Small Company Spotlight: Focusrite gets into the festival spirit

When Focusrite (TUNE)Follow | TUNE acquired loudspeaker specialist Martin Audio in December 2019, little did it know that live entertainment would be off the agenda for some time as Covid struck. But with the pandemic now firmly in the rear-view mirror, demand for the division’s industry-leading sound systems has rocketed as the festival  market roared back to life this summer. 

The company’s audio reproduction division – which sells state-of-the-art speakers for all forms of live performances – saw revenues jump 30.1% to £41.5m as demand for live music experiences surged, and post-pandemic supply chain troubles eased. In particular, falling freight costs helped gross margins improve from 45.3% to 47.5%, despite higher promotional activity to unwind inventory in its content creation division.

In contrast to audio reproduction, content creation had a tough year as resellers destocked after the pandemic boom for music production equipment. Sales in the division – which includes brands such as Novation and Focusrite’s Scarlett audio interfaces – slipped 9.7% to £137m as customers switched, as chief executive Tim Carroll put it “from buying tech to buying experiences”, compounded by the ongoing inflationary crisis. “Resellers were desperate for inventory last year and overbought, which meant a product glut just as the cost-of-living crisis hit”, said Mr Carroll.

However, with market conditions normalising in the second half and the trend for music production still very much intact, Focusrite remains in a strong position to deliver further growth. As well as expending its direct-to-consumer sales, the group is rolling out its go to market strategy to sell direct to resellers – rather than via resellers – having successfully trialled the new approach in Australia. “We were twice removed from end customers”, said Mr Carroll, noting that the approach gives Focusrite the ability to have much greater control of its demand generation activities.

That should help it fully capitalise on new product launches across both divisions, and ongoing M&A to add complementary products to the portfolio. It launched 32 new products over the year, including the fourth generation of its Scarlett interface, mid-range sound systems for smaller festivals, and additions to the Oberheim synth range, after acquiring the iconic US brand in 2022. 

Focusrite also bolstered its software business and DSP processing capabilities with the acquisition of Sonnox last December, an example of the strategy to acquire products adjacent to its core technologies. And with free cash flow generation heading back towards its target of 10-12% of sales and negligible net debt, the group has plenty of firepower to keep adding to the product portfolio.

Although Ebitda and diluted EPS fell, respectively down 7.4% and 23%, that reflects necessary investments in the expanded group’s technology infrastructure and one-off foreign exchange gains in the previous year. Brokers expect EPS to recover to 39.2p in the coming year, leaving the shares trading on a forecast PE ratio of 12.1x, undemanding given global growth opportunities across the group.