 2014. He has prior public market experience in a number of finance roles. Most recently, Jeremy was CFO of Atex Group, a leading worldwide developer of content management and advertising software to the media industry. Previously, he was CFO at Regenersis, an AIM-listed support services business. Before his CFO roles, Jeremy held several senior finance roles at DHL Express (UK) and Electrocomponents. He qualified as a chartered accountant at KPMG in 1992.

Principal shareholders

(%)

Philip Dudderidge and family

38.3

Canaccord Genuity

11.4

Charles Stanley

11.0

Schroder Investment Mgmt Group

7.6

Liontrust

5.2

Castlefield Investment Partners

3.7

Polar Capital

2.9

Focusrite employee benefit trust

1.9

Companies named in this report

KRK Systems, sE Electronics, PreSonus Apogee Electronics, Avid (AVID US), Universal Audio (UEIC US), Ableton, Akai Electric Co., Ultra Electronics (ULE LN), Sweetwater Sound, Amazon.com (AMZN US), Atex Group, DHL, Universal Electronics (UEIC.O), Electrocomponents (ECM LN), Tivo (TIVO US), Morgan Advanced Materials (MGAM LN), Photo-Me International (PHTM LN), Oxford Instruments (OXIG LN), Bang & Olufsen (BO DC), XP Power (XPP LN), Gooch & Housego (GHH.L), Dialight (DIAL.L), Judges Scientific (JDG.L), Quixant (QXT LN), Gear4music Holdings (G4M LN), Microsoft Corporation (MSFT.O ) , Netflix (NFLX.O )

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Focusrite and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Focusrite and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Share this with friends and colleagues