Focusrite revenue shrinks as audio budgets are squeezed

Focusrite (TUNE) sells hardware and software used for music production. Many people say they can’t live without music, but it appears that a large chunk can live without the most up-to-date recording equipment.

In the year to August, content creation revenue dropped 9.7 per cent to £137mn, a 15.3 per cent fall in organic terms. Content creation makes up three-quarters of the company's revenue and spans both amateurs and professionals. During the pandemic, many people needed to upgrade their equipment as they switched to streaming from home, but now their equipment is updated they have pulled back on spending.

These struggles were partly offset by the audio reproduction business, where revenue grew 30 per cent – a 20 per cent organic increase. This division focuses on producing audio for crowds, so has benefited from the return of live concerts and the backlog of demand for live events.

There are some green shoots of recovery. Focusrite returned to growth in the second half of the year. The pandemic meant inventories got stocked, but now this backlog has cleared.

A concern is that Focusrite has not shown much pricing power. Administrative costs increased around 10 per cent but it couldn’t offset much of this with price rises, probably because audio recording equipment is a luxury product for lots of people. However, Focusrite is still trading on a seemingly high valuation of 12 times its forward earnings, according to FactSet consensus.

Broker Peel Hunt is impressed by the 32 new products released in the year. This belief is backed up by an impressive historical return on equity of over 20 per cent. However, we would like to see growth return before updating our view. Hold.

Last IC View: Hold, 514p, 25 April 2023